**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WashingtonD.C. 20549**

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**FORM 20-F**

| **(Mark One)**                                                                                                                                                             |                                                                                                                 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
| o                                                                                                                                                                          | **REGISTRATION STATEMENT PURSUANT TO  SECTION 12(b) OR 12(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, 2005**                                                                                                                       |
| **OR**                                                                                                                                                                     |
| **o**                                                                                                                                                                      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**              |
| **For the transition period  from           to           .** |

 

**Commissionfile number 0-00000**

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**AURELIA ENERGY N.V.**

(Exact name of Registrantas specified in its charter)

**AURELIA ENERGY N.V.**

(Translation of Registrant’sname into English)

**Netherlands Antilles**

(Jurisdiction ofincorporation or organization)

**Landhuis JoonchiKaya Richard J Beaujun z/n**Curaçao, Netherlands Antilles(599) 9736 6277

(Address of principalexecutive offices)

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Securities registeredpursuant to Section 12(b) of the Act:

| **Title of class** | ** ** | **Name of  each exchange on which registered** |
|--------------------|------------|------------------------------------------------|
| None               |       | Not Applicable                                 |
| ** **         |       |                                           |

 

Securities registeredpursuant 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 2012Senior Subordinated Guarantees

(Title of class)

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Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report:

**34,000Non-Profit Sharing 5% Non-Cumulative Preference A Shares, par value U.S.$1,000per share**136,000 Common B Shares, par value U.S.$1,000per share

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days:

| **Yes****x** |   | **No****o** |
|--------------|--------|-------------|

 

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

| **Item 17****o** |   | **Item 18****x** |
|------------------|--------|------------------|

 

 

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**TABLE OF CONTENTS**

|                                                 | ** **                                                                    | **Page** |
|-------------------------------------------------|-------------------------------------------------------------------------------|----------|
| PRESENTATION OF FINANCIAL AND OTHER INFORMATION | 3                                                                             |
| FORWARD-LOOKING  STATEMENTS                     | 4                                                                             |
| PART I                                     | 5                                                                             |
| Item 1                                          | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                         | 5        |
| Item 2                                          | OFFER STATISTICS AND EXPECTED TIMETABLE                                       | 5        |
| Item 3                                          | KEY INFORMATION                                                               | 5        |
| Item 4                                          | INFORMATION ON THE COMPANY                                                    | 16       |
| Item 5                                          | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  | 37       |
| Item 6                                          | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    | 57       |
| Item 7                                          | MAJOR SHAREHOLDER AND RELATED PARTY TRANSACTIONS                              | 60       |
| Item  8                                         | FINANCIAL  INFORMATION                                                        | 62       |
| Item  9                                         | THE  OFFER AND LISTING                                                        | 63       |
| Item  10                                        | ADDITIONAL  INFORMATION                                                       | 63       |
| Item 11                                         | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                   | 81       |
| Item 12                                         | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                        | 83       |
| PART II                                    | 83                                                                            |
| Item 13                                         | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                               | 83       |
| Item 14                                         | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY  HOLDERS AND USE OF PROCEEDS | 83       |
| Item  15                                        | CONTROLS  AND PROCEDURES                                                      | 83       |
| Item 16A                                        | AUDIT COMMITTEE FINANCIAL EXPERT                                              | 84       |
| Item  16B                                       | CODE OF ETHICS                                                                | 85       |
| Item 16C                                        | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                        | 85       |
| Item 16D                                        | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT  COMMITTEES                   | 85       |
| Item 16E                                        | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND  AFFILIATED PURCHASERS       | 85       |
| PART III                                   | 85                                                                            |
| Item  17                                        | FINANCIAL  STATEMENTS                                                         | 85       |
| Item  18                                        | FINANCIAL  STATEMENTS                                                         | 85       |
| Item 19                                         | EXHIBITS                                                                      | 86       |
| SIGNATURE                                       | 92                                                                            |

 

2

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**PRESENTATION OF FINANCIAL AND OTHER INFORMATION**

We prepare our financial statements on a consolidatedbasis in accordance with accounting principles generally accepted in the UnitedStates (“U.S. GAAP”). Our auditors conduct their audit of our consolidatedfinancial statements in accordance with auditing standards generally acceptedby 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, 2001, 2002, 2003, 2004 and 2005and audited consolidated financial statements as of and for the years ended December 31,2003, 2004 and 2005.

We have included in this annual report EBITDA amountsfor certain periods, because we believe that EBITDA is a useful measure forcertain investors to determine our operating cash flow and historical abilityto meet debt service and capital expenditure requirements, and because webelieve that it provides a useful measure of the level of profitability weachieve with our asset base. EBITDA is not a measure of financial performanceunder U.S. GAAP and should not be considered as an alternative to cash flowfrom operating activities, a measure of liquidity or an alternative to netincome as indicators of our operating performance or any other measures ofperformance derived in accordance with U.S. GAAP. A reconciliation of theEBITDA amounts included herein to net income and net cash provided by operatingactivities (which are U.S. GAAP measures) is set forth under “Item 3: KeyInformation—(A) Selected Consolidated Financial Data—Notes”.

Certain monetary amounts and other figures included inthis annual report have been subject to rounding adjustments. Accordingly,figures shown as totals in certain tables may not be the arithmetic aggregationof the figures which precede them, and figures expressed as percentages in thetext may not total 100.0% when aggregated.

Certain ratios included in this annual report includeimmaterial corrections to amounts presented in reports and other documentspreviously filed by us with the Securities and Exchange Commission.

We have preparedthis annual report using a number of conventions, which you should considerwhen reading the information contained herein. When we use the terms “we”, “us”,“our” and words of similar import or the “Company”, we are referring to AureliaEnergy N.V., itself, or to Aurelia Energy N.V. and its consolidatedsubsidiaries, as the context requires. When we refer to “Aurelia Holding N.V.”,the registered shareholder of 100.0% of our outstanding voting shares, withrespect to dates on or after January 28, 2003, we are referring to AureliaHolding N.V. in liquidation. When we use the terms “own” and “owns”, withrespect to our FPSOs and FPSO hull, we are referring to:

·       ownershipof both 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

·       ownershipof the hull in the case of the *Aoka Mizu*.

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.$1.1845 and certain sterlingamounts into U.S. dollars at an exchange rate of £1.00 to U.S.$1.7204, 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, 2005. 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 March 30, 2006, the applicablenoon buying rates were €1.00 to U.S.$1.21 and £1.00 to U.S.$1.74.

3

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**FORWARD-LOOKING STATEMENTS**

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”, “will”, “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 need and our ability generally to finance in an optimal mannerthe expansion of our business;

·       ourability to enter into new service agreements for our FPSOs upon the terminationof their service 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 governmentalauthorizations required 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 thatcould cause actual results, performance or achievements to differ materiallyinclude, but are not limited to, those discussed under “Item 3: Key Information—(D) RiskFactors” and elsewhere in this annual report. We caution you not to place unduereliance on these forward-looking statements which reflect our management’sview only as of the date of this annual report. We undertake no obligation toupdate or revise any forward-looking statements, whether as a result ofnew information, future events or otherwise. In light of these risks,uncertainties and assumptions, the forward-looking events discussed inthis annual report might not occur.

**PART I**

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

Not applicable.

**ITEM 2:**               OFFERSTATISTICS AND EXPECTED TIMETABLE

Not applicable.

**ITEM 3:**               KEYINFORMATION

**(A)   SelectedConsolidated Financial Data**

The following table presents our selected financialdata on a consolidated basis as at and for each of the years ended December 31,2001, 2002, 2003, 2004 and 2005. We have extracted the following selectedfinancial data from our audited consolidated financial statements, prepared inaccordance with U.S. GAAP, for the periods indicated. You should read thefollowing selected consolidated financial data in conjunction with theinformation contained in “Item 5: Operating and Financial Review andProspects” and our consolidated financial statements and the notes theretoincluded elsewhere in this annual report.

5

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| ** **                                                                         | ** ** | **As at and for the year ended December 31,**                                     | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2001**                                                                                                                  | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(in U.S.$ thousands, except ratios and share and per share amounts)** | ** ** |
| **Income Statement Data:**                                                         |       |                                                                                                                      |       |   |   |   |   |   |   |   |   |
| Revenues                                                                           |       | 197,317                                                                                                                   |       | 262,799 |   | 295,780 |   | 437,665 |   | 398,990 |   |
| Operations expenses                                                                |       | 83,795                                                                                                                    |       | 145,309 |   | 185,755 |   | 314,073 |   | 255,597 |   |
| Selling, general  and administrative expenses                                      |       | 9,467                                                                                                                     |       | 9,736 |   | 9,800 |   | 9,754 |   | 11,310 |   |
| Other operating  income                                                            |       | (3,375                                                                                                                    | )          | (4,046 | ) | (4,014 | ) | (3,738 | ) | (30,702 | ) |
| Depreciation of  tangible fixed assets and amortization of intangible fixed assets |       | 58,335                                                                                                                    |       | 54,038 |   | 61,976 |   | 72,995 |   | 94,953 |   |
| Total operating  expenses                                                          |       | 148,222                                                                                                                   |       | 205,037 |   | 253,517 |   | 393,084 |   | 331,158 |   |
| Operating income                                                                   |       | 49,095                                                                                                                    |       | 57,762 |   | 42,263 |   | 44,581 |   | 67,832 |   |
| Interest income                                                                    |       | 5,188                                                                                                                     |       | 3,447 |   | 3,530 |   | 3,355 |   | 3,550 |   |
| Interest expense                                                                   |       | (28,776                                                                                                                   | )          | (48,898 | ) | (45,120 | ) | (44,940 | ) | (54,464 | ) |
| Currency exchange  results                                                         |       | 5,759                                                                                                                     |       | 1,452 |   | 10,841 |   | 2,924 |   | (14,873 | ) |
| Total financial  income and expenses                                               |       | (17,829                                                                                                                   | )          | (43,999 | ) | (30,749 | ) | (38,661 | ) | (65,787 | ) |
| Income before  income taxes                                                        |       | 31,266                                                                                                                    |       | 13,763 |   | 11,514 |   | 5,920 |   | 2,045 |   |
| Income taxes                                                                       |       | (32,614                                                                                                                   | )          | (23,615 | ) | (1,063 | ) | (469 | ) | (16,421 | ) |
| Income before  minority interest                                                   |       | 63,880                                                                                                                    |       | 37,378 |   | 12,577 |   | 6,389 |   | 18,466 |   |
| Minority interest                                                                  |       | —                                                                                                                    |       | — |   | — |   | — |   | 5,163 |   |
| Net income                                                                         |       | 63,880                                                                                                                    |       | 37,378 |   | 12,577 |   | 6,389 |   | 13,303 |   |
| Number of common  B shares outstanding                                             |       | 136,000                                                                                                                   |       | 136,000 |   | 136,000 |   | 136,000 |   | 136,000 |   |
| Net income per  common B shares outstanding                                        |       | 470                                                                                                                       |       | 275 |   | 92 |   | 47 |   | 98 |   |
| **Balance Sheet Data:**                                                            |       |                                                                                                                      |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                         |       | 15,713                                                                                                                    |       | 23,024 |   | 32,937 |   | 41,987 |   | 43,026 |   |
| Fixed assets(1)                                                                    |       | 977,700                                                                                                                   |       | 1,018,785 |   | 1,026,752 |   | 977,761 |   | 1,274,961 |   |
| Total assets                                                                       |       | 1,189,187                                                                                                                 |       | 1,279,820 |   | 1,321,536 |   | 1,303,520 |   | 1,529,685 |   |
| Total debt(2)                                                                      |       | 546,577                                                                                                                   |       | 581,103 |   | 587,455 |   | 545,293 |   | 715,192 |   |
| Subordinated  Marenco loan                                                         |       | 117,616                                                                                                                   |       | 125,849 |   | 134,659 |   | 142,085 |   | 147,031 |   |
| Share capital(3)                                                                   |       | 170,000                                                                                                                   |       | 170,000 |   | 170,000 |   | 170,000 |   | 170,000 |   |
| Shareholders’  equity (net assets)                                            |       | 424,704                                                                                                                   |       | 460,191 |   | 475,388 |   | 481,745 |   | 495,482 |   |
| **Cash Flow Data:**                                                                |       |                                                                                                                      |       |   |   |   |   |   |   |   |   |
| Net cash provided  by operating activities                                         |       | 73,719                                                                                                                    |       | 84,420 |   | 71,920 |   | 71,661 |   | 108,616 |   |
| Net cash (used  in) investing activities                                           |       | (285,102                                                                                                                  | )          | (95,105 | ) | (65,142 | ) | (18,744 | ) | (306,780 | ) |
| Net cash provided  by (used in) financing activities                               |       | 203,275                                                                                                                   |       | 20,018 |   | 5,807 |   | (40,282 | ) | 202,412 |   |
| **Other Financial Data and  Ratios:**                                              |       |                                                                                                                      |       |   |   |   |   |   |   |   |   |
| EBITDA(4)                                                                          |       | 107,430                                                                                                                   |       | 111,800 |   | 104,239 |   | 117,576 |   | 162,785 |   |
| Capital  expenditures, net(5)                                                      |       | 13,647                                                                                                                    |       | 95,105 |   | 69,912 |   | 23,915 |   | 392,249 |   |
| Cash interest  paid(6)                                                             |       | 20,738                                                                                                                    |       | 41,829 |   | 39,722 |   | 35,169 |   | 39,930 |   |
| Ratio of EBITDA  to cash interest paid                                             |       | 5.18x                                                                                                                     |       | 2.67x |   | 2.62x |   | 3.34x |   | 4.08x |   |
| Ratio of net debt  to EBITDA(7)                                                    |       | 4.94x                                                                                                                     |       | 4.99x |   | 5.32x |   | 4.28x |   | 4.13x |   |
| Ratio of earnings to  fixed charges(8)                                             |       | 2.14x                                                                                                                     |       | 1.22x |   | 1.15x |   | 1.18x |   | 1.09x |   |

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Notes:

(1)          “Fixed assets” includestangible fixed assets as presented in the consolidated balance sheet.

(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, theunsubordinated Marenco loan and our short-term bank loan for the periodsindicated.

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| ** **                                        | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2001**                                                     | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(in U.S.$ thousands)**                           | ** ** |
| Long-term  bank loans                             |       | 495,162                                                      |       | 324,733 |   | 249,108 |   | 207,358 |   | 356,266 |   |
| 101¤4%  Senior Notes due 2012                |       | —                                                       |       | 256,370 |   | 338,347 |   | 337,935 |   | 306,810 |   |
| Short-term  portion of long term-bank loans  |       | 47,828                                                       |       | — |   | — |   | — |   | 52,116 |   |
| Unsubordinated  Marenco loan                      |       | 3,587                                                        |       | — |   | — |   | — |   | — |   |
| Total debt                                        |       | 546,577                                                      |       | 581,103 |   | 587,455 |   | 545,293 |   | 715,192 |   |

 

(3)          No dividends weredeclared in the years presented.

(4)          “EBITDA”is defined as operating income (loss) plus depreciation and amortization. Thisdefinition deviates from other definitions of EBITDA used by some other companies,as it excludes interest income and currency exchange results. We believe thisdefinition is more appropriate since it provides investors with a helpfulmeasure for comparing our operating performance with that of other companies inour industry. EBITDA is presented as additional information because we believethat it is a useful measure for certain investors to determine our operatingcash flow and historical ability to meet debt service and capital expenditurerequirements. We also believe that it provides a useful measure of the level ofprofitability we achieve with our asset base. EBITDA is not a measure offinancial 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. 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,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2001**                                                     | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **(in U.S.$ thousands)**                           | ** ** |
| EBITDA                                                                       |       | 107,430                                                      |       | 111,800 |   | 104,239 |   | 117,576 |   | 162,785 |   |
| Depreciation of  tangible fixed assets and amortization of intangible assets |       | (58,335                                                      | )          | (54,038 | ) | (61,976 | ) | (72,995 | ) | (94,953 | ) |
| Financial income  and expense                                                |       | (17,829                                                      | )          | (43,999 | ) | (30,749 | ) | (38,661 | ) | (65,787 | ) |
| Income taxes                                                                 |       | 32,614                                                       |       | 23,615 |   | 1,063 |   | 469 |   | 16,421 |   |
| Minority interest                                                            |       | —                                                       |       | — |   | — |   | — |   | (5,163 | ) |
| Net income                                                                   |       | 63,880                                                       |       | 37,378 |   | 12,577 |   | 6,389 |   | 13,303 |   |
| Adjustments to  reconcile net income to cash provided                        |       | 27,448                                                       |       | 26,987 |   | 57,930 |   | 74,813 |   | 107,932 |   |
| Changes in  operating assets and liabilities, net of effect of acquisitions  |       | (17,609                                                      | )          | 20,055 |   | 1,413 |   | (9,541 | ) | (12,619 | ) |
| Net cash provided by  operating activities                                   |       | 73,719                                                       |       | 84,420 |   | 71,920 |   | 71,661 |   | 108,616 |   |

 

(5)          “Capitalexpenditures, net” represents additions to fixed assets less disposals of fixedassets and excludes the acquisitions of the *HaeweneBrim*, the *Munin* andtheir related operating companies. The following table presents areconciliation of “capital expenditures, net” to additions to tangible fixedassets, disposals of tangible fixed assets and accumulated depreciation of disposalsof tangible fixed assets for the periods indicated.

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| ** **                                                      | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2001**                                                     | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(in U.S.$ thousands)**                           | ** ** |
| Additions to  tangible fixed assets                             |       | 13,647                                                       |       | 95,105 |   | 77,978 |   | 25,391 |   | 392,276 |   |
| Disposals to  tangible fixed assets                             |       | —                                                       |       | — |   | (9,874 | ) | (14,802 | ) | (29 | ) |
| Accumulated  depreciation of disposals of tangible fixed assets |       | —                                                       |       | — |   | 1,808 |   | 13,326 |   | 2 |   |
| Capital expenditures,  net                                      |       | 13,647                                                       |       | 95,105 |   | 69,912 |   | 23,915 |   | 392,249 |   |

 

(6)          “Cash interest paid” isdefined as interest expense, plus capitalized interest, less accrued intereston the subordinated and unsubordinated Marenco loans, less amortization of debtarrangement fees and less the ineffective portion of hedges recognized inearnings and is disclosed as an additional cash flow disclosure in theconsolidated statements of cash flow in the audited consolidated financialstatements included in this annual report.

(7)          “Net debt” is defined astotal debt as calculated in Note 2 above, less cash and cash equivalents.

(8)          “Earnings”is the amount of pre-tax income from continuing operations before adjustmentfor minority interests in consolidated subsidiaries or income or loss fromequity investees, plus fixed charges, plus amortization of capitalizedinterest, plus distributed income to equity investees, plus the share ofpre-tax losses of equity investees for which charges arising from guaranteesare included in fixed charges, less interest capitalized, less preferencesecurity dividend requirements of consolidated subsidiaries, less the minorityinterest in pre-tax income of subsidiaries that have not incurred fixedcharges. “Fixed charges” means the sum of the following: (a) interestexpensed or capitalized, (b) amortized premiums, discounts and capitalizedexpenses related to indebtedness, (c) an estimate of the interest withinrental expense, and (d) preference security dividend requirements ofconsolidated subsidiaries. The term “preference security dividend” is theamount of pre-tax earnings that is required to pay the dividends on outstandingpreference securities, computed as the amount of the dividend divided by oneminus the effective income tax rate applicable to continuing operations.

**(B)   Capitalization and Indebtedness**

Not applicable.

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

Not applicable.

**(D)   Risk Factors**

*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.*

**Wedepend on capital expenditures by the offshore oil industry and reductions insuch expenditures have had and may continue to have a material adverse impacton 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 

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expenditures. Prices foroil, although relatively high in recent periods, historically have beenextremely volatile and have reacted to changes in the supply of and demand foroil (including changes resulting from the ability of the Organization ofPetroleum Exporting Countries to establish and maintain production quotas) anddomestic and worldwide economic conditions and political instability in oilproducing countries. Uncertainties with respect to international political,military and economic conditions may exacerbate the risk of change with respectto the foregoing, including with respect to levels of capital expenditure byoil companies regardless 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 given that current levels ofexploration and production activity and capital expenditures on offshore oiloperations will continue or that demand for our products and services willcontinue at the same level relative to the level of those activities, or willimprove in future periods. We anticipate that prices for oil will continue tobe volatile and affect the demand for and pricing of our products and services.A material decline in oil prices or offshore exploration and productionactivities could materially adversely affect our ability to extend existingcontract periods, enter into new service agreements or secure new SPM deliverycontracts.

**Wegenerate the majority of our revenues from a limited number of FPSOs andcustomers and the loss of revenues from any of these vessels or customers couldhave a material adverse effect on our financial condition and businessprospects.**

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.

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.

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**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.$250.0 million to U.S.$350.0 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 Fleetand FPSO Hull—*Glas Dowr*” and “Item 5:Operating and Financial Review and Prospects—(B) Liquidity and CapitalResources—Capital Expenditures”. Some of the delays and budget overruns that wehave experienced have been due to factors beyond our control. There can be noassurances that we will not experience material cost overruns or delays in thefuture. Because we bid our service agreements and SPM delivery contracts atfixed prices, any cost overruns or delays may require us, among other things,to seek to incur additional indebtedness to complete a project and may make itmore difficult for us to be awarded projects or to secure financing forprojects in the future. In addition, because we generally earn contractpayments after the date of first oil, material project delays could adverselyaffect the timing of the revenues we receive under our new service agreementsand, consequently, could affect our ability to service any indebtednessincurred in connection with the project. As a result, significant cost overrunsor delays could have a material adverse effect on our liquidity, financialcondition and results of operations. There can be no assurance that we would beable to fund any delays or overruns, through the incurrence of indebtedness orotherwise, or that such funds would be provided on favorable terms.

**Weare subject to competition which could limit our ability to maintain orincrease our market share or to maintain our prices at profitable 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, technologicalcapacity, performance, reputation (particularly with respect to safety andperformance), customer relations, long-standing relationships and experience ofpersonnel. Some of our competitors may be better positioned to withstand andadjust more quickly to volatile market conditions, such as fluctuations in oilprices and exploration and production levels or changes in governmentregulations. In addition, the FPSO market is characterized by long lead timesfor construction and competition in obtaining service agreements. FPSOs havefew alternative uses and, because of their nature and the environment in whichthey operate, have relatively high capital costs, whether or not operating.Because these costs are essentially fixed, and in order to avoid additionalexpenses associated with temporarily idling or “stacking” our FPSOs, we mayfrom time to time be required to bid our products and services for operation ordelivery at unattractive rates. See “Item 4: Information on the Company—(B) BusinessOverview—Competition”. We cannot predict the future level of demand for ourproducts or services.

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**Ourbusiness is subject to operational risks which may not be insured or insurableon economically 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 we are required under our credit facility to obtain such insurance ifthe number of 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. These indemnity arrangements may notprotect us in all circumstances.

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 

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indemnificationobligations to us could materially and adversely affect our results ofoperations and financial condition. Moreover, there can be no assurance that wewill be able to maintain adequate insurance in the future at commerciallyreasonable rates or that any particular types of coverage will continue to beavailable.

**Wehave a substantial 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 31,2005 was U.S.$715.2.million, U.S.$1,529.7 million and U.S.$495.5 million,respectively, and our ratio of earnings to fixed charges was 1.09x for the yearended December 31, 2005.

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 andthe industries 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.

**Ourinternal restructuring and our Dutch tax treatment of our group companiesremain subject to 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 prepared by an independentinvestment bank. The sales of these economic interests resulted in intercompanyprofits at the level of the selling companies and the creation of acorresponding amount of (amortizable) goodwill and intercompany indebtedness atthe level of Bluewater Holding B.V. Although extensive discussions were heldwith the tax authorities on the internal restructuring, the tax consequences ofour internal restructuring became subject to a tax audit and remain subject tofurther review by the tax authorities.

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 (U.S.$163.3 million), based on the position that these group companies,prior to and at the time of the restructuring, were residents of theNetherlands for Dutch tax purposes or had a taxable presence in the 

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Netherlands. We 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 €23.3 million (U.S.$27.6million). 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. We continue tovigorously contest the imposition of any additional taxes and have started legalproceedings to have the assessments reviewed. Such judicial review in theNetherlands may take a considerable period of time. As is permitted under Dutchlaw and regulations, we intend to withhold payment of amounts in respect ofcontested tax assessments pending final resolution of the issue.

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 31,2004 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 in respect of periods prior to December 31, 2004. As thedisallowed portion of the interest deduction depends significantly on the debt-equityratio of the relevant entity at the beginning and the end of any financialyear, it is clear that the outcome of the dispute with the Dutch taxauthorities concerning the relevant goodwill amount (and the annualamortization amount resulting therefrom) and the corresponding intercompanydebt amount will have a significant impact on the effect of the thin cap rules onBluewater Holding B.V.

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. Based upon current facts andcircumstances, applicable tax law, regulation and precedent, discussions withrelevant tax authorities and professional advisers and other relevant criteria,however, we estimate that it is currently probable that we will realizebenefits relating to at least U.S.$434.0 million of amortizable goodwilland at least U.S.$724.0 million of interest bearing inter-companydebt in connection with our internal restructuring at January 1, 2000 andthat such amounts will result in tax losses which may be carried forward forDutch income tax purposes, subject to the potential application of the thin caprules as of 2004. Notwithstanding our current estimates, however, it isimpracticable to quantify definitively at this 

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time theeffect that the outcome of such discussions may have on our 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 theanticipated legal proceedings, as well as the outcome of such proceedings. In addition,in December 2001, U.S.$379.5 million of the inter-companyindebtedness of Bluewater Holding B.V. relating to the internal restructuringwas converted to share capital, thereby reducing the amount of tax benefitsthat we may take advantage of in subsequent periods, at the same timeincreasing the equity amount for application of the thin cap rules as of2004. While we believe that it is probable that we will realize tax benefits inamounts that are not less than the foregoing estimates as set forth above andthat it is unlikely that the outcome of these discussions and the pendingproceedings relating thereto will have a material adverse effect on ourfinancial position, there can be no assurance in this regard and we could losesome or all of the future anticipated tax savings associated with our internalrestructuring.

**Ourbusiness is subject to governmental regulation and environmental laws withwhich it may be difficult or impossible to comply and which could lead tosignificant liabilities.**

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 theoffshore oil industry and, therefore, we are affected by changing taxes, pricecontrols and other laws that affect the oil industry generally and offshoreexploration and production specifically. The adoption of laws and regulationscurtailing exploration and development drilling for oil for economic or otherpolicy reasons or practical restrictions on our ability to provide our servicesto our customers could adversely affect our operations by limiting demand foroffshore production services. We cannot predict the extent to which our futureoperations and earnings may be affected by new legislation, new regulations orchanges 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 orcivil penalties and criminal prosecution. As a result, there can be noassurances that we will be able to comply with these laws in the future or thatwe will not be subject to liabilities that could adversely affect our financialcondition or results of operation.

**Ourefforts to protect our intellectual property rights or to defend ourselvesagainst any claims of infringement may be costly and, if unsuccessful, we maybe barred from 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 in possessionof operational and technical know-how to competitors 

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could result in suchinformation falling into the hands of our competitors, and it may be difficultfor us to prove its use by those competitors and enforce our rights in it.

Our strategy for filing patent applications is basedprincipally around protecting our designs in selected jurisdictions which weconsider to be important. However, ownership of our own patents or applicationsdoes not guarantee us freedom to operate over previously filed patents ofothers. In addition, the laws of certain foreign countries do not protectproprietary rights to the same extent as the laws of the Netherlands, theNetherlands Antilles or the United States. Enforcing intellectual propertyrights against others or defending ourselves against claims of infringementcould result in substantial costs and diversion of management and technicalpersonnel and resources. The outcome of intellectual property proceedings couldalso impair our ability to develop and commercialize products and result in theaward of substantial damages against us. In the event of an unfavorable outcomein litigation, we may need to obtain licenses or redesign our technologies orpotential product to avoid infringement.

In 2004, certain of our competitorsinitiated injuction proceedings in the district court in The Hague inrespect of an alleged infringement of intellectual property rights. The courtrejected the claim, and currently the alleged claim is under appeal in theCourt of Appeal. We expect the Court of Appeal to release its judgment midMay 2006. With respect to the patents at stake, we have received advicefrom our patent agent that our product design does not infringe upon any validclaim of the patent. In support of these proceedings we, in consultation withour patent advisors, initiated proceedings to obtain the decision of the Courtthat one of the patents relied upon by these competitors is declared null andvoid. Meanwhile our competitors also started proceedings at the sameCourt requesting a judgment on the merits of their case. The aboveproceedings are running in parallel with the European patentapplication of our competitor that was the subject of our oppositionproceeding. Both parties have appealed against the findings of the European PatentOffice in Munich.

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 our executiveofficers and key personnel, including Mr. Hugo Heerema, there 

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can beno assurance that we will be able to attract or retain qualified management inthe future. See “Item 6: Directors, Senior Management and Employees—(A) Directorsand 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.

**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”.

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**(B)   BusinessOverview**

**Overview of Operations**

We conduct our operations principally through twobusinesses that we staff and resource according to market conditions and ourbusiness needs. These businesses consist of 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*) thatwe have contracted to oil companies under service agreements or bareboatagreements and one FPSO hull (*Aoka Mizu*). Werecently entered into a service agreement under which we will convert the *Aoka Mizu*into an FPSO*.* In 2003, 2004and 2005, our FPSO business generated 87.3%, 84.6% and 83.7% of our revenues,respectively, 115.4%, 96.4% and 364.9% of our net income, respectively, and102.6%, 100.6% and 122.0% of our EBITDA, respectively.

·       **SPM business.**Our SPM business earnsrevenues from the design, development, project management and delivery of SPMsystems under our SPM delivery contracts. We have developed a number ofdifferent types of SPM systems for oil companies and contractors around theworld, resulting in the delivery of more than 60 SPM systems since ourfounding. Because SPM systems are integral to the operation of FPSOs in harshenvironments, and because they form an important link in the oil productionchain, we believe that it is important to preserve our core SPM capabilitiesfor use in connection with future FPSO projects. In 2003, 2004 and 2005, ourSPM business generated 12.7%, 15.4% and 16.3% of our revenues, respectively,(15.4%), 3.6% and (264.9)% of our net income, respectively, and (2.6%), (0.6%)and (22.0%) of our EBITDA, 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.

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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,**     | ** ** |
|----------------|------------|------------------------------------------------------------------|------------|
| ** **     | ** ** | **2003**                                                         | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **     | ** ** | **(in U.S.$ thousands, except percentages)** | ** ** |
| FPSO business: |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Europe         |       | 197,000                                                          |       | 66.6 | % | 285,775 |   | 65.3 | % | 241,706 |   | 60.6 | % |
| Asia           |       | 20,921                                                           |       | 7.1 | % | 19,395 |   | 4.4 | % | 31,851 |   | 8.0 | % |
| Africa         |       | 40,261                                                           |       | 13.6 | % | 65,071 |   | 14.9 | % | 60,250 |   | 15.1 | % |
| Other          |       | —                                                           |       | — |   | — |   | — |   | 21 |   | 0.0 | % |
| Total          |       | 258,182                                                          |       | 87.3 | % | 370,241 |   | 84.6 | % | 333,828 |   | 83.7 | % |
| SPM business:  |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Europe         |       | 11,004                                                           |       | 3.7 | % | 31,826 |   | 7.3 | % | 5,935 |   | 1.5 | % |
| Asia           |       | 16,473                                                           |       | 5.6 | % | 21,295 |   | 4.9 | % | 31,719 |   | 7.9 | % |
| Africa         |       | 8,440                                                            |       | 2.9 | % | 6,229 |   | 1.4 | % | 24,565 |   | 6.2 | % |
| America        |       | 1,681                                                            |       | 0.6 | % | 7,956 |   | 1.8 | % | 2,886 |   | 0.7 | % |
| Other          |       | —                                                           |       | — |   | 118 |   | 0.0 | % | 57 |   | — |   |
| Total          |       | 37,598                                                           |       | 12.7 | % | 67,424 |   | 15.4 | % | 65,162 |   | 16.3 | % |
| Total          |       | 295,780                                                          |       | 100.0 | % | 437,665 |   | 100.0 | % | 398,990 |   | 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 through the use of tie-backs, which are relativelyinexpensive compared to the development of an independent infrastructure. The *Uisge Gorm* and the *Bleo Holm* arecurrently benefiting from such 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 

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weather downtime and havegenerally maintained high operating uptimes while producing on-field. Thetechnical, regulatory and environmental standards to which our FPSOs were builtwould currently permit us to operate them in most offshore oil producingregions, including the offshore fields of the North Sea, South Africa, WestAfrica, Brazil, Asia, Australia and the U.S. Gulf of Mexico. Due to theiroriginal technical specifications and ability to be overhauled, we believe thatour FPSOs will be able to operate beyond the expected production profiles oftheir 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 60 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 SPMsystems to subcontractors. We believe that this approach to staffing providesus with substantial flexibility that enables us to maintain our coreengineering capabilities while being able to scale back our operations andmanage our cost base 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 regularly to ensure that our performance iscontinuously improved. We develop our FPSOs and SPM systems in line with theInternational Safety Management Code, ISO 9001 and ISO 14001. We have a strongrecord in safety and environmental issues. Our customers, governmental authoritiesand insurance companies perform regular audits of our FPSO operations and haveconsistently 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.**We believe 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 productionassets with their reservoir strategies. In this way, we expect to be able toassist oil companies in optimizing their field economics while prolonging the 

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production lives of ourFPSOs. Where possible, we will negotiate tariff and bonus payments in additionto fixed day rates when extending our existing service 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, projectmanagement and marketing, we believe we are able to preserve the flexibility ofour organization and reduce our vulnerability to the cyclicality of the oilindustry. We will maintain our strategy of outsourcing all fabrication workrelated to our business in the future.

·       **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. Our responsibility is to deliver an FPSO that complies with thesespecifications and to install a fully operational unit. Under our serviceagreements, we are responsible for performing the operations of the FPSO, formanaging the interface between the unit 

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and subsea facilities andoffloading systems and for decommissioning the FPSO upon the cessation ofproduction. Oil companies are responsible for the actual drilling, completionand testing of all wells and for the performance of any subsequent wellinterventions. Depending on the shuttle tanker or other arrangement, we mayalso be responsible for performing activities relating to offloading systemsand 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 thelevel of reserves for which it is estimated that there is a 90.0% probabilitythat the actual quantity will be more than the volume estimated and a 10.0%probability that it will be less. Given the uncertainties in predicting the productivityof a particular field, it is in the interest of oil companies to pursueflexible arrangements with FPSO operators in respect of contract periods. As aresult, our service and bareboat agreements generally provide for a minimumcontract period based on the P90 production profile of a particular field andcontain rollover provisions or extension options that enable the oil company toextend the service agreement beyond the minimum term.

When a service or bareboat agreement continues beyondthe minimum contract period, the subsequent contract payments are typicallygoverned by predetermined terms that were set before the minimum contractperiod began. Renegotiation of payment terms is not required during theseperiods. These service or bareboat agreement provisions allow us to receivepayments for a minimum contract period regardless of whether actual productionis terminated during the period, while they provide oil companies withcertainty that the service or bareboat agreement can be extended beyond theminimum contract period based on predetermined economic terms if the field lifeproves to be longer. To provide additional flexibility, our service or bareboatagreements also permit the oil company to terminate the service or bareboatagreement prior to the expiration of the minimum contract period, provided thattermination payments are made to compensate us for the amount that we wouldhave earned during the full minimum contract period. Depending on theparticular 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 service or bareboatagreement prior to the commencement of such notice period due to reservestatistics and production results. In view of the structure of these service orbareboat agreements as described above, both we and the oil company have a highlevel of economic predictability over our future production operations.

Generally, under our service agreements, a majority ofthe payments are calculated based on defined day rates. In 2005, these dayrates accounted for approximately 71.9% of the revenues from our FPSO business.Typically, our day rates are divided into a facility fee and an operating fee.The facility fee generally relates to the provision of the FPSO and theassociated risers, umbilicals and all other equipment that are required forproduction. The operating fee relates primarily to the cost of manning andmaintaining the vessel and normally is indexed to various factors, includinginflation. Currently, our service agreements require our FPSOs to maintainminimum operating uptimes that exceed certain thresholds. Depending on theparticular service agreement, our facility fee or our operating fee may beadjusted upward or downward to the extent that the relevant uptime exceeds orfalls below the applicable threshold. When an FPSO is removed from the field asa result of factors unrelated to operating performance (such as was the casewith the *Glas Dowr*), noadjustment is made based upon operating uptime. In such a case, however, ourday rate may be replaced by a lay-up rate (which could apply, among othertimes, in the event of poor field performance or periods of scheduledmaintenance) or a *force majeure*rate (which could 

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apply, among other times,in the event of a natural disaster, war or industrial action), depending, ineach case, on the particular service or bareboat agreement. See “—FPSO Fleetand FPSO Hulls”.

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 2005, tariffpayments accounted for approximately 12.9% 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 2005. Inaddition to our day rates, tariffs and oil bonuses, our FPSO contract revenuesinclude payments for equipment rentals, vessel modifications, work performed inconnection with tie-backs, project assistance and the provision of auxiliaryservices. These payments accounted for approximately 8.6% of the revenues fromour FPSO business in 2005 and mainly related to the installation of subseaequipment at the Sable Field and the development of water injection facilitieson the *Haewene Brim*.

***FPSO Fleet and FPSO Hull***

We currently own six high specification 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 that we are marketing worldwide. Our current fleet is describedbelow.

*UisgeGorm.**  *The*Uisge Gorm* is the fourth FPSOthat we developed and the first that we operated in the North Sea. It wasconverted from a conventional product tanker with double sides and is designedto satisfy stringent safety and environmental standards. The most significantmodifications included the installation of a turret mooring system that uses aBluewater designed swivel (which is capable of handling multiple risers andcontrol umbilicals), a flaring system, modularized dual fuel power andgenerating equipment, a stern offloading system, a helicopter deck, upgradedsafety features and a processing plant. The *UisgeGorm* currently is capable of accommodating 65 persons and has aweight of 92,000 dwt, a storage capacity of 594,000 barrels, a length of 248meters, a breadth of 40 meters, a depth of 21 meters and a deck area of7,390 square meters. Fluid capacity is 110,000 barrels per day and processingcapacity is 57,000 barrels per day.

We began operating the *Uisge Gorm* in August 1995 on the Fife Field at a waterdepth of 72 meters pursuant to a service agreement with Amerada Hess. TheFPSO was tied back to the neighboring Fergus Field in 1996 and the neighboringFlora Field in 1998. In 2001, the *Uisge Gorm*was further tied back to the neighboring Angus Field. The FPSO iscurrently  positioned approximately 6kilometers from the Fergus subsea well, 8.5 kilometers from the Flora subseawell and 18 kilometers from the Angus subsea well.

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.$94,000 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, 

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which levels, however, didnot 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. As per January 1, 2005, the *Uisge Gorm* achieved a volumetricefficiency of 80.8%. Under the extended contract the production tariff is basedon oil price, production levels, HSEQ performance and volumetric efficiency.Tariffs cannot fall below U.S.$25,000 per day.

*BleoHolm.**  *The*Bleo Holm* is the sixth FPSO thatwe developed and the third that we have operated in the North Sea. It wasconverted from a newly built double hull tanker. The primary modificationsincluded the installation of a turret mooring system that uses a Bluewaterdesigned swivel (which is capable of handling multiple risers and controlumbilicals), a new piping system, a flaring system, a stern offloading system,a helicopter deck, upgraded safety features and a processing plant. In April 2001,we shipped the *Bleo Holm* to theMcNulty shipyard in Newcastle, United Kingdom, for debottlenecking to allow forincreased production in connection with a tie-back arrangement and to installnew gas equipment. As modified, the vessel has a weight of 105,000 dwt, astorage capacity of 689,000 barrels, a length of 242 meters, a breadth of 42meters, a depth of 21 meters and a deck area of 7,985 square meters and canaccommodate 96 persons. The vessel has a fluid capacity of 126,000 barrels perday and a crude processing capacity of 95,000 barrels per day and hassufficient free deck space to enable the tie-back of neighboring fields.

We began operating the *Bleo Holm* on the Ross Field in April 1999 at a waterdepth of 100 meters pursuant to a service agreement with Talisman. The vesselwas 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 the Blake Field, weupgraded the processing capacity of the *BleoHolm*. Following the completion of the upgrades and the start ofproduction at the Blake Field, the *Bleo Holm*’saverage weighted uptime improved from its historic level. Notwithstanding thisinitial increase in average weighted uptime, shortly after the Blake Field cameon-stream, certain elements in the Blake Field produced fluids which caused achemical reaction. The combination of oil and produced water caused theformation of calcium naphanate which blocks the topside oil pipework on thevessel. To prevent this substance from forming, acetic acid was injected atquantities of up to 5,000 liters a day. The injection of the acetic acid led toan increase in corrosion rates on the topside oil pipework that specificallyaffected welds and weld materials. As a consequence, repairs were required,which have caused additional actual downtime in certain previous periods.During the end of 2002, we made repairs and modifications to the vessel toaddress this problem. However, the repairs and modifications led to an increasein actual downtime and a decrease in actual uptime in the end of 2002. Talismanfully compensated us for the costs of the repairs and modifications whichresulted from the formation of this substance and, despite the increased actualdowntime and decreased actual uptime, it continued to pay the full fixedfacility fee during the period.

Although in 2004 the management and the control of thecalcium naphanate formation improved it was known that a volume of calciumnaphanate remained in the topsides of the vessel. We therefore agreed withTalisman to implement a 26 day shut down between late July and late August toremove the calcium naphanate. Due to the additional scope of work, adverseweather and supply difficulties, the shut down over-ran by 6 days. Wesubsequently agreed to split costs with Talisman which increased our costs by atotal of U.S.$2.7 million. Following the shut down and implementation ofremedial measures, we achieved significantly improved uptimes in October 2004of 99.6%, in November 2004 of 100.0% and in December 2004 of 99.7%.

On July 14,  2005 Talisman and Bluewater signed Heads ofTerms for replacing the FPSO agreement. As a consequence, the FPSO agreementhas been terminated as per 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, 

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includingresourcing. Bluewater no longer provides onshore support. This heads ofagreement also settled for the cost of outstanding maintenance work that hadnot been carried out by Bluewater under the FPSO agreement and acceptance byboth Talisman and Bluewater of all disputes regarding pipework corrosion andcalcium naphanate management.

Until November 30,2005 we received from Talisman a defined day rate of approximately U.S.$174,000that consisted of a fixed facility fee for the provision of the FPSO andassociated equipment and an indexed operating fee for the operation andmaintenance of the vessel. As from November 30, 2005 we no longer receivean operating fee, but only a defined day rate of approximately U.S.$114,000. Inaddition we continue to receive tariff payments that are linked to the actualvolume of oil produced. These tariff payments, which totaledU.S.$7.7 million in 2005, increased with the addition of production fromthe Blake Flank Field in 2005. If a *forcemajeure* event were to occur, we would be entitled to receive a *force majeure* rate of U.S.$60,000 per day.

The agreement withTalisman will continue at pre-agreed rates until July 2012 unlessterminated earlier by Talisman. We believe that the combined production profileof the Ross, Blake and Blake Flank Fields will extend byond 2015 (subject to certainfactors, including the price of oil and overall production rates).

*Glas Dowr.**  *The *Glas Dowr* is the fifth FPSO that we developed and the secondthat we operated in the North Sea. Completed in 1997, the FPSO was directlyconverted from a newly built double hull tanker. The main modificationsincluded the installation of a turret mooring system with a Bluewater designedswivel (which is capable of handling multiple risers and control umbilicals), aflaring system, an offloading system, a processing plant, a helicopter deck andupgraded safety features and the refitting of the piping system, engine roomand living quarters. During the fourth quarter of 2003, we completed upgradesto the vessel’s processing and flaring facilities by installing a new Bluewaterdesigned swivel stack, a new gas compression module and two additionalprocessing modules. As modified, the *GlasDowr* currently accommodates 96 persons and has a weight of 105,000dwt, a storage capacity of 657,000 barrels, a length of 242 meters, a breadthof 42 meters, a depth of 21 meters and a deck area of 7,895 square meters. Thevessel has a fluid capacity of 70,000 barrels per day, a processing capacity of60,000 barrels per day and a gas compression capacity of 85.0 millionstandard cubic feet per day.

The *Glas Dowr* was initially deployed to theDurward and Dauntless Fields under a service agreement with Amerada Hess. InNovember 1998, however, Amerada Hess elected to remove the *Glas Dowr* from the fields due to lowerthan expected reservoir returns that were unrelated to the vessel’sperformance. Amerada Hess continued to make payments under the serviceagreement during the minimum contract period notwithstanding the vessels’removal from the fields. In June 2001, we entered into a new service agreementwith PetroSA, a South African oil company, for the operation of the *Glas Dowr* on the Sable Field in theBredasdorp Basin off the coast of South Africa. The Sable Field is principallyowned by PetroSA and Pioneer Natural Resources South Africa (Proprietary).

To prepare the *Glas Dowr* for operation on the SableField, we modified the vessel’s topsides and mooring system and developed thefield’s subsea infrastructure in accordance with requirements set forth in ourservice agreement with PetroSA. Due to an unanticipated increase in the scopeand complexity of the vessel modifications, labor unrest and difficulties withproject management on the part of the construction yard where the work wasperformed, the project experienced delays and cost overruns. The delay in theachievement of first oil and additional work on the vessel’s gas compressionfacilities, along with increased insurance costs, resulted in an upwardrevision in our costs estimates. The costs of the vessel modifications andsubsea work, excluding exchange rate differences and financing costs, wereapproximately U.S.$195.7 million. Of this amount, U.S.$50.4 millionwas reimbursable by PetroSA. We had expended approximatelyU.S.$150.7 million on the vessel modifications and approximatelyU.S.$39.2 million on developing the subsea infrastructure, and we hadreceived approximately U.S.$39.2 million in milestone payments fromPetroSA for the completion of the subsea work.

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In addition to the cost of vessel modifications andsubsea work, we have capitalized U.S.$9.7 million of financing costs,U.S.$11.0 million of costs relating to operational support prior toproduction and U.S.$3.0 million of expenses relating to exchange ratelosses resulting from the difference between the project exchange rate andactual 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. In connection with thecommencement of production, we entered into a temporary arrangement pursuant towhich we began to earn defined day rates according to the service agreementwith PetroSA.

The *Glas Dowr*achieved contractual first oil in the end of December 2003 at which timeour temporary arrangement with PetroSA was terminated and we began operatingthe vessel pursuant to the terms of our service agreement. Under our serviceagreement, we are responsible for operating and maintaining the *Glas Dowr* and for providing shuttle tankerservices, but not for offloading the hydrocarbon products. During the minimumcontract period, PetroSA is required to pay a minimum fee of approximatelyU.S.$124,000 per day plus tariff payments for each barrel of oil producedcommencing on the date of first oil. The minimum fee consists of a facilityfee, an operating fee and a fee for shuttle tanker services. If the *Glas Dowr* were to be removed from thefield, we would be entitled to receive our full facility fee, 80% of ouroperating fee and our full shuttle tanker fee. 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 the serviceagreement with PetroSA began in September 2004 and will last for threeyears. If PetroSA were to terminate the service agreement early, we would beentitled to a termination fee equal to the balance of the total fees that wouldhave been payable had the service agreement continued for the minimum contractperiod. Following the expiration of the minimum contract period, the serviceagreement will continue for a further seven years unless terminated by PetroSAwith 12 months’ notice. As a consequence, without termination, thecontract term is ten years.

*HaeweneBrim.**  *InJanuary 2002, we entered into share purchase agreements with AureliaHolding N.V. pursuant to which we acquired all of the share capital ofBluewater (*Haewene Brim*) N.V.,the owner of the *Haewene Brim*,and Pierce Production Company Ltd., the company that operates the *Haewene Brim*. The *Haewene Brim* is a harsh environment FPSOthat was converted by APS, Bergesen and Navion in 1999 from a double hullmultipurpose shuttle tanker. The main modifications included the installationof a submerged turret production system, fourteen topside modules, two rotatingdeck cranes, a flaring system, a stern offloading system, a helicopter deck,upgraded safety features and a processing plant. In February 2000, the *Haewene Brim* was shipped to the McNultyshipyard in Newcastle, United Kingdom, for debottlenecking. As modified, thevessel has a fluid capacity of 70,000 barrels of crude per day and a processingcapacity of 70,000 barrels per day. With sufficient space to accommodate 75persons, the *Haewene Brim* has aweight of 103,000 dwt, a storage capacity of 630,000 barrels, a length of 253meters, a depth of 23 meters and a deck area of 3,200 square meters. Thecurrent configuration of the topsides of the vessel can accommodate theinstallation of future modules, which would permit future upgrades.

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Pierce Production Company Ltd. began operatingthe *Haewene Brim* on the PierceField in March 1999 at a water depth of 85 meters pursuant to a serviceagreement with Enterprise Oil, which is currently owned by Shell. We assumedoperation of the *Haewene Brim* in November 2001when the vessel and Pierce Production Company Ltd. were acquired byAurelia Holding N.V.

Under our service agreement, we are required toprovide a crew to maintain and operate the *HaeweneBrim*. We receive a defined day rate of approximately U.S.$155,000that consists of a facility fee for the provision of the FPSO and associatedequipment (indexed to the sterling-U.S. dollar exchange rate) and an indexedoperating fee for the operation, maintenance and insurance of the vessel. If a *force majeure* event were to occur, wewould be entitled to receive our full facility fee for the first 30 daysof the force majeure event and 90% of our facility fee thereafter. In order toreceive the full facility fee, we must ensure that the *Haewene Brim* achieves a minimum gasreinjection uptime of 85%, unless otherwise agreed with Enterprise Oil/Shell.If our gas reinjection uptime is reduced below this threshold, our facility feeis reduced on a pro rata basis. If our gas reinjection uptime is above 92%, ourfacility fee is adjusted upward accordingly. The *Haewene Brim* achieved an average gas reinjection uptime of93.0% in 2005.

Enterprise Oil/Shell is obligated to continue to makepayments to us under our service agreement until the agreement expires in March 2014.The minimum guaranteed term of the service agreement expired in March 2004,permitting Enterprise Oil/Shell to terminate the agreement at any time upon12 months’ written notice. Enterprise Oil/Shell agreed to investapproximately £86 million (U.S.$148.0 million) to install a waterinjection unit on board of the *Haewene Brim*.We managed the project of the development and installation of the waterinjection unit on a cost plus basis and received a management fee. The waterinjection module was operational as from October 28, 2004. EnterpriseOil/Shell continued to pay full day rates and has agreed to deliver title tothe water injection unit to us for nominal consideration upon completion of theproject. We believe that the water injection unit may increase remainingrecoverable reserves at the Pierce Field by approximately 100 millionbarrels and, accordingly, that it is reasonably likely that the productionprofile of the Pierce Field will extend beyond 2014 (subject to certainfactors, including the price of oil and overall production rates) and that *Haewene Brim* may continue to operate underthe service agreement until that time.

*Munin.**  *In January 2002, we enteredinto a share 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 Marenco InvestmentsLimited, pursuant to which we acquired all of the share capital of LufengDevelopment Company, the company that operates the *Munin*. The *Munin*is a harsh environment FPSO that was converted from a double hull multipurposeshuttle tanker 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 75persons, has a weight of 103,000 dwt, a storage capacity of 605,000 barrels, alength of 253 meters, a depth of 23 meters and a deck area of 3,200 squaremeters. Its fluid capacity is 125,000 barrels per day and its processing capacityis 60,000 barrels per day of the heavy crude oil (with a low gas to oil ratio)found in the Lufeng Field. The vessel has a successful operating record.

Lufeng Development Company began operating the *Munin* in January 1998 on the LufengField at a water depth of 330 meters pursuant to a service agreement withStatoil. 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 

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93%, unless otherwiseagreed with Statoil. If the oil production uptime fell below this threshold,our facility fee was reduced according to a predetermined schedule. Since itbegan operating in January 1998, the *Munin*has maintained oil production uptimes that have exceeded the minimum threshold.In 2003, the *Munin* achieved anaverage oil production uptime of 96.1%. While we did not receive an operatingfee for operating the *Munin*,Statoil has reimbursed us for substantially all of our operating expenses,except for limited marine expenses and certain taxes.

In January 2004, Bluewater entered into a newservice agreement with Conoco Phillips to deliver, install and operate the *Munin* on the Xijiang Field in the South China Sea using theFPSO’s dynamic positioning system, which will enable us to avoid costsassociated with installing a fixed mooring system. As a consequence, ourexisting service agreement with Statoil was suspended in July 2004. The *Munin* was relocated to the Xijiang Oil Field in September 2004pursuant to the terms of the service agreement with Conoco Phillips and startedoperating on the field in October 2004. The new service agreement had aminimum term of 160 days and a maximum term of 190 days. Under thenew agreement, we were required to maintain a crew and operate the *Munin*. We received a defined day rate of approximatelyU.S.$99,750 per day that consisted of a facility fee and a fixed operating fee.We also received fixed ancillary fees to reimburse us for various costsassociated the performance of our duties under the agreement. In order toreceive the full facility fee, we had to maintain a production rate of at least50,000 barrels of oil produced per day and achieve an uptime of at least 97% ineach month, unless otherwise agreed with Conoco Phillips. If our productionlevel or uptime was below the applicable threshold, our facility fee had beenreduced on a pro rata basis. Production on Xijiang ended in March 2005 asper contract. After decommissioning at Xijiang, the *Munin* sailed under its own power from HK to the Lufeng fieldin June 2005 for reconnection to the subsea buoy and mooring system. Onthe June 9, 2005 the *Munin* restarted producing oil from theLufeng field to re-commence operations for Statoil Orient Inc. The amendedagreement with Statoil Orient Inc. is for a period of 3 years and will expirein April 2008. Under this revised agreement, Bluewater will receive afixed daily hire rate of U.S.$30,000 per day plus U.S.$3.35 for every barrel ofoil produced. The average anticipated revenue over this 3 year period isexpected to be in the region of U.S.$55,000 to U.S.$60,000 per day. Inaddition, Bluewater receives a monthly lump sum payment to cover a pre-definedscope 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.

*Jotun.*   Bluewater(Dyphavet) B.V., a subsidiary of the Company, and Norwegian company StandardMarine Nordsjo AS (“SMNAS”), an affiliate of Exxon Mobil Corporation, haveformed a partnership (PR Jotun DA) that purchased FPSO *Jotun A* 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 astorage capacity of 584,400 bbl and has been producing on the Jotun fieldlocated in the Norwegian sector of the North Sea since 1999. After itsacquisition, the FPSO has been leased back under a bareboat charter to theJotun field partners for a minimum term of five years, with extension optionsup to 15 years. Under the agreement a defined dayrate of approximately U.S.$168,000per day is payable by the Jotun field partners to PR Jotun DA. This amount isrealized on a straight-lined basis, calculated based on the term of theagreement.

*AokaMizu.**  *The*Aoka Mizu* is a newly-builtdouble hull based on a similar design to that of the *Bleo Holm*. Construction of the hull took place in Japan andwas completed in the second half of 2000. It was delivered with a moonpoolprepared to receive a Bluewater designed turret mooring system. The hull isfully coated both internally and externally for FPSO operations and hassupports for topside facilities. The hull has a weight of 105,000 dwt, a lengthof 242 meters, a breadth of 42 meters and a deck area of 7,985 square meters.Given its high standards, it is capable of taking advantage of opportunities inmarkets with stringent environmental requirements and harsh weather conditions.

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On March 31, 2006 weentered into a service agreement with Nexen Petroleum U.K. Ltd. with respect tothe provision and operation of an FPSO for production on the Ettrick field onthe UK continental shelf. For this project our existing hull *Aoka Mizu*will be converted into an FPSO*.*Underthe agreement with Nexen Petroleum U.K. Ltd. we will receive a fixed daily hirerate of U.S.$112,500 per day plus a production tariff per barrel of oilproduced. Nexen has agreed to pay us a minimum tariff based on 27 millionbarrels of oil produced during the five year contract term. All operating costswill be reimbursed by Nexen, including a profit mark-up.

***Development of New FPSOs***

An important activity of our FPSO business is thedevelopment of new FPSOs under service agreements with oil companies. Ourdevelopment activities consist of the design, engineering, project managementand delivery of FPSOs. Between 1985 and 1994, we developed three FPSOs based onrelatively simple designs and short production lives for use in relativelybenign marine and weather conditions in offshore fields in Asia, Australia,West Africa and the Mediterranean. The last of these FPSOs was decommissionedin 1995 in line with our strategic decision to concentrate on the production ofmore complex FPSO units that are suitable for use in harsh environments. Sincethen, we have designed, engineered and developed three high specification FPSOswith initial design lives of 15 to 20 years and an FPSO hull  that will be used for conversion into anFPSO.

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)                   |       | Ettrick Field (UK)                         |       |                 | — |   |   | Nexen |
| * *               |       |              |       | (under construction)    |       |                                 |       |                                       |       |                 |   |   |

 

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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%.

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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. If a service agreement is awarded, we willconvert the hull into an FPSO that is designed for use on the particular fieldor group of fields. The conversion process is extensive and generally takesbetween 18 and 24 months. The actual development of an FPSO takes place intwo principal phases: the production of the hull and the topsides at separatelocations and their integration at a common location. Based on historicalexperience, we believe that the cost of carrying out the conversion of a highspecification FPSO (including the cost of procuring a hull) ranges fromU.S.$350.0 million to U.S.$450.0 million, although larger and/or morecomplex FPSOs may have higher 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 allcommissioning is completed with records agreed by our operationsrepresentative. For critical safety systems, we require a certification from acompetent 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 ofFPSOs, which are used to offload and store hydrocarbons at offshore productionplatforms and near shore terminals that lack sufficient storage capacities.

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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 andfloating storage and offloading vessels designed and operated by us. Anessential component of these systems is a swivel which permits fluids totransfer at high pressures in both directions between fixed and rotating partsof our mooring systems. Our current swivel designs provide for multiflow pathsat different pressure ratings that are suitable for use in the extraction offluids 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 mooringsystem incorporated our advances in swivel technology and used a3x3 anchoring system, which connects the turret to the ocean floor throughthree sets of three anchor lines. Since then, we have designed and delivered 12turret mooring systems for use at a variety of water depths and marine andweather conditions. A substantial amount of these systems have been used byFPSOs that we 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 52 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 that issimilar to the yoke used in our wishbone buoy system and allows the attachedvessel to rotate according to wind, wave and weather conditions. We havedesigned and delivered three of these systems to date.

We delivered twenty buoy mooring systems from 2001 to2005 and are in the process of developing seven additional buoy mooring systemsfor delivery in 2006 and one tower mooring system for delivery in 2008. We didnot deliver any turret mooring systems from 2001 to 2005 due to a lack ofmarket demand for those types of systems during the period. We delivered onlyone tower mooring systems from 2001 to 2005.

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 inresponse to 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 submit 

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bids forthese contracts. A description of our FPSO service agreements and our SPMdelivery contracts is included under “—FPSO Business—FPSO Fleet and FPSO Hull”and “—FPSO Business—Development of New FPSOs”. A description of our revenuerecognition policies under these agreements is included under “Item 5:Operating and Financial Review and Prospects—(A) Operating Results—CriticalAccounting Policies and Estimates—Revenue Recognition and Inventory”.

**Intellectual Property**

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, 2005, 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 to avoid that competitors fileintellectual rights on this technology.

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

In 2004, certain of our competitorsinitiated injunction proceedings in the district court in The Haguein respect of an alleged infringement of intellectual property rights. Thecourt rejected the claim, and currently the alleged claim is under appeal inthe Court of Appeal. We expect the Court of Appeal to release its judgmentduring the second quarter of 2006. With respect to the patents at stake, wehave received advice from our patent agent that our product design does notinfringe upon any valid claim of the patent. In support of these proceedingswe, in consultation with our patent advisors, initiated proceedings to obtainthe decision of the Court that one of the patents relied upon by thesecompetitors is declared null and void. Meanwhile our competitors alsostarted proceedings at the same Court requesting a judgment on the meritsof their case. The above proceedings are running in parallel with the Europeanpatent application of our competitor that was the subject of ouropposition proceeding. Both parties have appealed against the findings of theEuropean Patent Office in Munich.

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 

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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 highlyspecialized and competitive, but dominated by a smaller number of companiesthan the FPSO market. We believe that technology is an important factor incompeting in this market. We have a strong position in this market and areamong the four market leaders in technology. Our principal competitors are SBM,Sofec and APL.

**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 and constructionof the helicopter facilities at offshore oil facilities and day-to-dayhelicopter operations. The Marine Safety Agency is responsible 

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for regulating oilpollution. We are responsible for ensuring that the relevant approvals andlicensing and certification requirements of these bodies are satisfied and haveimplemented a regulatory compliance plan to assist us in this 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 and certificationrequirements of these bodies are satisfied and have implemented a regulatorycompliance 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 expensive to comply with. We do not currentlyanticipate any material adverse effect on our business or financial position asa result of future compliance with existing laws and regulations; however,future events, such as changes in existing laws and regulations or theirinterpretation, more vigorous enforcement policies of regulatory agencies orstricter or different interpretations of existing laws and regulations, mayrequire us to make additional expenditures which may be material. In addition,offshore drilling and production operations in certain areas have been opposedby environmental groups and, in certain areas, have been restricted. To theextent laws are enacted or other governmental actions are taken that adverselyaffect offshore drilling or production, impose requirements that result inincreased costs to the oil industry or otherwise limit the demand for ourservices, our business and prospects could be adversely affected. We cannotpredict the exact extent to which our future operations and earnings may beaffected by new regulatory initiatives.

**Health,Safety and Environment 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.

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**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. When obtained,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 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 native arising upon the vessel during the charter period, arisingout of or in relation to the operation of the vessel by the charterer, includingbut not limited to claims from third parties against the Company caused bypollution or personal injury. These indemnity arrangements may not protect usin all circumstances.

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

We area limited liability company incorporated under the laws of the NetherlandsAntilles with our corporate seat in Curaçao, the Netherlands Antilles andregistered with the trade register of Curaçao with number 65489. We wereestablished in the Netherlands Antilles on December 6, 1993 to act asholding company for a group of companies that provide services and products tothe offshore oil industry. The following diagram illustrates our currentorganizational structure. Ownership of each company is 100% unless otherwiseindicated. A description of our subsidiaries is included under “Item 10:Additional Information—(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* and the *Aoka Mizu*.A description of these vessels is included under “—(B) Business Overview—FPSOBusiness—FPSO Fleet and FPSO Hull”. These assets are subject to encumbrances orlimitations on use as described below.

·       **Credit Facility.**We have granted thelenders under our credit facility customary forms of security interests overthe *Uisge Gorm*, the *Glas Dowr*,the *Bleo Holm*, the *Haewene Brim*,the *Munin* and the companies that own andoperate them. These security interests include mortgages, share pledges,assignments of income and assignments of insurance proceeds. However, thelenders under the credit facility have executed quiet enjoyment letters infavor of our clients that limit their ability to interfere with the vessels’operations. We have granted similar forms of security 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”..

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·       **Tax Lease Arrangements.**On November 3,2005 all tax lease structures that have 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 Company regainedfull ownership of the FPSO *Uisge Gorm*,the FPSO *Glas Dowr* and thetopsides of FPSO *Bleo Holm* andFPSO *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 currentand recent capital expenditures relating to our vessels is included under“—(B) Business Overview—FPSO Business—FPSO Fleet and FPSO Hull” and “Item 5:Operating and Financial Review and Prospects—(B) Liquidity and 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 and one FPSOhull (the *Aoka Mizu*). We recentlyentered into a service agreement under which we will convert the *Aoka Mizu* into an FPSO*.* In 2003, 2004and 2005, our FPSO business generated 87.3%, 84.6% and 83.7% of our revenues, respectively, 115.4%, 96.4% and364.9% of our net income, respectively, and 102.6%, 100.6% and 122.0% of ourEBITDA, 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 60 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. In2003, 2004 and 2005, our SPM business generated 12.7%, 15.4% and 16.3% of ourrevenues, respectively, (15.4%), 3.6% and (264.9%) of our net income,respectively, and (2.6%), (0.6%) and (22.0%) of our EBITDA, 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 2003,2004 and 2005, we had revenues of U.S.$295.8 million, U.S.$437.7 millionand U.S.$399.0 million, respectively, operating income of U.S.$42.3 million,U.S.$44.6 million and U.S.$67.8 million, respectively, net income ofU.S.$12.6 million, U.S.$6.4 million and U.S.$13.3 million,respectively, and EBITDA of U.S.$104.2 million, U.S.$117.6 millionand U.S.$162.8 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.$240.2 million and U.S.$43.2 million, respectively, to our totalrevenues of U.S.$399.0 million in 2005. 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,  2005Talisman and Bluewater signed Heads of Terms for replacing the FPSO agreement. Asa consequence, the FPSO agreement has been terminated as of 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. Under the heads of agreement Bluewater hasagreed to pay the costs of outstanding maintenance work with respect topipework corrosion and calcium naphtanate management that had not previouslybeen carried out under the PFSO agreement. Under the terms of the existing BareBoat Charter, Talisman is obligated to continue to make payments at pre-agreedrates until July 2012 unless the agreement is terminated earlier by Talisman.See “Item 4: Information on the Company—(B) Business Overview—FPSOBusiness—FPSO Fleet and FPSO Hull”.

**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 production at fields nearingthe end of their production profiles and, if sufficiently severe, may cause oilcompanies to alter production levels at producing fields, we have in certaininstances been subject to potential risks relating to our ability to enter intonew tie-back arrangements, to extend service agreements and to generate revenuefrom tariff and bonus payments. However, due to positive developments in oil 

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pricesand other relevant factors, these risks generally have not had a materialimpact on our financial condition or results of operations or adverselyaffected our FPSO business. We believe that our SPM business, which accountsfor a relatively smaller proportion of our revenues, is generally more affectedby fluctuations in oil price than our FPSO business due to the fact that SPMsystems are generally developed for sale rather than leased on a term basis.Because oil companies generally adjust their spending on SPM systems based ontrends in oil price, we would expect our SPM business to grow in response topositive developments in oil price and to decrease in response to negativedevelopments in oil price. We believe that having a flexible and scalableworkforce is an important factor in managing the costs associated with our morecyclical 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 *Glas Dowr***

We redeployed the *Glas Dowr* to the Sable Field off the coastof South Africa following the termination of the vessel’s original serviceagreement with Amerada Hess. To prepare the *GlasDowr* for operation on this field, we modified the vessel’s topsidesand mooring system and developed the Sable Field’s subsea infrastructure. Dueto an unanticipated increase in the scope and complexity of 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 and led to a delay in the commencement ofproduction at the Sable Field. While the *GlasDowr* commenced production on August 7, 2003, the delay in thecommencement of production and additional work on the gas compressionfacilities, along with increased insurance costs resulted in an upward revisionin our estimate of the costs of the vessel modifications and subsea work,excluding exchange rate differences and financing costs, to approximatelyU.S.$195.7 million. Of this amount, U.S.$50.4 million is reimbursableby PetroSA. We have capitalized the cost of the modifications to the *Glas Dowr*, including the financing costsrelating thereto, and have suspended depreciation of the *Glas Dowr* pending its redeployment. Theadditional revenues and income that we received from the *Haewene Brim* and the *Munin* while the relevant modificationswere made to the *Glas Dowr* weresufficient to offset the loss of revenues and income from the *Glas Dowr* during the period. The effectsof the current project delays and budget overruns on our liquidity and capitalresources are described under “—(B) Liquidity and Capital Resources—CapitalExpenditures”.

**Redeployment of the *Munin***

Our capital expenditures during 2004 related primarilyto modifications that we made to the *Munin*in connection with its redeployment to the Xijiang Field in the South ChinaSea. As of September 30, 2004, we capitalized U.S.$23.3 million inconnection with engineering work to the *Munin*in connection with its redeployment to the Xijiang Field in the South ChinaSea.

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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* sailed under its own power from HK to the Lufeng fieldin June 2005 for reconnection to the subsea buoy and mooring system. Onthe June 9, 2005 the *Munin* restarted producing oil from theLufeng field.

**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 loan agreements entered into to finance the acquisition of theFPSO *Jotun A* and the subordinated Marencoloans and amortization charges relating to debt arrangement fees. Our interestexpense does not include interest on financial debt relating to theconstruction or modification of FPSOs, which is capitalized and added to thehistorical cost of the FPSO to which it relates. Cash interest paid is definedas interest expense, plus capitalized interest, less accrued interest on thesubordinated Marenco loans, less amortization of debt arrangement fees and less the ineffective portion of hedgesrecognized in earnings. Our interest expense has increased since 2001due to an increase in the amount of our outstanding indebtedness (whichresulted from the incurrence of approximately U.S.$285.9 million ofadditional indebtedness in connection with our acquisitions of the *Haewene Brim*, the *Munin* and their related operatingcompanies and the incurrence of approximately U.S.$318.2 million of additionalindebtedness in connection with the loan agreements entered into to finance theacquisition of the FPSO *Jotun A* ) andan increase in the weighted average interest rate payable in respect of ourindebtedness (which resulted from the issuance of our 101¤4% Senior Notesdue 2012 at a relatively higher interest rate and from an increase inamortization 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 and in 2005, was nil.

To reduce the interest expense relating to our 101¤4%Senior Notes due 2012, we entered into a fixed-to-floating interest rate swaptransaction, with effect from April 25, 2003, that enabled us to swap theequivalent of the fixed rate amount of interest that is payable onU.S.$335.0 million aggregate principal amount of our 101¤4% Senior Notesdue 2012 for a floating rate amount of interest that would be payable on anequal amount of indebtedness. On May 27, 2003, we cancelled the swaptransaction. Under the swap, prior to the cancellation, we received interestpayments 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 over LIBOR. We received U.S.$7.6 million on May 30, 2003,which represented our net gain from the cancellation of the swap transaction.We deferred U.S.$6.7 million of this gain, which will be credited toincome over the remaining term of the 101¤4% Senior Notesdue 2012, and used the payment to repay outstanding indebtedness under ourcredit facility.

As of July 17, 2003, we entered into a newfixed-to-floating interest rate swap transaction, with terms identical to thoseof the previous swap transaction, that enables us to swap the equivalent of thefixed rate amount of interest that is payable on U.S.$335.0 millionaggregate 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, we receive payments that arecalculated at a fixed rate of 101¤4%and make interest payments that are calculated at a floating rate that is equalto a margin of 6.32% over LIBOR. As of February 15, 2005 the marginchanged to 6.44%.On November 4, 2005 the Company partially cancelled thefixed-to-floating interest rate swap transaction in relation to the U.S.$335.0million aggregate principal amount of the 101¤4% Senior Notesdue 2012 for the period from August 15, 2005 to August 15, 2007. Dueto the partial cancellation of the swap transaction the company will incur fairvalue fluctuations through the statement of income from the date ofcancellation until August 15, 2007. After that date the interest 

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will continue floating atLIBOR + 6.44%. The Company paid U.S.$6.9 million on November 4, 2005 whichrepresented its cost from the cancellation of the swap transaction. The Companywill defer this cost and debit it to the statement of income over the remainingduration of the 101⁄4% Senior Notes due 2012.

To limit the interestexposure after July 3, 2006 on the long-term bank loan entered into on July 1,2005 for financing of the acquisition of the 55% ownership interest in PR JotunDA,  the Company purchased an interestrate cap. This interest rate cap has a strike rate of 4.4%, limiting themaximum interest costs including margin to 5%. The interest rate cap has astarting notional amount of U.S.$143.9 million and the reduction scheduleof the notional amount of the cap is aligned with the repayment schedule of theloan.

**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.

**CriticalAccounting Policies 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 are believedto be reasonable under the circumstances, the results of which form the basisfor judgments made about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. Our management believesthat the following accounting policies, among others, are the most critical tounderstanding 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.

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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 are recognized in the period in which therevisions are determined. Our management identifies and estimates lossesrelating to uncompleted contracts and makes necessary provisions, if any, inthe period in which the losses are determined. Differences between the actualand estimated development of our work in progress could materially impact theresults of operations. A change in the percentage of completion would not havehad a significant impact on our revenues in 2004 or in prior years.

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.$163.3million), 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 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.$27.6million). 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.

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***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.$0.9 million in 2003, U.S.$0.6 million in 2004 and U.S. $20.3 millionin 2005 relating primarily to the amortization of goodwill and the deduction ofinterest on intercompany loans for income tax purposes. This goodwill anddeductible interest is associated with our internal restructuring, and we arecurrently in discussions with the Dutch tax authorities concerning our abilityto take advantage of the tax savings associated with it. See “—Income TaxesPayable”. The decrease in deferred tax assets during 2003 resulted from achange in the period over which goodwill associated with the restructuring isamortized, from 10 years to 15 years, which brings the amortizationperiod in line with the FPSO depreciation period. This change led to a decreasein the amount of amortization charges recorded for income tax purposes. Thedecrease in deferred tax assets during 2004 resulted from a change in thestatutory tax rate in the Netherlands from 34.5% to 30.0%, which accordinglyreduced the amount of tax credit available to offset against losses.

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. We continue tovigorously contest the imposition of any additional taxes and have startedlegal proceedings to have the assessments reviewed. Such judicial review in theNetherlands may take a considerable period of time. As is permitted under Dutchlaw and regulations, we intend to withhold payment of amounts in respect of contestedtax assessments pending final resolution of the issue.

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 31,2004 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 in respect of periods prior to December 31, 2004. As thedisallowed portion of the interest deduction depends significantly on thedebt-equity ratio of the relevant entity at the beginning and the end of anyfinancial year, it is clear that the outcome of the dispute with the Dutch taxauthorities concerning the relevant goodwill amount (and the annual amortizationamount resulting therefrom) and the corresponding intercompany debt amount willhave a significant impact on the effect of the thin cap rules on BluewaterHolding B.V.

The outcome of these discussions and judicialproceedings, which may take a considerable period of time, could limit ourability to take advantage of future tax savings associated with our internalrestructuring by limiting the amount of goodwill that we may amortize and theamount of interest that we may deduct for tax purposes in future periods. Inaddition, the outcome of our dispute with respect to thin cap rules maylimit the amount of deductible interest for the tax year 2004 and subsequentperiods. Based upon current facts and circumstances, applicable tax law,regulation and precedent, discussions with 

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relevant tax authoritiesand professional advisers and other relevant criteria, however, we estimatethat it is currently probable that we will realize benefits relating to atleast U.S.$434.0 million of amortizable goodwill and at leastU.S.$724.0 million of interest bearing inter-company debt inconnection with our internal restructuring at January 1, 2000 and thatsuch amounts will result in tax losses which may be carried forward for Dutchincome tax purposes, subject to the potential application of the thin cap rules asof 2004. Notwithstanding our current estimates, however, it is impracticable toquantify definitively at this time the effect that the outcome of suchdiscussions may have on our actual tax position, because such definitivequantification depends on a number of possible future events, including thespecific factual findings and legal and regulatory positions that may be takenby the Dutch tax authorities in the anticipated legal proceedings, as well asthe outcome of such proceedings. In addition, in December 2001,U.S.$379.5 million of the inter-company indebtedness of BluewaterHolding B.V. relating to the internal restructuring was converted to sharecapital, thereby reducing the amount of tax benefits that we may take advantageof in subsequent periods, at the same time increasing the equity amount forapplication of the thin cap rules as of 2004. While we believe that it isprobable that we will realize tax benefits in amounts that are not less thanthe foregoing estimates as set forth above and that it is unlikely that theoutcome of these discussions and the pending proceedings relating thereto willhave a material adverse effect on our financial position, there can be noassurance in this regard and we could lose some or all of the futureanticipated tax savings associated with our internal restructuring.

We have recorded adeferred tax asset based on our estimate of the probable result of thesediscussions. The carrying value of our net deferred tax assets assumes apositive outcome of our discussions with the Dutch tax authorities and that wewill be able to generate sufficient future taxable income in certain taxjurisdictions to take advantage of the benefits associated therewith. Webelieve that it is more likely than not that this deferred tax asset will berealized. However, if this assessment is incorrect, we may be required torecord full or partial valuation allowances against our deferred tax assetsresulting in the inclusion of additional income tax expense in our consolidatedfinancial statements. We evaluate the realizability of the deferred tax assetsand assess the need for a valuation allowance on a quarterly basis. We did notrecord a valuation allowance in 2003, 2004 and 2005.

***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 Companyregained full ownership of the FPSO *UisgeGorm*, the FPSO *Glas Dowr*and the topsides of FPSO *Bleo Holm*and FPSO *Haewene Brim.*In addition, the tax lease benefitsliability has been released to other operating income and restricted depositswere discharged and proceeds were used for repayment of the corporate creditfacility.

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 reference to a number of tax and financialassumptions made at the time the leases were entered into. Payment arrangementsat the inception of the lease transactions were structured, and security has beenprovided, such that, subject to the adjustments described under “Item 10:Additional Information—(C) Material Contracts—Tax Lease Arrangements”, wedid not have any rental payment obligations with respect to the *Uisge Gorm*, the *Glas Dowr*, thetopsides of the *Bleo Holm* or the topsides of the *Haewene Brim*. Our tax lease benefits liability representedthe amount that we would be required to pay the lessor in the event of avoluntary termination. In the event of an involuntary termination or an adversetax change under our tax lease arrangements (whether prospective orretrospective), the tax lease benefits liability 

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presentedin our balance sheets could have been required to be repaid to the lessor at anamount greater than the carrying value of the liability, which would have had amaterial adverse effect on our financial condition and results of operations.The liability declined over time as the tax benefits were realized by thelessor. Periodically, the Company assessed the likelihood of repayment of thevoluntary early termination liability. As long as there was more than a remotepossibility of early termination, the liability was recorded and was releasedto other operating income as the liability decreased over the lease term.Payments received from/made  to thelessor as a result of changes in underlying variables such as market interestrates and corporate income tax were accounted for in the statement of income asother operating income/expense. As per December 31, 2005, the tax leasebenefits liability was fully released.

***Tangible Fixed Assets and Depreciation***

Our FPSOs account forapproximately 79.3% 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 2003, 2004 or2005 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.$10.0 million for 2005.

***Accounts Receivable***

Accounts receivables are stated at face value less anallowance for possible uncollectible accounts. We continuously monitorcollections and payments from our customers and maintain a provision forestimated credit losses based upon our historical experience and any specificcustomer collection issues that we have identified. Because our accountsreceivables are concentrated in a relatively small number of customers, asignificant change in the liquidity or financial position of these customerscould have a material adverse effect on the collectability of our accountsreceivables and our results of operations. In 2005, we recorded no provisionrelating to credit losses, compared to U.S.$0.5 million in 2004.

**NewAccounting Policies**

**SFAS 151**

In November 2004, the FASB issued StatementNo. 151 (“SFAS 151”), “Inventory costs, an amendment of ARBNo. 43, Chapter 4”. SFAS 151 clarifies the accounting for abnormalamounts of idle facility expense and waste and prohibits such costs from beingcapitalized in inventory. In addition, SFAS 151 requires that allocationof fixed production overheads to the inventory cost be based on the normalcapacity of the production facilities. In accordance with the early adoptionprovisions of the statement, we have adopted SFAS 151 effective as ofJanuary 1, 2005. Adopting SFAS 151 did not have a material impact on ourconsolidated financial statements.

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**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 will become effective in 2006 but we do not anticipatethat the adoption of SFAS 153 will have a material impact on our consolidatedfinancial statements.

**SFAS 123R**

In December 2004, the FASB issued SFAS No. 123(revised 2004) (“SFAS 123R”), concerning Share-Based Payment.SFAS 123R is a revision of Statement No. 123, “Accounting for Stock-BasedCompensation”, which was adopted by us in 2003. SFAS 123R supersedes APBOpinion No. 25 that allowed the use of the intrinsic value for measuringstock-based compensation expenses for stock issued to employees.SFAS 123R focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions.SFAS 123R contains certain changes compared with the originalpronouncement. The provisions of this statement are effective for financialstatements issued for fiscal years beginning after January 1, 2006. We donot anticipate that the adoption of SFAS 123R will have a material impacton our consolidated financial statements since the company currently does nothave any stock-based compensation subject to SFAS 123R.

**FIN 47**

In March 2005, the FASB issued FASBInterpretation No. 47 (“FIN 47”), “Accounting for Conditional AssetRetirement Obligations”. FIN 47 clarifies that the obligation to perform theasset retirement activity is unconditional even though uncertainty exists aboutthe timing and the method of settlement. Accordingly the Company would berequired to recognize a liability for the fair value of a conditional assetretirement obligation if that fair value can be reasonably estimated. Thestatement became effective on December 31, 2005. The Company hasinvestigated the existence of such obligations and concluded that the effectson the financial statements are negligible.

**SFAS 154**

In May 2005, the FASB issued Statement No. 154(“SFAS 154”), “Accounting Changes and Error Corrections”, which replaces APBOpinion No. 20 and SFAS No. 3. The statement establishesretrospective application as the required method for reporting a change inaccounting principle in the absence of explicit transition requirements for newaccounting pronouncements. Error corrections must be applied in the same way asaccounting changes. In conformity with the transition guidance in thisStatement, the Company adopted SFAS No. 154 as from May 2005.Adopting SFAS 154 did not have a material impact on our consolidated financialstatements.

**SFAS 155**

In February 2006, the FASB issued Statement No. 155(“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments, anamendment of FASB Statements No. 133. and 140”. SFAS 155 provides entitieswith relief from having to separately determine the fair value of an embeddedderivative that would otherwise be required to be bifurcated from its hostcontract in accordance with Statement 133. The provisions of this statementwill be effective for all financial instruments acquired or issued after thebeginning of an entity’s first fiscal year that begins after September 15,2006. We do not anticipate that the adoption of SFAS 155 will have a materialimpact on our consolidated financial statements.

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**SFAS 156**

In March 2006, the FASB issued Statement No. 156(“SFAS 156”), “Accounting for Certain Hybrid Financial Instruments, anamendment of FASB Statement No. 140”. SFAS 156 requires an entity torecognize a servicing asset or servicing liability each time it undertakes anobligation to service a financial asset by entering into a servicing contract.The provision of this statement will be effective for all financial statementsissued for fiscal years beginning after September 15, 2006. We do notanticipate that the adoption of SFAS 156 will have a material impact on ourconsolidated financial statements.

**Results of Operations**

| ** **                                                                   | ** ** | **For year ended December 31,** | ** ** | **Change** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                                                   | ** ** | **2003**                                            | ** ** | **2004**   | ** ** | **2005** | ** ** | **2003-2004** | ** ** | **2004-2005** | ** ** |
| ** **                                                                   | ** ** | **(in U.S.$ thousands)**                  | ** ** | **(%)**    | ** ** |
| **Revenues**                                                                 |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| FPSO business                                                                |       | 258,182                                             |       | 370,241    |       | 333,828 |   |   | 43.4 |   |   |   | (9.8 | ) |   |
| SPM business                                                                 |       | 37,598                                              |       | 67,424     |       | 65,162 |   |   | 79.3 |   |   |   | (3.4 | ) |   |
| Total                                                                        |       | 295,780                                             |       | 437,665    |       | 398,990 |   |   | 48.0 |   |   |   | (8.8 | ) |   |
| **Operating expenses**                                                       |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Operations expenses:                                                         |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| FPSO business                                                                |       | 147,034                                             |       | 247,409    |       | 156,285 |   |   | 68.3 |   |   |   | (36.8 | ) |   |
| SPM business                                                                 |       | 38,721                                              |       | 66,664     |       | 99,312 |   |   | 72.2 |   |   |   | 49.0 |   |   |
| Total                                                                        |       | 185,755                                             |       | 314,073    |       | 255,597 |   |   | 69.1 |   |   |   | (18.6 | ) |   |
| Selling, general and  administrative expenses                                |       | 9,800                                               |       | 9,754      |       | 11,310 |   |   | (0.5 | ) |   |   | 16.0 |   |   |
| Other operating income                                                       |       | (4,014                                              | )          | (3,738     | )          | (30,702 | ) |   | (6.9 | ) |   |   | 721.3 |   |   |
| Depreciation of tangible  fixed assets and amortization of intangible assets |       | 61,976                                              |       | 72,995     |       | 94,953 |   |   | 17.8 |   |   |   | 30.1 |   |   |
| Total operating expenses                                                     |       | 253,517                                             |       | 393,084    |       | 331,158 |   |   | 55.1 |   |   |   | (15.8 | ) |   |
| **Operating income**                                                         |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| FPSO business                                                                |       | 45,307                                              |       | 45,339     |       | 103,730 |   |   | 0.1 |   |   |   | 128.8 |   |   |
| SPM business                                                                 |       | (3,044                                              | )          | (758       | )          | (35,898 | ) |   | (75.1 | ) |   |   | 4635.9 |   |   |
| Total                                                                        |       | 42,263                                              |       | 44,581     |       | 67,832 |   |   | 5.5 |   |   |   | 52.2 |   |   |
| **Financial income and expense**                                             |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                              |       | 3,530                                               |       | 3,355      |       | 3,550 |   |   | (5.0 | ) |   |   | 5.8 |   |   |
| Interest expense                                                             |       | (45,120                                             | )          | (44,940    | )          | (54,464 | ) |   | (0.4 | ) |   |   | 21.2 |   |   |
| Currency exchange  results                                                   |       | 10,841                                              |       | 2,924      |       | (14,873 | ) |   | (73.0 | ) |   |   | (608.7 | ) |   |
| Total                                                                        |       | (30,749                                             | )          | (38,661    | )          | (65,787 | ) |   | 25.7 |   |   |   | 70.2 |   |   |
| Income before taxes                                                          |       | 11,514                                              |       | 5,920      |       | 2,045 |   |   | (48.6 | ) |   |   | (65.5 | ) |   |
| Income taxes                                                                 |       | (1,063                                              | )          | (469       | )          | (16,421 | ) |   | (55.9 | ) |   |   | 3401.3 |   |   |
| Income after income  taxes                                                   |       | 12,577                                              |       | 6,389      |       | 18,466 |   |   | (49.2 | ) |   |   | 189.0 |   |   |
| Minority interest                                                            |       | —                                              |       | —     |       | 5,163 |   |   | — |   |   |   | — |   |   |
| Net income                                                                   |       | 12,577                                              |       | 6,389      |       | 13,303 |   |   | (49.2 | ) |   |   | 108.2 |   |   |
| EBITDA(1):                                                                   |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| FPSO business                                                                |       | 106,960                                             |       | 118,279    |       | 198,632 |   |   | 10.6 |   |   |   | 67.9 |   |   |
| SPM business                                                                 |       | (2,721                                              | )          | (703       | )          | (35,847 | ) |   | (74.2 | ) |   |   | 4999.1 |   |   |
| Total                                                                        |       | 104,239                                             |       | 117,576    |       | 162,785 |   |   | 12.8 |   |   |   | 38.5 |   |   |

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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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**YearEnded 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.

***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% from U.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 

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*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 arbitration proceedings.In addition, the operations expenses increased by U.S.$4.6 million becausehigher general project costs, U.S.$4.0 million because of a provision for losstaken on one of our SPM projects during 2005 and U.S.$4.1 million in relationto 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*.

***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 in2005, compared with a gain of 

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U.S.$2.9 million in 2004. U.S.$6.3 million ofthis 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.

**YearEnded December 31, 2004 Compared with Year Ended December 31, 2003**

***Revenues***

Revenues were U.S.$437.7 million in 2004, up 48.0%from U.S.$295.8 million in 2003. Revenues from our FPSO business wereU.S.$370.2 million in 2004, up 43.4% from U.S.$258.2 million in 2003.Revenues from our SPM business were U.S.$67.4 million in 2004, up 79.3%from U.S.$37.6 million in 2003.

Revenues from our FPSO business increased byU.S.$112.0 million in 2004. Of this increase, U.S.$90.3 million wasattributable to the reimbursement of expenses incurred in connection with theinstallation of a new water injection facility on the Haewene Brim (in 2004, wewere reimbursed U.S.$106.4 million, compared to U.S.$16.1 millionduring 2003). U.S.$24.8 million of this increase was attributable to anincrease in payments received under our service agreement with PetroSA for theGlas Dowr, which commenced production on August 7, 2003. The Glas Dowr wasoperational during the entire twelve months of 2004. During 2003, it wasoperating for only five months and mainly received income from the reimbursableexpenses incurred in connection with the installation of subsea equipment onthe Sable Field. In 2004, revenues from the Munin decreased byU.S.$1.5 million compared with 2003. This decrease was due to the factthat the vessel was taken out of operation for two and a half months for repairand lifetime extension work performed in connection with the redeployment ofthe Munin to the Xijiang Field and Lufeng reconnection. In addition, revenuesgenerated by the Haewene Brim decreased by U.S.$1.6 million in 2004,compared with 2003, due to lower incentive income as a result of theinstallation of a new water injection facility on the Haewene Brim.

Revenues from our SPMbusiness increased by U.S.$29.8 million in 2004. Of this increase,U.S.$9.9 million was attributable to the reimbursement of expensesincurred in relation to work performed in connection with the redeployment ofthe Munin to the Xijiang Field. The increase in revenues was also attributableto a higher level of SPM activities in 2004, compared to 2003. The higher levelof SPM 

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activitieswas due to SPM delivery contracts for the development of buoy mooring systemsduring 2003 which were awarded late in the year and which mainly generatedrevenues during 2004. In 2004 we were awarded four new buoy projects and wesold a stock buoy. We do not expect payments under the contracts to have amaterial effect on our results of operations in the future.

***Operations Expenses***

Operations expenses were U.S.$314.0 million in2004, up 69.1% from U.S.$185.8 million in 2003. In our FPSO business, ouroperations expenses were U.S.$247.4 million in 2004, up 68.3% fromU.S.$147.0 million in 2003. In our SPM business, operations expensesamounted to U.S.$66.7 million in 2004, up 72.2% fromU.S.$38.7 million in 2003.

The U.S.$100.4 million increase in the operationsexpenses of our FPSO business during 2004 was primarily attributable to therecognition of U.S.$90.3 million in reimbursable expenses relating to theinstallation of a new water injection facility on the Haewene Brim as describedabove under “—Revenues”. U.S.$10.1 million of this increase relates tohigher operations expenses for the Glas Dowr and lower operations expenses onthe Munin for the reasons described under “Revenues”.

Operations expenses of ourSPM business increased by U.S.$28.0 million during 2004. Operations expensesincreased by U.S.$9.9 million due to reimbursable expenses incurred inrelation to work performed in connection with the redeployment of the Munin tothe Xijiang Field. Of this increase, U.S.$18.1 million was attributable toa higher level of SPM activities in 2004, compared with 2003.

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

Selling, general andadministrative expenses amounted to U.S.$9.8 million both in 2003 and2004.

***Depreciation of Tangible Fixed Assets***

Charges for depreciationof tangible fixed assets amounted to U.S.$73.0 million in 2004, up 17.8%from U.S.$62.0 million in 2003. The increase of U.S.$11.0 million inthe amount of these charges resulted from U.S.$15.9 million indepreciation charges that we recorded in respect of the Glas Dowr following thecommencement of production at the Sable Field as of August 7, 2003. Thisincrease was partly offset by (i) a reduction of U.S.$3.2 million indepreciation charges relating to the Haewene Brim in connection with theinstallation of a new water injection facility (depreciation was temporarilysuspended during the period the vessel was of location); (ii) a reductionof U.S.$1.6 million in depreciation charges relating to repair andlifetime extension work performed on the Munin in connection with itsredeployment to the Xijiang Field and Lufeng reconnection; (iii) areduction of U.S.$0.1 million in depreciation charges relating to the saleof a leased buoy on June 19, 2003; and (iv) reduced depreciationcharges in relation to certain office equipment.

***Operating Expenses***

Due to the foregoingfactors, total operating expenses were U.S.$393.1 million in 2004, up55.1% from U.S.$253.5 million in 2003.

***Operating Income***

Due to the foregoingfactors, operating income amounted to U.S.$44.6 million in 2004, up 5.5%from U.S.$42.3 million in 2003. Our operating margin decreased to 10.2% ofour revenues in 2004, compared to 14.3% of our revenues in 2003.

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***Financial Income and Expense***

Net financial expense amounted toU.S.$38.7 million in 2004, up 25.7% from U.S.$30.7 million in 2003.

Our interest expense decreased fromU.S.$45.1 million in 2003 to U.S.$44.9 million in 2004. In 2003 wecapitalized U.S.$6.1 million of interest relating to modifications to theGlas Dowr, while in 2004, we capitalized U.S.$0.4 million of interestrelating to the repair and lifetime extension work of the Munin to the XijiangField and Lufeng reconnection. Our total debt decreased fromU.S.$587.5 million in 2003 to U.S.$545.3 million in 2004. In 2004, wealso benefited from a fixed-to-floating rate swap transaction relating to theinterest that is payable on the aggregate principal amount of our 101¤4%Senior Notes due 2012. See “—Interest Expense”. Both of these resulted in adecrease of interest costs of U.S.$5.9 million. The weighted averageinterest rate payable on our debt increased due to our issuance in April 2003of an additional U.S.$75.0 million aggregate principal amount of 101¤4%Senior Notes due 2012 at a relatively higher interest rate. In contrast, theissuance of 101¤4%Senior Notes due 2012 had limited effect on comparable periods, because we havebeen able to reduce the effective rate of interest payable on our 101¤4%Senior Notes due 2012 through the use of a fixed-to-floating interest rateswap.

Interest income was U.S.$3.4 millionin 2004, down 5.0% from U.S.$3.5 million in 2003, due to lower prevailinginterest rates in 2004. Currency exchange results were a gain ofU.S.$2.9 million in 2004, compared with a gain of U.S.$10.8 millionin 2003. U.S.$2.8 million of this decrease was attributable to oursterling and euro foreign currency exchange contracts. In 2004, we recognizedU.S.$1.6 million of gain on these foreign currency exchange contractscompared to a gain of U.S.$.4.4 million in 2003. In addition, the transferof £20 million restricted deposits to U.S. dollar restricted depositsresulted in a lower [revaluation profit] in 2004, compared to 2003 and themovement of the U.S. dollar and the Euro exchange rates resulted in a lowerexchange gain in 2004, compared to 2003.

***Income before Taxes***

Due to the foregoingfactors, income before taxes was U.S.$5.9 million in 2004, down 48.6% fromU.S.$11.5 million in 2003. As a percentage of revenues, our income beforetaxes decreased from 3.9% in 2003 to 1.4% in 2004.

***Income Taxes and Net Income***

Werecorded U.S.$0.5 million of income tax credits in 2004, down 45.5% fromU.S.$1.1 million in 2003. These income tax credits consisted of currenttax charges of U.S.$1.0 million in 2004, down 37.5% fromU.S.$1.6 million in 2003, and deferred tax credits ofU.S.$1.5 million in 2004, down 44.4% from U.S.$2.7 million in 2003.The deferred tax credits primarily resulted from the increase of tax loss carry-forwardswhich resulted from our internal restructuring. The amount of tax credit that wecan deduct depends on, among other things, our aggregate losses and theapplicable tax rate. Consequently, the decrease of U.S.$1.2 million in thedeferred tax credit in 2004 was primarily attributable to a change in thestatutory tax rate in the Netherlands from 34.5% to 30.0%, which accordinglyreduced the amount of tax credit available to offset against losses. Aftertaking into account income tax credits, net income amounted toU.S.$6.4 million in 2004, down 49.2% from U.S.$12.6 million in 2003.

**(B)   Liquidity and 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.

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

| ** **                                                        | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **(in U.S.$ thousands)**         | ** ** |
| Provided by  operations                                           |       | 71,920                                     |       | 71,661 |   | 108,616 |   |
| (Used in)  investing activities                                   |       | (65,142                                    | )          | (18,744 | ) | (306,780 | ) |
| Provided by (used  in) financing activities                       |       | 5,807                                      |       | (40,282 | ) | 202,412 |   |
| Bank debt                                                         |       | (73,988                                    | )          | (40,282 | ) | 182,890 |   |
| 101¤4% Senior  Notes due 2012                                |       | 75,375                                     |       | — |   | — |   |
| Debt arrangement fees                                             |       | (2,260                                     | )          | — |   | (1,137 | ) |
| Minority interest                                                 |       | —                                     |       | — |   | 29,019 |   |
| Premium paid for interest rate cap.                               |       | —                                     |       | — |   | (1,462 | ) |
| Proceeds/(payments)  from fixed-to-floating interest rate swap(1) |       | 6,680                                      |       | — |   | (6,898 | ) |

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Notes:

(1)          Relates to thefollowing: a net gain was realized in 2003 in connection with the unwinding ofa fixed-to-floating interest rate swap transaction entered into on April 25,2003 that was associated with our 101¤4%Senior Notes due 2012. A net loss was realized in 2005 in connection with thepartially unwinding of a fixed-to-floating interest rate swap entered into on July 17,2003 that is associated with our 101¤4%Senior Notes due 2012. See “—(A) Factors Affecting Results of Operations—InterestExpense”.

**Net Cash Flow Provided 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.$71.9 million in 2003, U.S.$71.7 million in 2004 andU.S.$108.6 million in 2005. The increase in net cash flow provided byoperations from 2003 to 2004 was U.S.$0.2 million. The changes in workingcapital include movements in work in process, billings in excess of cost andunrealized income, other receivables, other liabilities and accrued expenses,accounts payable and prepaid expenses. Work in process increased fromU.S.$8.1 million to U.S.$13.8 million because the level of our SPMbusiness activities was lower in 2003 compared to 2004. Billings in excess ofcost increased from U.S.$4.3 million to U.S.$8.5 million becauseduring 2004 there were more SPM projects for which advance billings were sent.Other receivables increased by U.S.$1.1 million primarily because of ahigher amount in chargables to the client in relation to variation orders notyet approved. Other liabilities and accrued expenses increased byU.S.$12.6 million, primarily because of the increase in the number ofSPMs we recorded a higher accrual for expenses. Accounts payable increasedby U.S.$1.5 million mainly because of increased project expenses relatingto the water injection unit project of the *HaeweneBrim*. In 2004, prepaid expenses increased by U.S.$2.1 million,primarily due to the higher level of advance payments, as compared to 2003, inconnection with general office expenditures.

The increase in net cashflow provided by operations from 2004 to 2005 was U.S.$36.9 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 forwhich advance billings were sent. 

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Other receivables increased from U.S.$24.9 millionto U.S.$25.7 million primarily because of a higher amount in chargables tothe client. Other liabilities and accrued expenses increased byU.S.$23.0 million, primarily because of a provision in the costs inrelation to the alleged failure of the Company to pay for additional work and the market to market value of the foreigncurrency exchange contracts. Accountspayable decreased by U.S.$8.5 million mainly because of decreased projectexpenses 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.

**NetCash Flow (Used in) Investing Activities**

Net cash flow (used in)investing activities depends primarily on the amount of capital expendituresthat we make in connection with the construction, modification or acquisitionof FPSOs. Net cash flows (used in) investment activities totaled U.S.$(65.1)million in 2003, U.S.$(18.7) million in 2004 and U.S.$(306.8) million in 2005.The net cash outflow in 2003 resulted primarily from modifications that we madeto the Glas Dowr to prepare it for operation on the Sable Field. In 2004, cashflow used in investment activities related to modifications that we made to the*Munin*to prepare it for redeployment onthe Xijiang field and an investment in the issued share capital of EmeraldEnergy Resources Ltd. The cost of the *Munin*modificationshave been capitalized and added to the historic cost of the vessel. The netcash outflow in 2005 consisted of U.S.$381.8 million for the purchase ofFPSO *Jotun A*, U.S.$2.2 million for workperformed in connection with building two stock buoys and U.S.$2.3 millionfor work performed in connection with the recently commenced FPSO conversion ofthe *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.

**NetCash Flow Provided by (Used in) Financing Activities**

The net cash flowprovided by (used in) financing activities is primarily driven by our borrowingactivities. These cash flow amounted to U.S.$5.8 million in 2003,U.S.$(40.3) million in 2004 and U.S.$202.4 million in 2005. Our netindebtedness typically increases while we are modifying, developing oracquiring an FPSO, while our net indebtedness tends to decrease if we are notengaged in those activities. In 2003, the net cash flow provided by financingactivities resulted primarily from expenditures relating to the refinancing ofour former credit facility and certain other indebtedness and from the issuanceof an additional U.S.$75.0 million outstanding 101¤4%Senior Notes due 2012. In 2004, the net cash used in financing activities wasprimarily applied to repay part of the revolving credit facility. In 2005, thenet cash used in financing activities was primarily from borrowings for ourfully consolidated partnership PR Jotun DA. In addition, the Company usedfinancing activities for paying debt arrangement fees and for partiallycanceling the fixed-to-floating interest rate swap transaction in relation tothe U.S.$335.0 million aggregate principal amount of the 101¤4% Senior Notesdue 2012 for the period from August 15, 2005 to August 15, 2007.

**FinancingArrangements**

As of December 31,2005, 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.$116.9 millionincurred under our credit facility, a long term bank debt of U.S.$291.5 millionin relation of the purchase of the FPSO *Jotun A* andcash of U.S.$43.0 million. We also had U.S.$335.0 million aggregateprincipal amount of 101¤4%Senior Notes due 2012 outstanding and U.S.$147.0 million of indebtednessoutstanding under the subordinated Marenco loan.

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***Credit Facility***

Our credit facility is a U.S.$600.0 millionrevolving credit facility that we signed in January 2002 with aninternational syndicate of banks led by Barclays Capital, Fortis Bank and INGBank. The facility has a tenor of eight years and may be used to finance thedevelopment of new FPSOs and for general corporate purposes. Its structureincludes a borrowing base, calculated according to the present value of cashflows we earn or expect to earn under our FPSO service agreements and a proportionof the residual value of our assets. The facility may be drawn upon at any timeup to the lower of the current amount of the facility limit and the borrowingbase. The facility limit, which was U.S.$ 320 million as of December 31,2005, reduces by U.S.$20.0 million per quarter and is scheduled to reachzero in December 2009. Interest is payable at a rate that is equal to amargin over LIBOR. The margin, which is currently 1.400%, varies from 1.300% to1.700% depending on certain factors. As of December 31, 2005, theapplicable interest rate was 5.67%. A description of the principal terms of thecredit facility, including restrictions on the incurrence of indebtedness andother financial covenants, is included under “Item 10: Additional Information—(C) MaterialContracts—Credit Facility”.

The following table presents certain informationregarding the expected availability of funding under our credit facility in itscurrent form during the periods indicated.

| ** **        | ** ** | **Year ending December 31,** | ** ** |
|-------------------|------------|---------------------------------------------|------------|
| ** **        | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **        | ** ** | **(in U.S.$ millions)**           | ** ** |
| Facility limit    |       |                                        | 240        |   |   |   | 160 |   |   |   | 80 |   |   |   | 0 |   |   |   | — |   |   |
| Borrowing base(1) |       |                                        | 291        |   |   |   | 274 |   |   |   | 253 |   |   |   | 224 |   |   |   | — |   |   |

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Note:

(1)          Basedon our current FPSO fleet except for FPSO *Jotun A*

***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, PR Jotun DA entered into a U.S.$143.2 million loan agreement withStandard Marine Nordsjo 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 

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facility and to pay anestimated U.S.$2.0 million of costs relating to the issuance. The 101¤4% SeniorNotes due 2012 have been fully and unconditionally guaranteed, on a joint andseveral basis, by our other group companies. A description of the principalterms of the 101¤4% Senior Notes due 2012, including financial covenants andchange of control provisions, is included under “Item 10: Additional Information—(C) MaterialContracts—101¤4% SeniorNotes due 2012, Indenture and Associated Swap”.

·       **Subordinated Marenco Loan.**We haveborrowings outstanding under a loan from Marenco Investments Limited, ouraffiliate, that is fully subordinated to both our credit facility and theguarantees of our 101¤4% Senior Notes due 2012. As of December 31, 2005, thetotal amount of this loan (including accrued interest) wasU.S.$147.0 million. Interest is payable at a rate of 7.0% per annum;however, cash interest payments on the loan can be made only in accordance withthe provisions of our credit facility and the restricted payment provisions ofthe indenture for our 101¤4% Senior Notes due 2012. In 2005, we accrued approximatelyU.S.$4.9 million, and we repaid U.S.$5.0 million of interest on theloan. A description of the principal terms of the Subordinated Marenco Loan,including limitations on interest payments, is included under “Item 10:Additional Information—(C) Material Contracts—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.$23.7 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, 2005, we hadU.S.$18.1 million of obligations guaranteed under these facilities.

**Capital Expenditures**

From time to time, we are requiredto make capital expenditures in respect of our FPSOs and our SPM developmentprojects. In 2003 our capital expenditures resulted primarily frommodifications that we made to the *Glas Dowr* toprepare it for operation on the Sable Field. 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*.

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

**(C)****        Researchand Development**

We have focused our research and developmentactivities on technology that is integral to our FPSO and SPM businesses. Wehave an in-house design and engineering team consisting of engineers trained ina number of disciplines. We also access new sources of information ortechnology by entering into strategic alliances with equipment manufacturers,oil and gas companies, universities or by participating in joint industryprograms. While the market for our products and services is subject to continualtechnological changes, development cycles from initial conception throughintroduction can extend over several years. Our efforts have resulted in thedevelopment of a number of inventions, new processes and techniques, many ofwhich have been incorporated as improvements to our product lines. Our researchand development activity has led to a number of patents or patent applications,principally in the area of SPM systems. See “Item 4: Information on the Company—(B) BusinessOverview—Intellectual Property”. During 2003, 2004, and 2005, our research anddevelopment expenditures were U.S.$0.5 million, U.S.$0.5 million, andU.S.$0.6 million, respectively. We expect to expend a similar amount onresearch and development in future periods.

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**(D)****       Off-balanceSheet Arrangements**

We are not a party to any material off-balance sheetfinancial arrangements.

**(E)****        TabularDisclosure of Contractual Obligations**

The following table presents the scheduled maturitiesof our contractual obligations, including estimated interest expenses, assumingthat any available rollover provisions were inapplicable, as of December 31,2005.
|                                | ** ** | **Total**                                                                 | ** ** | **<1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **>5 years** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|--------------------|------------|----------------------|------------|
| ** **                     | ** ** | **Payments due by Period  (in U.S.$ thousands)** | ** ** |
| Long-term  debt obligations    |       | 1,066,969                                                                 |       | 105,646             |       | 241,607            |       | 275,309            |       | 444,407              |       |
| Long-term  loan, related party |       | 236,100                                                                   |       | —              |       | —             |       | —             |       | 236,100              |       |
| Interest rate  swaps           |       | (11                                                                       | )          | (11                 | )          | —             |       | —             |       | —               |       |
| Capital lease  obligations     |       | —                                                                    |       | —              |       | —             |       | —             |       | —               |       |
| Operating lease  obligations   |       | 18,768                                                                    |       | 1,505               |       | 4,406              |       | 4,533              |       | 8,324                |       |
| Purchase  obligations          |       | —                                                                    |       | —              |       | —             |       | —             |       | —               |       |
| Other long-term  liabilities   |       | —                                                                    |       | —              |       | —             |       | —             |       | —               |       |
| Total                          |       | 1,321,826                                                                 |       | 107,140             |       | 246,013            |       | 279,842            |       | 688,831              |       |

** **

**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 serviceproviders to and operators in the offshore oil industry. These investmentactivities are managed by Aurelia Energy N.V.’s management board, which isauthorized to represent the company. Aurelia Energy N.V.’s management boardcurrently consists of two managing directors, Intertrust (Curaçao) N.V., whichwas elected to the management board on December 6, 1993 by a vote of thesole shareholder of Aurelia Energy N.V. for an indefinite term, and Mr. JohnCollison, who was elected to the management board on December 29, 2000 bya vote of the sole shareholder of Aurelia Energy N.V. for an indefinite term.

***Meespierson Intertrust (Curaçao)N.V.***

Meespierson Intertrust (Curaçao) N.V. is a limitedliability company established under the laws of the Netherlands Antilles onMay 11, 1981 that provides director nominee services on a fee basis for NetherlandsAntilles companies. Meespierson Intertrust (Curaçao) N.V. has served as amanaging director of Aurelia Energy N.V. since the company was established inthe Netherlands Antilles in 1993. Meespierson Intertrust (Curaçao) N.V.currently also serves as a managing director of a number of Aurelia Energy N.V.’ssubsidiaries and affiliates, and it provides similar services on a fee basisfor a number of other companies. Mr. R.J.G.A. Bremer as managing directorand Ms. V.M.G. Haseth-Portillo as Attorney-in-Fact are authorized to representMeespierson Intertrust (Curaçao) N.V. in its capacity as the sole managingdirector of Aurelia Energy N.V. Meespierson Intertrust (Curaçao) N.V. waselected to the management board of Aurelia Energy N.V. on December 6, 1993at the direction of Mr. Hugo Heerema who, at the time of the election, wasthe beneficial owner of 100.0% of Aurelia Energy N.V.’s outstanding sharecapital. See “Item 7: Major Shareholder and Related Party Transactions—(A)Major Shareholder”.

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***John Collison***

Mr. Collison, 66, 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 Holding B.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 theircompensation and benefits. Bluewater Holding B.V.’s management board currentlyconsists of one managing director, Mr. Hugo Heerema, who is authorized torepresent the 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.

***Hugo Heerema***

Mr. Heerema, 53, isthe sole managing director of Bluewater Holding B.V. and the founder of AureliaEnergy N.V. Mr. Heerema founded Aurelia Energy N.V. in September 1993in connection with his acquisition of the “Bluewater” group of companies. Priorto this acquisition, Mr. Heerema was employed by the Heerema Group, wherehe served as a commercial director. Mr. Heerema holds an MBA from theUniversity of Delft and has over 25 years of experience in the offshoreindustry. Mr. Heerema has acted as the managing director of Aurelia EnergyN.V.’s various Dutch subsidiaries since 1993. He has also held several advisorypositions and non-executive directorships in affiliated companies. At the timeof his appointment to the management board of Bluewater Holding B.V., Mr. Heeremawas the beneficial owner of 100.0% of Aurelia Energy N.V.’s outstanding sharecapital. While he has since transferred this shareholding to the Jacaranda Trust,the trustees of the Jacaranda Trust are prohibited from exercising their powerin a manner that would result in Mr. Heerema being dismissed or replacedas Bluewater Holding B.V.’s sole managing director without his prior writtenconsent. See “Item 7: Major Shareholder and Related Party Transactions—(A) MajorShareholder”.

**Bluewater Energy Services 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.

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The following table presents certain informationconcerning the current executives of 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, 56, 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, 58,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.

***Jesse van de Korput***

Mr. van de Korput,48, 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, 43,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 nine years of experience in the offshore industry. Mr. Voormolenalso has approximately 19 years of experience with structured financing,project financing and mergers and acquisitions.

***Maarten van Aller***

Mr. van Aller, 37,serves as Vice President of Projects. He held project management positionswithin the IHC Caland Group and sales positions within a shipping servicecompany prior to joining our company in 2001 as a Business Development Manager.Mr. van Aller holds a masters degree in civil engineering from the DelftUniversity of Technology. Mr. van Aller has 12 years of experience inthe offshore sector.

***René Raaijmakers***

Mr. Raaijmakers, 37, serves as Vice President of Proposals. Hejoined Bluewater early 1996 and held various positions withinthe Technology & Development and Business Developmentdivisions and the last 2 years as the Business DevelopmentManager for Bluewater Offshore Production Systems (USA), Inc. in

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Houston. Mr. Raaijmakers holds a mastersdegree in civil engineering from the Delft University of Technologyand has more than 10 years of experience in the offshore sector.

**(B)****        Compensation**

The aggregatecompensation of our various managing directors and executive officers as agroup was U.S.$1.6 million in 2005. In 2005, we set aside or accrued U.S.$0.3million to provide pension, retirement or similar benefits.

**(C)****        BoardPractices**

None of ourmanaging directors or directors is a party to a contract providing for benefitsupon termination of employment. We have not established an audit orremuneration committee.

**(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.

The following table presents the average number ofworkers that we employed on a permanent and on an auxiliary basis during theperiods indicated.
|                      | ** ** | **Year ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Permanent  employees |       |                                       | 413        |   |   |   | 476 |   |   |   | 670 |   |   |
| Auxiliary  employees |       |                                       | 119        |   |   |   | 114 |   |   |   | 75 |   |   |
| Total employees      |       |                                       | 532        |   |   |   | 590 |   |   |   | 745 |   |   |

 

We have neverexperienced a material work stoppage by members of our staff and considerour relations with our employees to be good, although in certain instances wehave been 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.

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

**(A)****         MajorShareholder**

Aurelia Holding N.V. is the registered shareholder of136,000 of our common B shares and 34,000 of our preference A shares,representing 100.0% of our outstanding voting shares. On January 28, 2003,

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Mr. Hugo Heerema, asthe holder of 100.0% of the issued and outstanding share capital of AureliaHolding N.V., voted in an extraordinary general meeting of shareholders ofAurelia Holding N.V. to dissolve and liquidate the company. The resolution isirrevocable and binding on all subsequent shareholders. Due to the foregoing,it is expected that, upon the expiration of a winding-up period, thedissolution and liquidation of Aurelia Holding N.V. will be completed and theshareholder or shareholders of Aurelia Holding N.V. immediately prior to thecompletion of the dissolution and liquidation will become the direct owner or ownersof 100.0% of our outstanding common B shares and 100.0% of our preference Ashares.

On January 29, 2003, Mr. Heerema transferredby gift, and for no consideration, his shareholdings in Aurelia Holding N.V. toBailhache Labesse Trustees Limited and Mr. Graham Boxall, as trustees ofthe Jacaranda Trust. The Jacaranda Trust is an irrevocable discretionary trustconstituted under the laws of Jersey. Mr. Heerema and certain members ofhis immediate family are the current beneficiaries of the Jacaranda Trust. Inconnection with this transfer, the Jacaranda Trust became the beneficial ownerof 136,000 of our common B shares and 34,000 of our preference A shares,representing 100.0% of our outstanding voting shares. It is expected that, uponcompletion of the dissolution and liquidation of Aurelia Holding N.V.,Bailhache Labesse Trustees Limited and Mr. Graham Boxall, as trustees ofthe Jacaranda Trust, will become the direct owner of these shares. While thetransfer of Mr. Heerema’s shareholdings in Aurelia Holding N.V. resultedin a change of control for the purposes of the U.S. securities laws, it did notresult in a “Change of Control” under the indenture for our 101¤4% SeniorNotes due 2012.

The documentation relatingto the transfer of Mr. Heerema’s shareholdings in Aurelia Holding N.V. andthe settlement of the Jacaranda Trust includes certain provisions affecting thepotential for a future change of control for the purposes of the U.S.securities laws and the election of managing directors that are generallyresponsible for setting policies and managing the general affairs and businessof our operating subsidiaries. In particular, the documentation providing forthe transfer to the Jacaranda Trust of Mr. Heerema’s shareholdings inAurelia Holding N.V. will be revoked and annulled, and ownership of AureliaHolding N.V., or, after the liquidation of Aurelia Holding N.V., ownership ofus, will revert back to Mr. Heerema if his death occurs within certainperiods of time and is subject to certain Belgian or Dutch tax consequences. Inaddition, while the documentation relating to the settlement of the JacarandaTrust generally provides its trustees with discretion in determining the mannerin which our outstanding shares may be voted, it prohibits them from exercisingtheir powers in a manner that would result in Mr. Heerema being dismissedor replaced as the sole member of the management board of Bluewater HoldingB.V. without his prior written consent. The management board of BluewaterHolding B.V. is generally responsible for setting the policies of our operatingcompanies.

**(B)**   Related PartyTransactions

**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.$147.0 million. This is the amount ofindebtedness that was outstanding as of December 31, 2005. MarencoInvestments Limited loaned these funds to us in a series of transactions toenable us to finance the construction and modification of FPSOs. In 2005, weaccrued approximately U.S.$4.9 million and repaid U.S.$5.0 million ofinterest on the loan.

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**ITEM 8:**   FINANCIALINFORMATION

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

**Financial Statements**

Please refer to Item 18.

**Legal and Arbitration Proceedings**

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. Further issues remain outstanding inconnection with this dispute, including interest costs, legal costs and thetreatment of exchange rates. These matters are likely to be subject of furthernegotiations between the parties and/or adjudication by the Tribunal.Considering the Tribunal’s ruling and the remaining uncertainty regarding theoutstanding matters, the Company recorded a provision its 2005 statement ofincome amounting to U.S.$17 million.

From time to time, the Company is subject to variousclaims arising out of the ordinary course of business. At December 31,2005, a significant claim existed against the Company involving claims allegingaggregate damages of U.S.$16.0 million. This claim relates to the allegedbreach of a contract for the design of equipment. Since the outcome of thisclaim is uncertain the Company cannot estimate a possible loss or range ofloss. While the ultimate result of all such matters is not presentlydeterminable, based upon current knowledge and facts, management does notexpect that their resolution will have a material adverse effect on the Company’sconsolidated financial position or results of operation.

In 2004, certain of our competitorsinitiated injunction proceedings in the district court in The Haguein respect of an alleged infringement of intellectual property rights. Thecourt rejected the claim, and currently the court’s rejection of the claim isunder appeal in the Court of Appeal. We expect the Court of Appeal torelease its judgment during the second quarter of 2006. With respect to the patentsat stake, we have received advice from our patent agent that our product designdoes not infringe upon any valid claim of the patent. In support of theseproceedings we, in consultation with our patent advisors, initiated proceedingsto obtain the decision of the Court that one of the patents relied upon bythese competitors is declared null and void. Meanwhile ourcompetitors also started proceedings at the same Court requesting ajudgment on the merits of their case. The above proceedings are running inparallel with the European patent application of our competitor that wasthe subject of our opposition proceeding. Both parties have appealed againstthe findings of the European Patent Office in Munich.

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 and Dividend Policy**

Underour articles of incorporation, we may pay dividends from our net profit at thediscretion of a general meeting of shareholders. Any declared dividends arepaid first to preference A shareholders to the extent of their preference. Theremaining dividends are paid to common B shareholders in proportion to theamount of common B shares held by them. Unless the entire preferred dividend isdeclared on our preference A shares over the fiscal year, a resolution toreserve profits may be adopted only during a general meeting of shareholders,during which all preference A shares must vote in favor of such a resolution.Our management 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 covered by reserves or compensated inany other way. Notwithstanding the foregoing, our ability to pay 

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dividends in respect of our preference A shares andour common B shares is limited by the terms and conditions of certain of ourfinancing arrangements, 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)   Significant Changes**

There have not been anysignificant changes to our business or financial condition since December 31,2005.

**ITEM 9:   THE OFFER AND LISTING**

**(A)   Offer and 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)   Plan of 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)   Selling Shareholders**

Not applicable.

**(E)   Dilution**

Not applicable.

**(F)   Expenses of the Issuer**

Not applicable.

**ITEM 10:   ADDITIONAL INFORMATION**

**(A)   Share Capital**

Not applicable.

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**(B)   Articles of 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 state that we are aholding company and participate in other corporations and enterprises. Theseobjectives 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-finished products 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.

**Summaryof Provisions 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.

**Descriptionof Share 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 

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permitted. Shares areissued by the management board and new shares may be issued from time to timeby the management board, provided that the price of any newly issued shares maynot be below par. New shares shall be issued to existing shareholders, inproportion to the shares held by them at the time. We may acquire fully-paid upshares for our own capital, provided that at least 20% of our authorized sharecapital remains issued and outstanding with other shareholders after anyacquisitions. We may not vote or make a claim on any shares held by us and anyshares held by us may not participate in any profit or 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 incomestatement may be reserved or paid out as a dividend, at the discretion of ageneral meeting of shareholders. Insofar as the profit permits, any declareddividends will be paid to preference A shareholders first to the extent forwhich those preference A shares have preference, over the amount paid up on thepreference A shares. The remaining profit declared for dividends will be paidto common B shareholders in proportion to the amount of common B shares held bythem. Unless the entire preferred dividend has been declared on the preferenceA shares 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.

**Modificationsof Shareholders’ 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 

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contain the agenda for themeeting or state the agenda has been deposited at our office for theshareholders’ inspection. If the meeting is being convened to deal withproposed amendments to our articles of incorporation, the advertisement mustinclude a statement to that effect. Even if the above provisions are not abidedby, resolutions will nevertheless be valid if they are adopted by unanimousvote at a meeting in which our entire share capital is represented.

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 toamendments to our articles of incorporation.

**Limitationson Rights 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 Share Ownership**

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

**(C)   Material Contracts**

**Service and Bareboat 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*willbe 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 Fleetand FPSO Hull”.

**Credit Facility**

We are a party to arevolving credit facility agreement, dated January 15, 2002, amongBluewater Holding B.V., Bluewater Energy Services B.V., Bluewater OffshoreProduction Systems Ltd., Bluewater (*HaeweneBrim*) N.V., Bluewater (*Munin*)N.V., Ranberger Holding N.V., Luludia Asset Finance B.V. and Refugio B.V., asborrowers, Barclays Bank PLC, Fortis Bank (Nederland) N.V. and ING Bank N.V.,as arrangers, and ING Bank N.V., as facility agent, Barclays Bank PLC, as technicalbank and facility security trustee, and certain financial institutions, aslenders. Obligations under the credit facility are guaranteed by Aurelia EnergyN.V. and its subsidiaries other than the borrowers and, Bluewater FinanceLimited pursuant to a facility guarantee, dated January 28, 2002.

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***Structure***

The credit facility is aU.S.$600.0 million reducing revolving credit facility. See “—Maturity andAmortization”. Subject to certain conditions the facility can be used tofinance the construction of new FPSOs and for general corporate purposes. Thestructure of the facility includes a borrowing base, calculated according tothe present value of cash flows we will or may earn under our FPSO serviceagreements and a certain amount of residual asset value. The facility can bedrawn at any time up to the lower of the limit and the borrowing base amount atthat time. The borrowing base amount consists of the sum of three tranches.Tranche 1 consists of 100.0% of the net present value of the contracted facilityfee income under our FPSO service agreements during the minimum contractperiods. Tranche 2 consists of 65.0% of the net present value of the contractedfacility fee income during expected contract extensions. Tranche 3 consists of50.0% of the net present value of the market value of the FPSOs at the end ofthe expected contract term, up to a maximum amount of U.S.$20.0 millionper vessel and U.S.$100.0 million in total. A new borrowing base isrecalculated every six months subject to majority bank approval or, if suchapproval is not obtained, subject to an independent expert. During thesix-month period, the borrowing base may be redetermined following certainevents, including the termination of our service agreements, the total loss ofan FPSO or a change in the deployment period of an FPSO as confirmed by the oilcompany.

***Interest Rates and Fees***

Advances under the creditfacility bear interest at a rate per annum equal to LIBOR plus a margin of1.300% for the first five years of the credit facility and 1.500% for theremainder of the life of the credit facility. There is a margin adjustmentmechanism under which the applicable margin is increased by up to 0.200% duringeach such five-year period if the amount of credit that is drawn exceedscertain percentages of the borrowing base. Pursuant to the margin adjustmentmechanism, the applicable margin is also reduced if our rating by Standard &Poor’s reaches a certain level. Commitment commissions are 50.0% of theapplicable margin.

***Guarantees and Security***

The borrowers’ obligationsunder the credit facility are guaranteed by Aurelia Energy N.V. and each of itsdirect and indirect subsidiaries other than the borrowers and Bluewater FinanceLimited. Together, the borrowers and the guarantors have granted securityinterests over substantially all of their assets, including mortgages over allFPSOs, fixed charges over certain of their properties, debts, bank accounts,insurance proceeds and specified agreements. In addition, the shares of eachFPSO-owning company have been pledged in favor of the facility security trusteefor the lenders under the credit facility, and the operating income relating toour FPSO service agreements has been pledged to the lenders to secure thecredit facility.

***Covenants***

The credit facility contains certain customarynegative covenants that restrict the borrowers (subject to certain agreedexceptions) from, among other things, changing their jurisdiction oforganization, engaging in certain mergers or consolidations, incurring additionaldebt, creating security interests on their assets and disposing of assets otherthan in the ordinary course. The facility further requires us to observecertain customary covenants, including, but not limited to, covenants relatingto the provision of information, maintenance of government approvals andlicenses, ranking of the advances, compliance with law, maintenance ofcorporate existence and line of business.

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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.$350.0 million and 25% of total assets;

·       ensurethat our ratio of earnings before interest, tax, depreciation and amortizationover net interest (excluding interest accrued under the subordinated Marencoloan and interest capitalized during construction) is greater than 2.50x;

·       ensurethat our ratio of earnings before interest, tax, depreciation and amortizationover the sum of interest payable (including interest on the 101¤4% Senior Notesdue 2012 and the credit facility) and scheduled debt repayments is, at anytime, at least 1.25x for the subsequent six months and at least 1.00x for thesubsequent two years; and

·       maintain a minimumliquidity of not less than U.S.$15.0 million in freely available cash,other marketable securities or availability under the credit facility.

***Maturity and Amortization***

The credit facility had aremaining term of four years as of December 31, 2005. The facility limit,which reduces by U.S.$20.0 million per quarter, wasU.S.$320.0 million as of December 31, 2005 and is scheduled to reachzero by December 2009.

***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 borrowing base and we willbe required to prepay within 90 days the lesser of the amount by which ouroutstanding indebtedness at that time exceeds the borrowing base and the amountby which the borrowing base is reduced due to the total loss.

***Events of Default***

The credit facilitycurrently contains certain events of default customary for senior bankfinancings, the occurrence of which would allow the lenders to accelerate alloutstanding loans and terminate their commitments.

**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 

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Production Company Ltd. Pursuant to asupplemental indenture, dated as of March 31, 2004, Bluewater Oil &Gas Investments Ltd. has acceded to the indenture as an additionalguarantor of the 10 1¤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 the 101¤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 future securedobligations the guarantors. The guarantees rank equal in right of payment withall existing and future trade payables and senior subordinated obligations ofthe guarantors.

***Interest***

Interest is payable semi-annually in arrears on February 15and August 15 of each year and is payable at a rate of 101¤4%per annum. On July 17, 2003, we entered into a fixed-to-floating interestrate swap transaction, with terms that are identical to the fixed-to-floatinginterest rate swap transaction that enables us to swap the equivalent of thefixed rate amount of interest that is payable on U.S.$335.0 millionaggregate principal 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 receive paymentsthat are calculated at a fixed rate of 101¤4% and makesinterest payments that are calculated at a floating rate that is equal to amargin of 6.32% over LIBOR. Substantially all of the guarantors of our 101¤4%Senior Notes due 2012 have guaranteed obligations under the swap. As of February 15,2005 the margin has 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 willincur fair value fluctuations through the statement of income from the date ofcancellation until August 15, 2007. After August 15, 2007 theinterest will continue floating at LIBOR + 6.44%.

***Maturity and Redemption***

The 101¤4%Senior Notes due 2012 mature on February 15, 2012. Other than out of theproceeds of certain public equity offerings prior to February 15, 2005, orfor certain tax 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 containscertain covenants that, among other things, limit our ability to incuradditional indebtedness, make certain payments with respect to our sharecapital, make certain investments, prepay subordinated debt, create certainliens, enter into certain sale and leaseback transactions, enter into certaintransactions with affiliates, issue or sell share capital, engage in certainasset sales, consolidate, merge or transfer all or substantially all our assetsand enter into other lines of business. These covenants are subject to a numberof important limitations and exceptions that are set forth in the indenture.

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***Events of Default***

The indenture containscertain events of default that are customary for high yield debt securities,the occurrence of which would allow the holders to accelerate the payment oftheir outstanding 101¤4%Senior Notes due 2012.

**Financing PR JotunDA**

We are party to aU.S.$175.0 million loan agreement to finance the acquisition of our 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 to the lenders of the bareboat charter contract with the Jotun fieldpartner.

PR Jotun DA is party to aU.S.$ 143.2 million loan agreement with Standard Marine Nordsjo AS (“SMNAS”) tofinance the acquisition of the FPSO *Jotun A.*Theloan will amortize to zero over a period of six years and a quarter, bySeptember 2011. Interest equals 5%. In accordance with the provisions ofFIN 46R the company fully consolidated PR Jotun DA and records a 45% minorityinterest.

**SubordinatedMarenco Loan**

We are a party to anamended and restated subordinated loan agreement, dated November 21, 2001,between Aurelia Energy N.V., as borrower, and our affiliate, MarencoInvestments Limited, as lender. Under the amended and restated loan agreement,the subordinated Marenco loan bears interest on an annual basis at a rate of7.0% per annum with effect from January 1, 2000. The subordinated Marencoloan will not mature and may not be repaid, mandatorily redeemed or repurchasedprior to the date on which the 101¤4% Senior Notesdue 2012 mature or are fully repaid in cash. Cash interest payments may only bepaid in certain circumstances. In addition, the agreement prohibits MarencoInvestments Limited from taking any enforcement action under the subordinatedMarenco loan prior to the satisfaction by payment in cash of all obligations inrespect of the 101¤4%Senior Notes due 2012 or from transferring the subordinated Marenco loan to anyperson other than Aurelia Energy N.V.

**Intercompany Loan**

In connection with ourissuance 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. theU.S.$75.4 million of the gross proceeds from the issuance (excludingaccrued interest from and including February 15, 2003, to but excludingthe issue date) on the same basis as the original loan. The intercompany loanbears interest at a rate of 101¤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 theintercompany loan are made without deductions for or on account of tax. In theevent that Bluewater Holding B.V. is required to make any such deduction, itwill be required to gross-up each payment to Bluewater Finance Limited toensure that Bluewater Finance Limited receives and retains a net sum equal tothe sum which it would have received had no such deduction or withholding beenmade or required to be made. Further, all payments under the intercompany loanagreement must be 

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made ona 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**

Weentered into certain tax lease arrangements for the *Uisge Gorm*, the *Glas Dowr*and the topsides of the *Bleo Holm*from 1994 to 1999 and, in April 2003, signed a new tax lease for thetopsides of the *Haewene Brim*, ineach case with Hill Samuel Leasing No. 4 Ltd, a UK lessor, that was ableunder UK tax law to obtain tax depreciation on the capital expenditure incurredby it on acquiring the leased assets. These arrangements are principallycomprised of the documents included as Exhibits 4.48 to 4.55 of this annualreport. 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 toboth the hull and topsides of each of the *UisgeGorm* and the *Glas Dowr*and to the hull of the *Bleo Holm*and the *Haewene Brim*. The UKlessor held legal title to the topsides of the *BleoHolm* and the *Haewene Brim*.In each case, the UK lessor had leased its interest in those asset to uspursuant to lease arrangements that provided us with the right to use, operate,posses and enjoy the leased assets without interference and entitled us to thefull economic benefit of the operation of the leased assets.

These arrangements allowedthe lessor to claim tax depreciation in respect of its expenditure to acquirethe vessel or the equipment, which was passed on to, or shared with, us in theform of reduced rentals. Our rental payment obligations were calculated byreference to a number of tax and financial assumptions made at the time theleases were entered into. Payment arrangements at the inception of the leasetransactions were structured, and security had been provided, such that,subject to the adjustments described below, we did not had any current rentalpayment or termination payment obligations with respect to the *Uisge Gorm*, the *Glas Dowr*, the topsides of the *Bleo Holm* or the topsides of the *Haewene Brim*. If certain of these assumptions proved to beincorrect, the rental payments under the tax lease arrangements would beadjusted by the lessor to preserve the lessor’s agreed after-tax rate of returnon its acquisition of the leased assets and, in the case of an increase in suchrentals or anticipated termination sums, we would be liable for the excessabove the realizable value of the security held by the lessor and the lessorwould be entitled to require the provision of additional security.

See “Item 5: Operating andFinancial Review and Prospects—(A) Operating Results—Critical AccountingPolicies and Estimates—Tax Lease Benefits Liability”.

On November 3, 2005all 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.*As aresult of the termination, the Company regained full ownership of the FPSO *Uisge Gorm*, the FPSO *Glas Dowr* and the topsides of FPSO *Bleo Holm* and FPSO *Haewene Brim.*The tax lease benefits liability has been released as otheroperating 

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incomeand restricted deposits were discharged and proceeds were used  for repayment of the corporate creditfacility.

**Economic SaleAgreement**

Effective January 1,2000, we entered into an internal restructuring process. In connectiontherewith, the economic interests in most of the assets and liabilities ofcertain non-Dutch group companies were sold to Bluewater Holding B.V. pursuantto an economic sale agreement, while legal title to those assets andliabilities remained with the selling companies. The companies making suchdispositions 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 (NewHull) N.V., Bluewater Offshore Production Systems Ltd., Bluewater OffshoreProduction Systems N.V., Bluewater (Malta) Ltd. and BrightfieldCorporation. The valuation of the assets and liabilities transferred was basedon a valuation report prepared by an independent investment bank. This saleresulted for income tax purposes only in intercompany profits (estimated at €589.0 million(U.S.$697.7 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.

**(D)   ExchangeControls**

There are no legislativeor other legal provisions currently in force in the Netherlands Antilles orarising under our articles of incorporation that currently restrict our abilityto transfer capital to or from the Netherlands Antilles (because we haveobtained the relevant licenses under applicable foreign exchange controlordinances) or that affect the availability of cash or cash equivalents for useby our member companies. There are also no legislative or other legalprovisions currently in force in the Netherlands Antilles or arising under ourarticles of incorporation that affect our ability to remit dividends, interestor other payments to non-resident holders of our securities, except asdescribed under “Item 10: Additional Information—(B) Articles ofIncorporation—Description of Share Capital: Rights, Restrictions andPreferences”.

**(E)   Taxation**

**NetherlandsAntilles Taxation**

The following is a generaldiscussion of certain Netherlands Antilles tax considerations relating to our101¤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.

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***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 andCapital Gains***

Anindividual 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.

Aholder which has not been organized under the laws of the Netherlands Antilles,will not be subject to any Netherlands Antilles taxes on income or capitalgains 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 to be resident in the NetherlandsAntilles; and

·       such holder is not engagedin a trade or business in the Netherlands Antilles through a permanentestablishment or representative.

***Gift, Estate orInheritance Taxes***

No gift, estate orinheritance taxes will arise in the Netherlands Antilles with respect to anacquisition of 101¤4%Senior Notes due 2012 by way of gift by, or on the death of, a holder who isneither resident nor deemed to be resident in the Netherlands Antilles. Aholder will not be deemed to be resident in the Netherlands Antilles by reasononly of the holding of 101¤4%Senior Notes due 2012.

***Sales Tax***

No sales tax (*omzetbelasting*), expenditure tax (*algemene bestedingsbelasting*), turnovertax (*belasting op bedrijfsomzetten*)or similar tax will arise on the invoicing or payment of principal, premium andinterest on the 101¤4%Senior Notes due 2012.

***Other Taxes andDuties***

No Netherlands Antillesregistration tax, custom duty, transfer tax, stamp duty or any similardocumentary tax or duty, other than court fees, will be payable in theNetherlands Antilles in respect of or in connection with the execution,delivery and/or enforcement by legal proceedings of 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 orbecome liable for any registration tax, custom duty, transfer tax, stamp dutyor any other similar documentary tax or duty by reason only of the acquisition,ownership or disposal of the 101¤4% Senior Notesdue 2012.

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**U.S.Federal Income Taxation**

The following is a summaryof the material U.S. federal income tax consequences of the acquisition,ownership and disposition of our 101¤4% Senior Notesdue 2012 by a U.S. Holder (as defined below). This summary deals only withinitial 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 a beneficial 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 incometax treatment of a partner in a partnership that holds our 101¤4%Senior Notes due 2012 will depend on the status of the partner and theactivities of the partnership. Investors that are partnerships should consulttheir tax advisers concerning the U.S. federal income tax consequences to theirpartners of the acquisition, ownership and disposition of our 101¤4% Senior Notesdue 2012 by the partnership.

The summary is based onthe tax laws of the United States, including the Internal Revenue Code of 1986,as amended, its legislative history, existing and proposed regulations thereunder published rulings and court decisions, all as currently in effect and allsubject to change at any time, possibly with retroactive effect.

**THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCESSET OUT BELOW IS FOR GENERAL INFORMATION ONLY. ALL PROSPECTIVE PURCHASERSSHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEMOF 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 ofInterest***

Interest on a 101¤4%Senior Note due 2012 will be taxable to a U.S. Holder as ordinary income at thetime it is received or accrued, depending on the holder’s method of accountingfor tax purposes. Interest paid by Bluewater Finance Limited on the 101¤4%Senior Notes due 2012 constitutes income from sources outside the UnitedStates. Prospective purchasers should consult their tax advisors concerning theapplicability of the foreign tax credit and source of income rules toincome attributable to our 101¤4%Senior Notes due 2012.

*Pre-Issuance AccruedInterest.**  *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 

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accrued interest. Otherwise, the full amount of thisfirst interest payment will be taxable, and the pre-issuance accrued interestwill be included in the issue price and taken into account in determining theU.S. Holder’s purchase premium. See “—101¤4% Senior Notesdue 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.

*Market Discount.**  *Our 101¤4% Senior Notesdue 2012 generally will be treated as purchased at a market discount (“MarketDiscount Notes”) if the principal amount on our 101¤4% Senior Notesdue 2012 exceeds the amount for which the U.S. Holder purchased our 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, anygain recognized on the maturity or disposition of a Market Discount Note willbe treated as ordinary income to the extent that the gain does not exceed theaccrued market discount on the Note. Alternatively, a U.S. Holder of a MarketDiscount Note may elect to include market discount in income currently over thelife of the Note. This election applies to all debt instruments with marketdiscount acquired by the electing U.S. Holder on or after the first day of thefirst taxable year for which the election is made. This election may not berevoked without the consent of the IRS. The U.S. Holder may include marketdiscount in income on the basis of rateable accrual, or make an irrevocableelection to use a “constant-yield method”. The amount of market discountincludible in income under the constant-yield method is the sum of thedaily 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.

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Under current law, marketdiscount on a Market Discount Note will accrue on a straight-line basis unlessthe U.S. Holder elects to accrue the market discount on a constant-yieldmethod. This election applies only to the Market Discount Note with respect towhich it is made 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 andRetirement of our 10***1¤4%Senior Notes due 2012

A U.S. Holder’s tax basisin 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.

A U.S. Holder willgenerally recognize gain or loss on the sale or retirement of a 101¤4%Senior Note due 2012 equal to the difference between the amount realised on thesale or retirement and the tax basis of the 101¤4% Senior Notedue 2012. The amount realised does not include the amount attributable toaccrued but unpaid interest, which will be taxable as interest income to theextent not previously included in income. Except to the extent described under “MarketDiscount” above, gain or loss recognized by a U.S. Holder on the sale orretirement of our 101¤4%Senior Notes due 2012 will be capital gain or loss and will be long-termcapital gain or loss 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 Withholdingand Information Reporting***

Payments of principal, andinterest on, and the proceeds of sale or other disposition of, 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 

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withholdingmay apply to these payments if the U.S. Holder fails to provide an accuratetaxpayer identification number or certification of exempt status or fails toreport all interest and dividends required to be shown on its U.S. federalincome tax returns. Certain U.S. Holders (including, among others,corporations) are not subject to backup withholding. U.S. Holders shouldconsult their tax advisors as to their qualification for exemption from backupwithholding and the procedure for obtaining an exemption.

**(F)   Dividendsand Paying Agents**

Not applicable.

**(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 Room of the Securities and ExchangeCommission at 450 Fifth Street, N.W., Washington, D.C. 20549 and may obtaincopies of these materials at prescribed rates by calling the Securities andExchange Commission at (1) 800 SEC 0330. Some of our filings may also beviewed on the Commission’s website at www.sec.gov. All information referred toabove will, for so long as our 101¤4% Senior Notesdue 2012 are listed on the Luxembourg Stock Exchange and the rules of theLuxembourg Stock Exchange so require, also be available, without charge, at thespecified office of our paying agent in Luxembourg during usual business hourson any weekday that is not a public holiday. The Bank of New York (Luxembourg)S.A. currently acts as our paying agent in Luxembourg and maintains offices atAerogolf Centre, 1A, Hoehenhof, L-1736, Senningerberg, Luxembourg.

**(I)   SubsidiaryInformation**

Thefollowing is a description 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.

·       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.

·       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 

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company that isengaged in the investment in companies engaged in the field of the supply ofservices and products to the offshore oil industry.

·       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.

·       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. Established on November 14, 1994, it is a dormantcompany and is not engaged in any activities.

·       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 andindustry for Amsterdam with number 34130591. Established on March 10,2000, it is a holding company that is engaged in the investment in companiesengaged in the field of the supply of services and products to the offshore oilindustry.

·       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 and conductingour day to day business affairs to the extent such activities are not performedby 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.

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·       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.

·       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*.

·       Bluewater(New Hull) 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 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.

·       BluewaterOil & Gas Investments Ltd. is a company with limited liabilityincorporated under the laws of Nigeria with its corporate seat in Lagos,Nigeria. Established on September 2, 2003, it is primarily engaged ininvestments and 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 

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industry forAmsterdam with number 34146572. It was established on November 25, 1977.The activities of the company are performed by Bluewater Energy Services B.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.

·       Bluewater(Tullebuk) B.V. is a private company with limited liability incorporated underthe laws of the Netherlands with its corporate seat in Hoofddorp, the Netherlandsand registered with the chamber of commerce and industry for Amsterdam withnumber 34228592. Established on June 24, 2005, it is primarily engaged inactivities in the field of the supply of services and products to the offshoreoil 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.

·       RefugioB.V. is a private company with limited liability incorporated under the laws ofthe Netherlands with its corporate seat in Hoofddorp, the Netherlands andregistered with the chamber of commerce and industry for Amsterdam with number33240453. Established on December 22, 1972, it is primarily engaged infinancing activities.

·       LuludiaAsset Finance 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 33281388. Established on June 11, 1996, it isprimarily engaged in financing 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 Rate Sensitivity**

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, 2005, thisrepresented approximately 6.5% of the outstanding indebtedness under thefacility.

To reduce the interest expense relating to our 101¤4%Senior Notes due 2012, we have entered into a fixed-to-floating interest rateswap 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 receive paymentsthat are calculated at a fixed rate of 101¤4% and makeinterest payments that are calculated at a floating rate that is 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 company willincur fair value fluctuations through the statement of income from the date ofcancellation until August 15, 2007. After August 15, 2007 theinterest will continue floating at LIBOR + 6.44%.

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 Company purchased an interest rate cap.This interest rate cap has a strike rate of 4.4%, limiting the maximum interestcosts including margin to 5%. The interest rate cap has a starting notionalamount of U.S.$143.9 million and the reduction schedule of the notionalamount of the cap is aligned with the repayment schedule of the loan.

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, which were outstanding asof December 31, 2005. For debt obligations, the tables present ourprincipal cash flows and related weighted average interest rates by expectedmaturity dates under our existing debt arrangements. For interest rate swaps,the tables present notional amounts and weighted average interest rates byexpected (contractual) maturity dates. Notional amounts are used to calculate thecontractual payments to be exchanged under the swap. Weighted average variablerates are based on 

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implied forward rates in the yield curve at thereporting date. The information is presented in U.S. dollars, which is ourreporting currency. The instrument’s actual cash flows are also denominated inU.S. dollars.

| ** **                  | ** ** | **Expected Maturity Date**                | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **As of December 31,**               | ** ** |
| **Liabilities**             | ** ** | ** **                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
| ** **                  | ** ** | **(in thousands U.S.$ equivalents)** | ** ** |
| **Long-Term Debt**          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate debt             |       | —                                              |       | — |   | — |   | — |   | — |   | 147,031 |   | 147,031 |   | 147,193 |   |
| Average interest rate  |       | 7.0                                                 | %          | 7.0 | % | 7.0 | % | 7.0 | % | 7.0 | % | 7.0 | % | — |   | — |   |
| Variable rate debt(1)       |       | —                                              |       | — |   | — |   | — |   |   |   | 335,000 |   | 335,000 |   | 360,125 |   |
| Average interest rate  |       | LIBOR+M                                             |       | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | — |   | — |   |
| Variable rate debt(2)       |       | —                                              |       | — |   | — |   | 36,854 |   | 80,000 |   | — |   | 116,854 |   | — |   |
| Average interest rate  |       | 10                                                  | 1⁄4%    | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | — |   | — |   |
| Variable rate debt(3)       |       | 28,664                                              |       | 28,105 |   | 27,577 |   | 28,931 |   | 28,387 |   | 18,676 |   | 160,340 |   | — |   |
| Average interestrate        |       | LIBOR+M                                             |       | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | — |   | — |   |
| Fixed rate debt(4)          |       | 23,452                                              |       | 22,995 |   | 22,563 |   | 23,671 |   | 23,225 |   | 15,282 |   | 131,188 |   | — |   |
| Average interest rate  |       | 5                                                   | %          | 5 | % | 5 | % | 5 | % | 5 | % | 5 | % | — |   | — |   |
| **Interest Rate Swaps**     |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable to Fixed           |       | 7,006                                               |       | — |   | — |   | — |   | — |   | — |   | 7,006 |   | (11 | ) |
| Average pay rate            |       | 3.463                                               | %          | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Average receive rate        |       | LIBOR                                               |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Variable cap                |       | 14,695                                              |       | 27,885 |   | 27,706 |   | 28,946 |   | 44,637 |   | — |   | 143,869 |   | — |   |
| Average pay rate            |       | 4.4                                                 | %          | 4,4 | % | 4,4 | % | 4,4 | % | 4,4 | % | 4,4 | % | — |   | — |   |
| Average receive             |       | LIBOR                                               |       | LIBOR |   | LIBOR |   | LIBOR |   | LIBOR |   | LIBOR |   | — |   | — |   |
|                             |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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Notes:

(1)          Represents indebtednessin respect of our 101¤4%Senior Notes due 2012, which are the subject of a fixed-to-floating rate swaptransaction that enables us to swap the equivalent of the fixed rate amount ofinterest that is payable on U.S.$335.0 million aggregate principal amountof 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 current swap, we receivepayments that are calculated at a fixed rate of 101¤4% and makepayments that are calculated at a floating rate that is equal to a margin of6.32% over LIBOR. As of February 15, 2005 the margin changed to 6.44%. Theswap was partially cancelled until Augutst 15, 2007. While we recordedU.S.$306.8 million of indebtedness under the 101¤4% Senior Notesdue 2012 as of December 31, 2005, U.S.$335.0 million is payable uponmaturity.

(2)          Represents indebtedness underour credit facility. Interest is payable at a rate that is equal to a marginover LIBOR. The margin varies from 1.300% to 1.700% depending on certainfactors and is currently set at 1.400%.

(3)          Represents indebtednessof the Company under our Jotun loan agreement. Interest is payable at a ratethat is equal to a specified margin over a monthly average of LIBOR for onemonth (or shorter applicable period). The margin is currently set at 0.600%.

(4)        Representsindebtedness of PR Jotun DA to Standard Marine Nordsjo AS (“SMNAS”). Interestis payable at a rate of 5%.

**Exchange Rate Sensitivity**

The Company’s revenues areprimarily denominated in U.S. dollars and, to a lesser extent, sterling andEuro. In 2005, approximately £37,736 (U.S.$64,921) of the Company’s revenueswas denominated in sterling and approximately €3,130 (U.S.$ 3,707) was denominated in Euro. Our expenses are denominatedprimarily in U.S. dollars and to a lesser degree, euro and sterling. We areexposed to fluctuations in foreign currency exchange rates, because a portionof our expenses and financial indebtedness is denominated in 

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currenciesthat are different from our revenues. The Company’s policy is to match, throughour FPSO service agreements, the revenues in a particular currency with itsoperating costs 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 from financialinstitutions to the extent of any residual exposure. The Company manages itsoutstanding 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. Inthe year 2005 the Company entered into foreign currency exchange contracts inrelation to projects to hedge against the risk of fluctuations in foreigncurrency exchange rates for expenditures in currencies other than the projectcurrency. The Company has designated certain foreign currency exchangecontracts as cash flow hedges. For such contracts designated and that qualifyas cash flow hedges gains and losses related to project specific currencytransactions are recognized as part of our accumulated other comprehensiveincome/(loss).

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

Not applicable.

**PART II**

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

None.

**ITEM 14:**        MATERIALMODIFICATIONS TO THE 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**

**ControlsEvaluation and 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 annual reportsand other filings with the Securities and Exchange Commission are filed withinrequired time periods. In connection with this evaluation, we also reviewed ourinternal controls, because we believe that those controls are important to theefficacy of our disclosure controls and procedures and because such a review isnecessitated in connection with the Certifications set forth herein under “Certifications”.Internal Controls are procedures designed to provide reasonable assurance thatour transactions are properly authorized, our assets are safeguarded againstunauthorized or improper use and our transactions are properly recorded andreported, in each case to permit the preparation of our financial statements inconformity with U.S. GAAP.

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**Definitionof Disclosure Controls and Scope of Controls Evaluation**

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.

**Limitationson the Effectiveness of Controls**

In connection with ourevaluation, we sought, among other things, to determine whether there were any “significantdeficiencies” or “material weaknesses” in our internal controls and whetherthere were any identifiable acts of fraud involving personnel with asignificant role in our internal controls. We believe that these inquiries areimportant to conducting a proper evaluation. They are also essential forenabling our principal executive officer and our principal financial officer toreport any deficiencies to our independent registered public accounting firmand our managing directors. In professional auditing literature, “significantdeficiencies” are referred to as “reportable conditions,” which are controlissues that could have a significant adverse effect on the ability to record,process, summarize and report financial data in our consolidated financialstatements. Auditing literature defines “material weakness” as a particularlyserious reportable condition where the internal control does not reduce to arelatively low level the risk that misstatements caused by error or fraud mayoccur in amounts that would be material in relation to the financial statementsand the risk that such misstatements would not be detected within a timelyperiod by employees in the normal course of performing their assignedfunctions. We also sought to identify other control issues in connection withour evaluation and to consider whether it is necessary to make any revision,improvement or correction to our procedures.

**Conclusions**

Basedupon our evaluation, Mr. Heerema and Mr. Voormolen have concludedthat our disclosure controls are effective to ensure that material informationrelating to us is made 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**

Notapplicable.

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

Notapplicable.

**(D)****       Changesin Internal Control Over Financial Reporting**

Not applicable.

**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.

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**ITEM 16B:**            CODEOF 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 ACCOUNTANTFEES AND SERVICES

Deloitte Accountants B.V. has served as ourindependent registered public accountants for each of the years ended in thethree-year period ended December 31, 2005. The following table presentsthe aggregate fees for professional audit services and other services renderedby Deloitte Accountants B.V. in 2004 and 2005.

| ** **          | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** |
|---------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **          | ** ** | **(in U.S.$ thousands)**                       | ** ** |
| Audit fees          |       |                                                     | 555        |                                                     |       |   | 270 |   |   |
| Audit-related  fees |       |                                                     | 178        |                                                     |       |   | 163 |   |   |
| Tax fees            |       |                                                     | —     |                                                     |       |   | — |   |   |
| All other fees      |       |                                                     | —     |                                                     |       |   | — |   |   |
| Total               |       |                                                     | 733        |                                                     |       |   | 433 |   |   |

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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, agreed upon procedures work on our quarterlyfinancial results, services related to statutory and regulatory filings or oursubsidiaries, services provided in connection with accounting consultations andthe service provided in connection with our issuance of our 101¤4%Senior Notes due 2012.

**Audit-related fees**

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.

**PART III**

**ITEM17:**                     FINANCIALSTATEMENTS

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

**ITEM18:**                     FINANCIALSTATEMENTS

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

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**Indexto 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.                                                                                                            |
| 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. |

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| 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.                                                                                        |

87

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| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

88

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| 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.                                                                                   |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                |

89

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| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 7.1*****                         |   | Statement Regarding  Computation of Ratios.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

90

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| 8.1****   |   | Subsidiaries of Aurelia  Energy N.V.                                                                                                                                                                     |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 11.1****  |   | Code of Ethics.                                                                                                                                                                                          |
| 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.

*****     Filedherewith.

†                                 Portionsof the exhibit have been omitted pursuant to the Securities ExchangeCommission’s Order Granting Confidential Treatment Under the Securities Act of1933 (SEC File No. 333-87336-CF#12672), dated August 21,2002.

††                          Portionsof the exhibit have been omitted pursuant to the Securities ExchangeCommission’s Order Granting Confidential Treatment Under the Securities Act of1933 (SEC File No. 333-106170-CF#14072), dated June 27,2003.

†††                   Portionsof the exhibit have been omitted pursuant to the Securities ExchangeCommissioning Order Granting Confidential Treatment Under the Securities Act of1933 (SEC File No. 333-87336-01-CF#15007), datedAugust 20, 2004.

††††            Portionsof the exhibit have been omitted pursuant to a Request for ConfidentialTreatment.

91

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**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/ R.J. G. A. BREMER                                                                                |
|   |   | *Meespierson Intertrust (Curaçao) N.V.,*Represented by R.J.G.A. Bremer*Managing Director*       |
|   | By:    | */s/ V. M. G. HASETH-PORTILLO*                                                                       |
|   |   | *Meespierson Intertrust (Curaçao) N.V.,*Represented by V.M.G. Haseth-Portillo*Attorney-in-Fact* |

 

Date: March 31, 2006

92

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholder of Aurelia Energy N.V.

We have audited the accompanying consolidated balancesheets of Aurelia Energy N.V., Willemstad (Curaçao), Netherlands Antilles andsubsidiaries as of December 31, 2005 and 2004 and the related consolidatedstatements of income, changes in shareholder’s equity, and cash flows for eachof the three years in the period ended December 31, 2005. These financialstatements are the responsibility of the company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with auditingstandards generally accepted by the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting 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, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Aurelia Energy N.V. and its subsidiaries as at December 31,2005 and 2004 and of the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2005, inconformity with accounting principles generally accepted in the United Statesof America.

Deloitte Accountants B.V.Amsterdam, The NetherlandsMarch 31, 2006

F-1

----

**Aurelia Energy N.V.Consolidated Balance Sheets**

| ** **                           | ** ** | ** ** | ** ** | **At December 31,**                                                                | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Note**   | ** ** | **2005**                                                                                     | ** ** | **2004** | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **(in U.S.$ thousands,  except share and per share  amounts)** | ** ** |
| **ASSETS**                           | ** ** | ** ** | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| **Current assets**                   | ** ** | ** ** | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| *Cash  and cash equivalents*         |       | 6          |       | 43,026                                                                                       |       | 41,987 |   |
| *Accounts  receivable*               |       | 7          |       |                                                                                         |       |   |   |
| Trade, net                           |       |       |       | 31,529                                                                                       |       | 38,338 |   |
| Related party                        |       |       |       | 99                                                                                           |       | 110 |   |
| Other receivables                    |       | 8          |       | 25,654                                                                                       |       | 24,867 |   |
| Prepaid expenses                     |       |       |       | 4,027                                                                                        |       | 4,869 |   |
|                                 |       |       |       | 61,309                                                                                       |       | 68,184 |   |
| *Inventory*                          |       |       |       |                                                                                         |       |   |   |
| Work in process                      |       | 9          |       | 15,174                                                                                       |       | 13,847 |   |
|                                 |       |       |       | 119,509                                                                                      |       | 124,018 |   |
| **Non current  assets**              |       |       |       |                                                                                         |       |   |   |
| Financial  investment                |       | 11         |       | 9,500                                                                                        |       | 7,500 |   |
| Restricted  deposits                 |       | 12         |       | —                                                                                       |       | 88,069 |   |
| Loan                                 |       | 10         |       | 150                                                                                          |       | 150 |   |
| Fixed assets                         |       |       |       |                                                                                         |       |   |   |
| Tangible fixed assets, net           |       | 13         |       |                                                                                         |       |   |   |
| FPSOs                                |       |       |       | 1,213,532                                                                                    |       | 921,607 |   |
| Other tangible fixed assets          |       |       |       | 61,429                                                                                       |       | 56,154 |   |
| Income tax  receivable               |       |       |       | 2,330                                                                                        |       | 3,408 |   |
| Deferred income  taxes               |       | 26,30      |       | 106,783                                                                                      |       | 86,486 |   |
| Financial  instruments at fair value |       | 28         |       | 2,125                                                                                        |       | — |   |
| Debt arrangement  fees               |       | 14         |       | 14,327                                                                                       |       | 16,128 |   |
|                                 |       |       |       | 1,410,176                                                                                    |       | 1,179,502 |   |
|                                 |       |       |       | 1,529,685                                                                                    |       | 1,303,520 |   |

 

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

F-2

----

**Aurelia Energy N.V.Consolidated Balance Sheets (Continued)**

| ** **                                                                                                                                                                            | ** ** | ** ** | ** ** | **At December 31,**                                                                      | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **Note**   | ** ** | **2005**                                                                                           | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                            | ** ** | ** ** | ** ** | **(in U.S.$ thousands, except   share and per share  amounts)** | ** ** |
| **LIABILITIES  AND SHAREHOLDER’S EQUITY**                                                                                                                                        | ** ** | ** ** | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** |
| **Current  liabilities**                                                                                                                                                              |       |       |       |                                                                                               |       |   |   |
| Accounts payable                                                                                                                                                                      |       |       |       | 18,070                                                                                             |       | 26,492 |   |
| Related party                                                                                                                                                                         |       |       |       | 125                                                                                                |       | 125 |   |
| Income taxes                                                                                                                                                                          |       | 26,30      |       | 1,010                                                                                              |       | 736 |   |
| Wage taxes and  social security contributions                                                                                                                                         |       |       |       | 2,564                                                                                              |       | 2,864 |   |
| Other liabilities  and accrued expenses                                                                                                                                               |       | 15         |       | 85,766                                                                                             |       | 60,230 |   |
| Billings in  excess of cost and unrealized income                                                                                                                                     |       | 9          |       | 11,624                                                                                             |       | 8,452 |   |
| Short-term  portion of long-term debt                                                                                                                                                 |       |       |       | 52,116                                                                                             |       | — |   |
|                                                                                                                                                                                  |       |       |       | 171,275                                                                                            |       | 98,899 |   |
| **Non current liabilities**                                                                                                                                                           |       |       |       |                                                                                               |       |   |   |
| Long term bank  loans                                                                                                                                                                 |       | 16,17      |       | 356,266                                                                                            |       | 207,358 |   |
| 101¤4%  Senior Notes due 2012                                                                                                                                                    |       | 18         |       | 306,810                                                                                            |       | 337,935 |   |
| Long term loans,  related party                                                                                                                                                       |       | 19         |       | 147,031                                                                                            |       | 142,085 |   |
| Tax lease  benefits liability                                                                                                                                                         |       | 20         |       | —                                                                                             |       | 34,422 |   |
| Financial  instruments at fair value                                                                                                                                                  |       | 28         |       | 17,258                                                                                             |       | 288 |   |
| Pensions                                                                                                                                                                              |       | 21         |       | 1,381                                                                                              |       | 788 |   |
|                                                                                                                                                                                  |       |       |       | 828,746                                                                                            |       | 722,876 |   |
| **Minority interest**                                                                                                                                                                 |       | 32         |       | 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, 2005 and  2004, respectively |       |       |       | 34,000                                                                                             |       | 34,000 |   |
| Common shares,  U.S.$1,000 par value, 136,000 shares authorized, issued and outstanding as of  December 31, 2005 and 2004, respectively                                          |       |       |       | 136,000                                                                                            |       | 136,000 |   |
| Retained earnings                                                                                                                                                                     |       | 31         |       | 348,207                                                                                            |       | 334,904 |   |
| Accumulated other  comprehensive loss                                                                                                                                                 |       |       |       | (22,725                                                                                            | )          | (23,159 | ) |
|                                                                                                                                                                                  |       |       |       | 495,482                                                                                            |       | 481,745 |   |
|                                                                                                                                                                                  |       |       |       | 1,529,685                                                                                          |       | 1,303,520 |   |

 

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

F-3

----

**Aurelia Energy N.V.Consolidated Statements ofIncome**

| ** **                                            | ** ** | ** ** | ** ** | **For the years ended December 31,**                                          | ** ** |
|-------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Note**   | ** ** | **2005**                                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | **(in U.S.$ thousands, except share   and per share amounts)** | ** ** |
| **Revenues**                                          |       | 27         |       | 398,990                                                                                                |       | 437,665 |   | 295,780 |   |
| **Operating expenses**                                |       |       |       |                                                                                                   |       |   |   |   |   |
| Operations  expenses                                  |       | 22         |       | 255,597                                                                                                |       | 314,073 |   | 185,755 |   |
| Selling, general  and administrative                  |       | 23         |       | 11,310                                                                                                 |       | 9,754 |   | 9,800 |   |
| Depreciation of  tangible fixed assets                |       | 13         |       | 94,953                                                                                                 |       | 72,995 |   | 61,976 |   |
| Other operating  income                               |       | 25         |       | (30,702                                                                                                | )          | (3,738 | ) | (4,014 | ) |
|                                                  |       |       |       | 331,158                                                                                                |       | 393,084 |   | 253,517 |   |
| Operating income                                      |       |       |       | 67,832                                                                                                 |       | 44,581 |   | 42,263 |   |
| **Financial income and expense**                      |       |       |       |                                                                                                   |       |   |   |   |   |
| Interest income                                       |       |       |       | 3,550                                                                                                  |       | 3,355 |   | 3,530 |   |
| Interest expense                                      |       |       |       | (54,464                                                                                                | )          | (44,940 | ) | (45,120 | ) |
| Currency exchange  results                            |       |       |       | (14,873                                                                                                | )          | 2,924 |   | 10,841 |   |
|                                                  |       |       |       | (65,787                                                                                                | )          | (38,661 | ) | (30,749 | ) |
| Income before  income taxes and minority interest     |       |       |       | 2,045                                                                                                  |       | 5,920 |   | 11,514 |   |
| Income tax  benefits                                  |       | 26,30      |       | (16,421                                                                                                | )          | (469 | ) | (1,063 | ) |
| Income before  minority interest                      |       |       |       | 18,466                                                                                                 |       | 6,389 |   | 12,577 |   |
| Minority interest                                     |       | 32         |       | 5,163                                                                                                  |       | — |   | — |   |
| Net income                                            |       | 31         |       | 13,303                                                                                                 |       | 6,389 |   | 12,577 |   |
| Basic and diluted  earnings per common share          |       |       |       | 98                                                                                                     |       | 47 |   | 92 |   |
| 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

----

**Aurelia Energy N.V.Consolidated Statementsof Changes in Shareholder’s Equity**

| ** **                                                                                                  | ** ** | **For the years ended December 31, 2005, 2004 and 2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **Issued and  Paid-in Capital**                                                             | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total  Shareholder’s Equity** | ** ** |
| ** **                                                                                                  | ** ** | **(in U.S.$ thousands)**                                                                    | ** ** |
| **Balance  at January 1, 2003**                                                                        |       |                                                                                                  | 170,000    |   |   | 315,938 |   |   | (25,747 | ) |   |   | 460,191 |   |   |
| Net income 2003                                                                                             |       |                                                                                                  | —     |   |   | 12,577 |   |   | — |   |   |   | 12,577 |   |   |
| Increase in fair  value of cash flow hedges (net of tax of U.S.$885)                                        |       |                                                                                                  | —     |   |   | — |   |   | 1,681 |   |   |   | 1,681 |   |   |
| Reclassification  adjustments for settled portion of hedge realized in net income (net of tax  of U.S.$847) |       |                                                                                                  |       |   |   |   |   |   | 1,609 |   |   |   | 1,609 |   |   |
| Translation  result                                                                                         |       |                                                                                                  | —     |   |   | — |   |   | (670 | ) |   |   | (670 | ) |   |
| Comprehensive  income for the year                                                                          |       |                                                                                                  | —     |   |   | — |   |   | — |   |   |   | 15,197 |   |   |
| **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 |   |   |

 

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

F-5

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**Aurelia Energy N.V.Consolidated Statementsof Cash Flows**

| ** **                                                                     | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash flows from operating activities**                                       |       |                                                      |       |   |   |   |   |
| Net income                                                                     |       | 13,303                                                    |       | 6,389 |   | 12,577 |   |
| **Adjustments to reconcile net income to cash  provided**                      |       |                                                      |       |   |   |   |   |
| Depreciation of tangible  fixed assets                                         |       | 94,953                                                    |       | 72,995 |   | 61,976 |   |
| Amortization of debt  arrangement fees                                         |       | 2,938                                                     |       | 2,730 |   | 2,651 |   |
| Increase in deferred  income tax assets                                        |       | (19,858                                                   | )          | (1,431 | ) | (2,668 | ) |
| Accrued interest on long-term  loan from related party                         |       | 9,946                                                     |       | 7,426 |   | 8,809 |   |
| Amortization of discount  on 10 1¤4% Senior Notes due 2012                |       | 355                                                       |       | 355 |   | 371 |   |
| Amortization benefit from  unwinding swap                                      |       | (674                                                      | )          | (767 | ) | (447 | ) |
| Change in pension  provision                                                   |       | (92                                                       | )          | 326 |   | (506 | ) |
| Increase/(decrease) in  provision for uncollectible accounts receivable        |       | (520                                                      | )          | 212 |   | 759 |   |
| (Gain)/loss on foreign  currency forward contracts                             |       | 4,801                                                     |       | (1,607 | ) | (4,396 | ) |
| Change in fair value of  interest rate swap                                    |       | 6,650                                                     |       | — |   | — |   |
| Interest accrued on  restricted deposits                                       |       | 4,270                                                     |       | (5,426 | ) | (8,619 | ) |
| Minority interest in  income of subsidiaries                                   |       | 5,163                                                     |       | — |   | — |   |
| **Change in operating assets and liabilities, net  of effect of acquisitions** |       |                                                      |       |   |   |   |   |
| (Increase)/decrease  income taxes receivable                                   |       | 1,078                                                     |       | (297 | ) | (1,743 | ) |
| (Increase)/decrease in  work in process                                        |       | (1,327                                                    | )          | (5,779 | ) | 3,721 |   |
| (Increase)/decrease in  trade receivables                                      |       | 7,329                                                     |       | (8,555 | ) | (1,847 | ) |
| (Increase)/decrease in  related party receivables                              |       | 11                                                        |       | (8 | ) | (13 | ) |
| (Increase)/decrease in  other receivables                                      |       | (787                                                      | )          | 1,135 |   | (14,297 | ) |
| (Increase)/decrease in  prepaid expenses                                       |       | 842                                                       |       | (2,125 | ) | 2,632 |   |
| Interest withdrawn from  restricted deposits                                   |       | (2,992                                                    | )          | (3,103 | ) | (3,166 | ) |
| (Increase)/decrease in  accounts payable                                       |       | (8,512                                                    | )          | (1,579 | ) | 3,385 |   |
| Increase in other  liabilities and accrued expenses                            |       | 23,015                                                    |       | 11,422 |   | 10,889 |   |
| Increase/(decrease) in  other short term liabilities other than loans          |       | (26                                                       | )          | (220 | ) | 277 |   |
| Increase in billings in  excess of cost and unrealized income                  |       | 3,172                                                     |       | 4,131 |   | 2,363 |   |
| Decrease of non current  liabilities, other than loans                         |       | (34,422                                                   | )          | (4,563 | ) | (788 | ) |
| Net cash provided by  operating activities                                     |       | 108,616                                                   |       | 71,661 |   | 71,920 |   |
| **Cash flows from (used in) investing activities**                             |       |                                                      |       |   |   |   |   |
| Additions to tangible  fixed assets                                            |       | (391,596                                                  | )          | (22,643 | ) | (77,871 | ) |
| Disposals of tangible  fixed assets                                            |       | 25                                                        |       | 1,476 |   | 8,066 |   |
| Loans provided                                                                 |       | —                                                    |       | (50 | ) | (100 | ) |
| Additions to financial  investments                                            |       | (2,000                                                    | )          | (7,500 | ) | — |   |
| Proceeds from restricted  deposits                                             |       | 88,656                                                    |       | 54,130 |   | 9,759 |   |
| Deposited to restricted  deposits                                              |       | (1,865                                                    | )          | (44,157 | ) | (4,996 | ) |
| Net cash used in  investing activities                                         |       | (306,780                                                  | )          | (18,744 | ) | (65,142 | ) |
| **Cash flows provided by (used in) financing  activities**                     |       |                                                      |       |   |   |   |   |
| Proceeds from long term  and short term loans from banks and third parties     |       | 428,894                                                   |       | 110,966 |   | 251,636 |   |
| Proceeds from issuance 10 1¤4% Senior Notes due 2012                      |       | —                                                    |       | — |   | 75,375 |   |
| Premium paid for interest  rate cap.                                           |       | (1,462                                                    | )          | — |   | — |   |
| Proceeds/(payments)  from/for unwinding swap transaction                       |       | (6,898                                                    | )          | — |   | 6,680 |   |
| Redemption of loans and  short term bank liabilities                           |       | (246,004                                                  | )          | (151,248 | ) | (325,624 | ) |
| Debt arrangement fees                                                          |       | (1,137                                                    | )          | — |   | (2,260 | ) |
| Minority interest                                                              |       | 29,019                                                    |       | — |   | — |   |
| Net cash provided by  (used in) financing activities                           |       | 202,412                                                   |       | (40,282 | ) | 5,807 |   |
| Translation differences                                                        |       | (3,209                                                    | )          | (3,585 | ) | (2,672 | ) |
| Net increase in available  cash and cash equivalents                           |       | 1,039                                                     |       | 9,050 |   | 9,913 |   |
| Cash and cash equivalents  at beginning of the year                            |       | 41,987                                                    |       | 32,937 |   | 23,024 |   |
| Cash and cash equivalents  at end of the year                                  |       | 43,026                                                    |       | 41,987 |   | 32,937 |   |
| **Additional cash flow disclosures**                                           |       |                                                      |       |   |   |   |   |
| Interest paid                                                                  |       | 39,930                                                    |       | 35,169 |   | 39,722 |   |
| Income taxes paid                                                              |       | 2,945                                                     |       | 2,115 |   | 2,382 |   |

 

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

F-6

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**Aurelia Energy N.V.Notes to ConsolidatedFinancial Statementsat December 31, 2005, 2004 and 2003(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 Aurelia Holding N.V., Willemstad (Curaçao), Netherlands Antilles,which is currently in the process of dissolution and liquidation, of which allshares are directly held by the Jacaranda Trust, an irrevocable discretionarytrust constituted under the laws of Jersey.

Its major investment is Bluewater Energy N.V., theholding company of a group of companies engaged in the field of the supply ofservices and products to the oil industry. Bluewater Energy N.V. together withits group companies are further referred to as Bluewater.

The registrant’soffice address is Landhuis Joonchi, Kaya Richard J. Beaujun z/n, Curaçao, theNetherlands 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 and constructssingle 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 anofftake system utilizing shuttle tankers. Bluewater’s fleet of FPSOs isinvolved in the production, rather than the exploration or drilling, of oil.The FPSOs are leased 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 an indexed operating feethat are received from the operation of FPSOs pursuant to leases with oilcompanies, supplemented primarily with fees from predetermined thresholds on volumesproduced (oil production, water injection, and gas uplift) and predeterminedlevels of uptime, and from the design, engineering and management services thatare provided in the various FPSO and SPM projects being managed. FPSO and SPMprojects are being managed from the initial design and engineering phase tofinal installation. Further Bluewater engages subcontractors in the fabricationof FPSOs, SPMs and auxiliary equipment.

F-7

----

**2.   Principles of 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 Energy N.V.                               | Willemstad, Curaçao            |
| Bluewater Offshore  Production Systems Ltd.         | Valletta, Malta                     |
| Bluewater Holding B.V.                              | Hoofddorp, The  Netherlands         |
| Bluewater Finance Ltd.                              | George Town, Cayman  Islands        |
| Bluewater Terminal  Systems N.V.                    | Willemstad, Curaçao            |
| Bluewater Floating  Production B.V.                 | Hoofddorp, The  Netherlands         |
| Bluewater Energy  Services B.V.                     | Haarlemmermeer, The  Netherlands    |
| Bluewater International  B.V.                       | Hoofddorp, The  Netherlands         |
| Bluewater (Malta) Ltd.                              | Valletta, Malta                     |
| Bluewater Offshore  Production Systems N.V.         | Willemstad, Curaçao            |
| Bluewater Equipment  Leasing Ltd.                   | Valletta, Malta                     |
| Bluewater (Glas Dowr)  N.V.                         | Willemstad, Curaçao            |
| Bluewater Services (UK)  Ltd.                       | London, United Kingdom              |
| Bluewater Operations  (UK) Ltd.                     | London, United Kingdom              |
| Bluewater (UK) Ltd.                                 | London, United Kingdom              |
| Bluewater (Floating  Production) Ltd.               | London, United Kingdom              |
| Bluewater Offshore  Production Systems Nigeria Ltd. | Lagos, Nigeria                      |
| Bluewater (Bleo Holm)  N.V.                         | Willemstad, Curaçao            |
| Bluewater (Munin) N.V.                              | Willemstad, Curacao                 |
| Bluewater (Haewene Brim)  N.V.                      | Willemstad, Curacao                 |
| Lufeng Development  Company ANS                     | Oslo, Norway                        |
| Pierce Production  Company Ltd.                     | London, United Kingdom              |
| Bluewater (New Hull)  N.V.                          | Willemstad, Curaçao            |
| Bluewater Oil &  Gas Investments Ltd.      | Lagos, Nigeria                      |
| Bluewater Manning  Services Ltd.                    | London, United Kingdom              |
| Bluewater Services  International Private Ltd.      | Singapore                           |
| Bluewater Offshore  France S.A.S                    | Paris, France                       |
| Bluewater Norway ANS.                               | Oslo, Norway                        |
| Bluewater Offshore  Production Systems (USA) Inc.   | Delaware, United States  of America |
| PR Jotun DA.                                        | Sandnes, Norway                     |
| Bluewater (Tullebuk) B.V                            | Hoofddorp, The  Netherlands         |
| Bluewater (Dyphavet) B.V                            | Hoofddorp, The  Netherlands         |
| Refugio B.V                                         | Hoofddorp, The  Netherlands         |
| 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 which is fully consolidatedin accordance with the provisions of FIN 46R.

F-8

----

**3.   Accounting Principles**

***(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 haveall been applied consistently throughout all years presented. Certainreclassifications have been made to the comparative figures in order to conformto the current year’s presentation.

The financialstatements have been prepared under the historical cost convention.

***(b)******           Use of estimates and reclassifications***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect certain reported amounts and disclosures.Accordingly, actual results can differ from those estimates.

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

*i.**                    Reportingcurrency*

Because of theinternational nature of the Company’s activities and the fact that the Company’stransactions are primarily denominated in U.S. dollars, the financialstatements are prepared in U.S. dollars.

*ii.**                 Functionalcurrency*

Consolidated groupcompanies having other functional currencies than U.S. dollars are the group companieslegally seated in the Netherlands having Euros and the group companies legallyseated in the United Kingdom having pound sterling as functional currency.

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

Monetary assets andliabilities denominated in foreign currencies are remeasured into therespective functional currencies at the rate of exchange prevailing atyear-end. Transactions in foreign currencies are remeasured into the respectivefunctional currencies at the exchange rate in effect at the time of thetransaction. The exchange results are recorded under financial income andexpense 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 average rates of exchange for the month.

Gains and lossesresulting from the translation are recorded directly in shareholder’s equity,as a foreign currency translation adjustment.

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

Cash includes cashon hand and cash with banks. Cash equivalents are short-term deposits withoriginal maturities of three months or less.

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

Accounts receivableare stated at face value, less an allowance for possible uncollectibleaccounts.

***(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).

F-9

----

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 constructionor the 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   |   |
| Machinery and  other equipment                    |   | 3-12 years |   |
| Office equipment and  other tangible fixed assets |   | 4-10 years |   |

 

Tangible fixedassets operated by the Company under a financial lease agreement arecapitalized.

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

The Companyperiodically evaluates the recoverability of the carrying amount of its long-livedassets in accordance with SFAS No. 144, “Accounting for the Impairment ofLong-Lived Assets”. Whenever events or changes in circumstances indicate thatthe carrying amounts of those assets may not be recoverable, the Company willcompare undiscounted net cash flows estimated to be generated by those assetsto the carrying amount of those assets. When these undiscounted cash flows areless than the carrying amounts of the assets, the Company will recordimpairment losses to write the asset down to fair value, measured by thediscounted estimated net future cash flows expected to be generated from theassets. During the three years ended December 31, 2005, no impairmentlosses have been recorded by the Company.

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

Debt arrangementfees represent costs incurred in arranging a corporate borrowing facility,costs incurred in the issuance of 101¤4% Senior Notesdue 2012 and costs incurred in arranging a loan agreement to finance theacquisition of a 55% ownership in PR Jotun DA. The debt arrangement fees areamortized on a straight line basis to interest expenses over the term of thefacility, the term of the 101¤4%Senior Notes due 2012 and the term of the loan agreement, respectively.Amortization on a straight-line basis approximates the effective interest ratemethod over the duration of the related debt.

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

*i.**                    Financelease (lessee)*

The Companyaccounts for finance leases by capitalizing the related asset and byrecognizing the related debt at amounts equal to the fair value of the leasedasset and related debt, respectively, at inception of the lease.

*ii.**                 Operatinglease (lessor)*

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

F-10

----

Direct operating costsincurred specifically to earn revenues from an operating lease are recognizedas an expense in the income statement in the period in which they are incurred.

***(k)******           Tax lease benefits liability***

The tax leasebenefits liability arises from the tax lease structures of the FPSO *Uisge Gorm*, the FPSO *Glas Dowr*, theprocess facilities on board the FPSO *Bleo Holm* andthe process facilities on board the FPSO*Haewene Brim*and represents the amount that would need to be repaid to the lessor in theevent of a voluntary termination of the prepaid leases. The liability declinesover time as the tax benefits are realized by the lessor. Periodically, theCompany assesses the likelihood of repayment of the voluntary early terminationliability. As long as there is more than a remote possibility of earlytermination, the liability is recorded and is released to other operatingincome as the liability decreases over the lease term. Payments receivedfrom/made to  the lessor as result ofchanges in underlying variables such as market interest rates and corporateincome tax are accounted for in the consolidated statement of income as otheroperating income/expense.

***(l)******              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 pensionobligation is measured at the present value of estimated future cash flowsusing a discount rate that is similar to the interest rate of Dutch governmentbonds, where the currency and terms of the government bond are consistent withthe currency and estimated terms of the defined benefit obligation.

*ii.**                 Definedcontribution plan*

In addition to thedefined benefit plans described above, the group companies in the United Kingdomsponsor defined contribution plans based on local practice and regulations. Theplans provide for contributions amounting to 5% of salary. The contributionsrelating to defined contribution plans are charged to income in the year towhich they relate.

***(m)******       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 ofhedges is 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. The net result of the interest rate swap isrecognized in the income statement.

Currently, the Company actively uses both interestrate swaps 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 swaps and some of theforeign currency exchange contracts as hedging instruments. Accordingly, theforeign currency exchange contracts are marked to market at each reporting datewith the gains and losses being recognized under other liabilities and accruedexpenses in the balance sheet and are reported as a separate component ofaccumulated other comprehensive income/(loss) to the extent the hedge iseffective and for the ineffective part under currency exchange results in theincome statement. The net gains and losses on the revaluation of the derivativeinstruments that are designated and qualify as cash flow hedges are reported asa separate component of accumulated other comprehensive income/(loss) to the extentthe hedge is effective.

***(n)******          Recognition of income***

In general, the Companyrecognizes revenues from operating lease arrangements of FPSOs and from theconstruction (design, engineering and project management) of SPMs and theinstallation and mobilization of FPSOs and SPMs.

*i. Operating leasearrangements 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 facility fee;

(2)         An operational fee;

(3)         Amounts related to thevolumes of water, gas and oil produced;

(4)         Payments which may becomepayable 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 disclosurewith respect to the material terms of the operating lease arrangements and therelated revenue recognition policies by FPSO, reference is made to note 4.

F-12

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*ii. Construction ofSPMs and auxiliary equipment*

Revenue from construction (design, engineering andproject management) of SPMs and auxiliary equipment are recognized underthe percentage of completion method of accounting as the project is performed.Percentage of completion is measured by the labor and material cost incurred tototal estimated labor and material cost method.

Billings issued to and cash payments received fromcustomers in excess of estimated earnings are not shown as sales revenues, butdeducted without effect on income from cost and estimated earnings in excess ofbillings on uncompleted contracts or added to billings in excess of cost andestimated 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 which suchlosses are determined.

*iii. Installation,mobilization and other services*

In connection withFPSOs and SPMs, the Company recognizes revenues from installation, mobilizationand other 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.

***(o)******           Research and development costs***

Research anddevelopment costs are expensed in the period in which they are incurred.Research and development expenditures for the years 2005, 2004 and 2003 amountto U.S.$500, U.S.$450 and U.S.$450, respectively.

***(p)******           Income taxes***

The income tax charge is based on the tax regimeapplicable to the various group companies in the countries in which they are legallyseated. These tax regimes charge income taxes based on operating profits or onthe basis of other criteria as agreed upon by the group in specific taxrulings. Deferred taxation is considered in accounting for the income taxcharge for the year.

Deferred incometaxes are accounted for using the balance sheet liability method. Deferredincome taxes are provided for temporary differences between the tax bases ofassets or liabilities and their reported amounts in the financial statements.Future tax benefits attributable to these differences, if any, are recognizedto the extent that realization of such benefits is more likely than not.

***(q)******           Provisions***

Provisions arerecognized when a present obligation as a result of a past event exists, it isprobable that an outflow of resources will be required to settle the obligationand a reliable estimate can be made of the amount of the obligation.

***(r)******            Contingencies***

Contingent assets are notrecognized in the financial statements.

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***(s)******            New Accounting Principles***

**SFAS 151**

In November 2004, theFASB issued Statement No. 151 (“SFAS 151”), “Inventory costs, anamendment of ARB No. 43, Chapter 4”. SFAS 151 clarifies theaccounting for abnormal amounts of idle facility expense and waste andprohibits such costs from being capitalized in inventory. In addition,SFAS 151 requires that allocation of fixed production overheads to theinventory cost be based on the normal capacity of the production facilities. Inaccordance with the early adoption provisions of the statement, we have adoptedSFAS 151 effective as of January 1, 2005. Adopting SFAS 151 did nothave a material impact on our consolidated financial statements.

**SFAS 153**

In December 2004, theFASB issued Statement No. 153 (“SFAS 153”), “Exchanges ofNon-monetary Assets, an amendment of APB Opinion No. 29”. SFAS 153eliminates the exception in Opinion No. 29 for non-monetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges of non-monetary assets that lack commercial substance. The statementwill become effective in 2006 but we do not anticipate that the adoption ofSFAS 153 will have a material impact on our 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 was adopted by us in2003. SFAS 123R supersedes APB Opinion No. 25, that allowed the useof the intrinsic value for measuring stock-based compensation expensesfor stock issued to employees. SFAS 123R focuses primarily on accountingfor transactions in which an entity obtains employee services in share-basedpayment transactions. SFAS 123R contains certain changes compared with theoriginal pronouncement. The provisions of this statement are effective forfinancial statements issued for fiscal years beginning after January 1,2006. We do not anticipate that the adoption of SFAS 123R will have amaterial impact on our consolidated financial statements since the companycurrently does not have any stock-based compensation subject toSFAS 123R.

**FIN 47**

In March 2005, theFASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting forConditional Asset Retirement Obligations”. FIN 47 clarifies that the obligationto perform the asset retirement activity is unconditional even thoughuncertainty exists about the timing and the method of settlement. Accordinglythe Company would be required to recognize a liability for the fair value of a conditionalasset retirement obligation if that fair value can be reasonably estimated. Thestatement became effective on December 31, 2005. The Company hasinvestigated the existence of such obligations and concluded that the effectson the financial statements are negligible.

**SFAS 154**

In May 2005, the FASBissued Statement No. 154 (“SFAS 154”), “Accounting Changes and ErrorCorrections”, which replaces APB Opinion No. 20 and SFAS No. 3. Thestatement establishes retrospective application as the required method forreporting a change in accounting principle in the absence of explicittransition requirements for new accounting pronouncements. Error correctionsmust be applied in the same way as accounting changes. In conformity with thetransition guidance in this Statement, the Company adopted SFAS No. 154 asfrom May 2005.Adopting SFAS 154 did not have a material impact on ourconsolidated financial statements.

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**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. We do not anticipate that the adoption ofSFAS 155 will have a material impact on our consolidated financial statements.

**SFAS 156**

In March 2006, theFASB issued Statement No. 156 (“SFAS 156”), “Accounting for Certain HybridFinancial Instruments, 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. We do not anticipate that the adoption of SFAS 156 will have a materialimpact on our consolidated financial statements.

**4.   OperatingLease Arrangements for FPSOs**

The materialterms of the Company’s FPSO agreements and the related revenue recognitionpolicies are as follows:

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

TheFPSO *Uisge Gorm* fees earnedconsist of:

·       Afacility fee per day which is fixed for the lease period on the basis of amaximum number of days’ downtime per quarter. If the number of days’ downtimeper quarter exceeds a certain limit, the facility fee can be reduced by amaximum of 50%, unless the Company demonstrates practical best endeavors inrestarting production. The facility fee is recognized on a straight-line basisover the lease period. The reductions for downtime, if any, are recognizedquarterly when incurred. This fee was terminated as of December 31, 2004and replaced by  fee payments which arerelated to specified and agreed upon volumes of oil produced. Fee payments thatdepend on the volumes of oil are recognized when the specified and agreed uponvolumes have been produced.

·       Anoperational fee per day for the operation, maintenance and insurance of theFPSO on the basis of minimum average oil production and water reinjectionuptimes per year that exceed 95% and 85%, respectively. If the oil productionand water reinjection uptimes fall below these thresholds, the operational feeis reduced according to a predetermined formula. The operational fee isadjusted periodically based on changes in agreed-upon official price indicesapplicable in the industry. The operational fee is recognized on astraight-line basis over the lease term. Contingent payments that depend on theuptimes for oil production and water injection or on changes in the priceindices are recognized when the specified uptimes are realized or when theapplicable price indices have changed. This fee was terminated as of December 31,2004 and replaced by  an operational feeper day for the operation, maintenance and insurance of the FPSO on the basisof an agreed annual Operations Budget. A new Operations Budget is agreed eachyear. The operational fee is recognized on a straight-line basis over the leaseterm.

·       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 andwater produced and gas lifted are recognized when the specified and agreed-uponvolumes have been produced. These fees ceased to be paid on December 31,2004.

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·       Fee payments that depend onthe price of oil are recognized when the agreed-upon price level of oil hasbeen reached. Fee payments related to the price of oil up to a maximum of U.S.$10,000since inception of the lease. This maximum was reached in October 2001.

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

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

·       Afacility fee per day which is fixed for the lease period on the basis of anaverage weighted oil production, water reinjection and gas uplift uptime perquarter that 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 payments that depend on thechanges in the price indices are recognized when the applicable price indiceshave 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 wasterminated and simultaneously the production of the vessel was continued undera bareboat agreement. The fees earned under the bareboat agreement consist of:

·       A charter fee per day whichis fixed for the charter period. The charter fee is recognized on astraight-line basis over the charter period.

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

TheFPSO *Glas Dowr* fees earnedconsist of:

·       Afacility fee per day which is fixed for the lease period on the basis ofminimum average oil production and gas injection and separately water injectionof which uptimes per month exceeds 95%. The uptimes are determined by apredescribed formula based on the barrels of oil produced. If the oilproduction and gas injection uptime falls below this threshold, the facilityfee is adjusted downward monthly. The facility fee is recognized on astraight-line basis over the lease period. The downward adjustments for uptime,if any, are recognized monthly when incurred. In addition, the facility fee isadjusted downward if the actual water injection uptime over a two month periodfalls below the agreed threshold. After the minimum contract period, thefacility fee is adjusted upward.

·       Afixed operational fee per day for the operation, maintenance and insurance ofthe FPSO and a fixed fee per day for the provision of shuttle tankers. Thelabor charges included in the operational fee are adjusted yearly based onchanges in agreed-upon official price indices. The operational fee and shuttletanker fee is recognized on a straight-line basis over the lease period.Payments that depend on changes in actual costs are made on a monthly basis.

·       Feepayments which are related to specified and agreed upon volumes of oil producedand which are guaranteed for a minimum amount of barrels. After a minimumamount of barrels are produced, the tariff payment is adjusted upwards but isno longer guaranteed.

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During the year 2002 and part of 2003, the *Glas Dowr* topsides were modified inconnection with the FPSO’s redeployment to another field. The *Glas Dowr* commenced production of oil onAugust 7, 2003.

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

The FPSO *Haewene Brim* fees earned consist of:

·       Afacility fee per day which is fixed for the lease period on the basis ofminimum gas reinjection uptime per year of 85%. If this gas reinjection uptimefalls below this threshold, the facility fee is adjusted downward yearly on apro rata basis. If the gas reinjection uptime is above 92%, the facility fee isadjusted upward yearly on a pro rata basis. The facility fee is recognized on astraight-line basis over the lease period. The upward and/or downwardadjustments for uptime, if any, are recognized annually when incurred.

·       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 payments that depend onchanges in the price indices are recognized when the applicable price indiceshave changed.

·       Fee payments which arerelated to specified and agreed upon volumes of oil produced and the price ofoil. Fee payments that depend on the volumes of oil produced and the price ofoil are recognized when the specified and agreed upon volumes have beenproduced.

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

The FPSO *Munin* fees earned consist of:

·       InJanuary 2004, Bluewater entered into a new service agreement with ConocoPhillips to deliver, install and operate the *Munin*on the Xijiang Field in the South China Sea using the FPSO’s dynamicpositioning system, which enables us to avoid costs associated with installinga fixed mooring system. As a consequence, our existing service agreement withStatoil was suspended in July 2004. The *Munin*was relocated to the Xijiang Oil Field in September 2004 pursuant to theterms of the service agreement with Conoco Phillips and started operating onthe field in October 2004. The new service agreement had a minimum term of160 days and a maximum term of 190 days. Under the new agreement, wewere required to maintain a crew and operate the *Munin*.We received a defined day rate of approximately U.S.$100 per day that consistedof a facility fee and a fixed operating fee. We also received fixed ancillaryfees to 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 the applicablethreshold, our facility fee had been reduced on a pro rata basis. Production onXijiang ended in March 2005 as per contract.

F-17

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·       After decommissioning atXijiang, the *Munin* sailed 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 to re-commence operations for Statoil Orient Inc. The amendedagreement with Statoil Orient Inc. is for a period of 3 years and will expirein April 2008. Under this revised agreement, Bluewater receives a fixeddaily hire rate of $30 per day plus $0.0335 for every barrel of oil produced.The average anticipated revenue over this 3 year period is expected to be inthe region of $55 to $60 per day. In addition, Bluewater receives a monthlylump sum payment to cover a pre-defined scope of work for operations support,including the vessel insurance. All other costs incurred by Bluewater such ascrew costs, flag and classification services etc., are reimbursed by StatoilOrient Inc. at cost.

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

The FPSO *Jotun A* fees earned consist of:

·       Bluewater (Dyphavet) B.V.,a subsidiary of the Company, and Norwegian company Standard Marine Nordsjo AS (“SMNAS”),an affiliate of Exxon Mobil Corporation, have formed a partnership (PR JotunDA) that purchased FPSO *Jotun A* fromNorwegian  Jotun field partners ExxonMobil Exploration and Production Norway AS, Lundin Norway AS and Petoro AS. TheCompany holds 55% ownership in PR Jotun DA with SMNAS holding the remaining 45%. After its acquisition, the FPSOhas been leased back under a bareboat charter to the Jotun field partners for aminimum term of five years, with extension options up to 15 years. Ontermination of the lease contract, SMNAS has both a call and a put option to eitherpurchase the Company’s share in the partnership or to sell its own share in thepartnership to the Company at predetermined price. The bareboat charter isexpected to continue for the remaining life of the Jotun field. ExxonMobil willcontinue to operate the FPSO. In accordance with the provisions of FIN 46R, theCompany fully consolidates PR Jotun DA and records a 45% minority interest. Forthe period July 1, 2005 - June 30, 2007 we receive a defined day rateof U.S.$180 per day. For the period July 1, 2007 - June 30, 2010 wereceive a defined day rate of U.S.$160 per day. In accordance with FAS 13,revenues are straight lined over the lease term i.e. U.S.$168 per day have beenrecorded as revenues and *Leases* U.S.$12per day have been accrued as deferred revenues.

***(g)******           Contingent payments***

Contingent paymentsfor the years 2005, 2004 and 2003 amounted to U.S.$94,740, U.S.$156,252 andU.S.$72,639, respectively.

***(h)******          Guaranteed day rates***

*UisgeGorm.**  *TheCompany receives from Amerada Hess a minimum day rate of approximately U.S.$94per day that consists of a minimum facility fee for the provision of the FPSOand associated equipment and a budget defined operating fee for the operationand maintenance 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.

*BleoHolm.**  *TheCompany receives from Talisman a defined day rate of approximately U.S.$114which is a charter fee for the provision of the FPSO and associated equipment.Under the terms of the existing Bare Boat Charter, Talisman is obligated tocontinue to make payments until May 2007, after which the contract willcontinue at pre-agreed rates until July 2012 unless terminated byTalisman..

*GlasDowr.**  *Duringthe minimum contract period of three years, PetroSA will be required to pay aminimum fee of approximately U.S.$124 per day plus guaranteed tariff paymentsfor each barrel of oil produced commencing on the date of first oil, which wasachieved in the end of December 2003. The minimum fee per day consists ofa fixed facility fee, a fixed operating fee and a fee for shuttle tanker 

F-18

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services. The minimumguaranteed tariff payments until the end of the minimum contract period amountto 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 12 months’notice. As a consequence, without termination, the contract term is ten years.

*HaeweneBrim.**  *TheCompany receives from Enterprise Oil/Shell a defined day rate of approximatelyU.S.$155 that consists of a facility fee for the provision of the FPSO andassociated equipment (indexed to the pound sterling-U.S.$ exchange rate) and anindexed operating fee for the operation, maintenance and insurance of thevessel. Enterprise Oil/Shell is obligated to continue to make payments to theCompany under its service agreement until the agreement expires in March 2014.The minimum 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 the Lufengfield. Under its current service agreement,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 a defined day rateof approximately U.S.$180 for the period July 1, 2005 - June 30,2007. For the period July 30, 2007 - June 30, 2010 we receive adefined day rate of U.S.$160 per day. Under the existing bareboat charter,Exxon is obliged to continue to make payments until June 30, 2010, afterwhich the contract will continue at pre-agreed rates until June 30, 2020unless terminated by Exxon.

**5.   Tax LeaseStructures for FPSOs *Uisge Gorm*, *Glas Dowr*, *Bleo Holm* and *HaeweneBrim***

As of December 31, 2004 the Company was engagedin tax lease structures with a leasing subsidiary of a UK bank (“the lessor”).The Company leased the FPSOs *Uisge Gorm*and *Glas Dowr* and the processfacilities on board the FPSO *Bleo Holm*and on board of the FPSO *Haewene Brim*from the lessor for a period of 15 years commencing for the *Uisge Gorm* in August 1995, for theFPSO *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.

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.

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Thecomposition of these assets under capital lease is as follows:

| ** **                | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                | ** ** | **(in U.S.$ thousands)**           | ** ** |
| FPSOs                     |       |                                         | —     |                                         |       | 914,131 |   |
| Accumulated  depreciation |       |                                         | —     |                                         |       | (297,564 | ) |
| Balance December 31  |       |                                         | —     |                                         |       | 616,567 |   |

 

At inception of the lease, the Company funded thefuture lease installments to a third party bank, which will pay the futurelease installments to the lessor. Further, it is agreed that the lessor is notlegally entitled to hold the Company liable in case the bank does not fulfillits obligations against the lessor. Accordingly, the Company’s balance sheetdoes not include a lease liability against the lessor for these leases.

Under these taxlease structures:

(a)    TheCompany entered into a lease structure with a UK financial institution thatprovides the financial institution with an ownership interest in the relevantequipment whether by legal title or as purchaser under a conditional saleagreement. The UK ownership interest in the vessel entitles the UK financialinstitution to claim certain benefits of ownership of the equipment for taxpurposes in its tax jurisdiction.

(b)   Thefinancial institution paid the Company an amount of cash. This representsconsideration for the tax benefits to be obtained by the financial institutionin its tax jurisdiction. The income statement recognition of this cash receiptwas deferred (see below).

(c)    TheCompany leased back the equipment from the financial institution under a leasewhich is a capital lease back. The liability under the capital lease back wasextinguished upon inception of the lease because the parties to the transactionprefunded the liability under the lease back to a third party financialinstitution which would, as primary obligator, pay the future lease payments tothe lessor and the lessor was not entitled to hold the Company liable under thelease back if the third party financial institution does not meet itsobligations to make payments to the lessor.

The tax lease benefitsliability represents the amount that would need to be repaid to the lessor inthe event of a voluntary termination of the leaseback arising from the taxlease structures of the FPSO *Uisge Gorm*,the FPSO *Glas Dowr*, the processfacilities on board of the FPSO *Bleo Holm*and the process facilities on board of the *HaeweneBrim* and the liability declines as the tax benefits are recognizedby the lessor.

**6.   Cash and CashEquivalents**

No restrictions on usageof cash exist.

**7.   AccountsReceivable**

Accountsreceivable are as follows:

| ** **                                 | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                 | ** ** | **(in U.S.$ thousands)**                       | ** ** |
| Trade                                      |       |                                                     | 32,452     |                                                     |       |   | 39,781 |   |   |
| Less provision  for uncollectible accounts |       |                                                     | 923        |                                                     |       |   | 1,443 |   |   |
| Net trade  receivables                     |       |                                                     | 31,529     |                                                     |       |   | 38,338 |   |   |
| Related party                              |       |                                                     | 99         |                                                     |       |   | 110 |   |   |
|                                       |       |                                                     | 31,628     |                                                     |       |   | 38,448 |   |   |

 

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Themovement in the provision for uncollectible accounts is as follows:

| ** **       | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **       | ** ** | **(in U.S.$ thousands)** | ** ** |
| January 1   |       | 1,443                              |       | 1,231    |       | 472      |       |
| Additions        |       | 36                                 |       | 486      |       | 816      |       |
| Release          |       | (556                               | )          | (27      | )          | (50      | )          |
| Write offs       |       | —                             |       | (247     | )          | (7       | )          |
| December 31 |       | 923                                |       | 1,443    |       | 1,231    |       |

 

Accounts receivable aspresented under current assets mature within one year.

**8.   Other Receivables**

Otherreceivables are specified as follows:

| ** **                                                    | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **(in U.S.$ thousands)**                       | ** ** |
| Accrued income                                                |       |                                                     | 21,636     |                                                     |       |   | 16,779 |   |   |
| Accrued gain on  forward currency exchange contracts          |       |                                                     | —     |                                                     |       |   | 1,607 |   |   |
| Accrued interest  on the fixed-to-floating interest rate swap |       |                                                     | 11         |                                                     |       |   | 3,727 |   |   |
| Insurance  receivables                                        |       |                                                     | 1,925      |                                                     |       |   | — |   |   |
| Other                                                         |       |                                                     | 2,082      |                                                     |       |   | 2,754 |   |   |
| Total                                                         |       |                                                     | 25,654     |                                                     |       |   | 24,867 |   |   |

 

**9.   Work in Process**

Work in process in excess of billings arises whenrevenues have been recorded but the amounts cannot be billed under the terms ofthe contracts. Such amounts are recoverable from customers upon variousmeasures of performance, including achievement of certain milestones,completion of specified units or completion of the contract. Work in processcontains directly allocable costs (labor costs of services provided by thirdparties) as well as the appropriate portion of overheads including pro rataadministrative expenses.

Also included in work in process are amounts theCompany seeks or will seek to collect from customers or others for errors orchanges in contract specifications or design, contract change orders in disputeor unapproved as to both scope and price, or other customer related causes ofunanticipated additional contract costs claims and pending change orders. Theseamounts are recorded at their estimated net realizable value when realizationis probable and can be reasonably estimated. No profit is recognized on thecosts incurred in connection with these amounts. Pending change orders involvethe use of estimates and it is reasonably possible that revisions to theestimated recoverable amounts or recorded pending change orders may be made inthe near term.

F-21

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Workin process is specified as follows:

| ** **                                             | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                             | ** ** | **(in U.S.$ thousands)** | ** ** |
| Cost incurred on  projects                             |       | 90,271                             |       | 63,440   |       |
| Profit/(loss)  recognized, less loss provisions taken  |       | (25,109                            | )          | 3,984    |       |
| Revenues  recognized                                   |       | 65,162                             |       | 67,424   |       |
| Invoiced to  customers                                 |       | (61,612                            | )          | (62,029  | )          |
|                                                   |       | 3,550                              |       | 5,395    |       |
| Which is  specified as follows:                        |       |                               |       |     |       |
| Cost incurred in  excess of billings (work in process) |       | 15,174                             |       | 13,847   |       |
| Billings in  excess of cost and unrealized income      |       | (11,624                            | )          | (8,452   | )          |
|                                                   |       | 3,550                              |       | 5,395    |       |

 

**10.   Loan**

The loan was provided to athird party on November 13, 2003 for U.S.$100. On January 16, 2004 anadditional 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.

**11.   FinancialInvestment**

On May 26, 2004,Bluewater International B.V. entered into an agreement with Emerald EnergyResources Ltd. (“Emerald”), a Nigerian indigenous oil company, for theacquisition of shares of Emerald at a total price of U.S.$3.0 million. On November 25,2004 Bluewater International B.V. obtained additional ordinary shares ofEmerald at a total price of U.S.$4.5 million. On April 27, 2005 BluewaterInternational B.V. obtained additional shares of Emerald at a total price ofU.S.$2.0 million. The total investment in Emerald represents approximately 9.6%of its authorized and outstanding capital and is stated at historical cost. TheCompany has an option to acquire an additional amount of 800,000 ordinaryshares.

**12.   RestrictedDeposits**

The restricted deposits at December 31, 2004represent UK pound sterling and U.S. dollars deposits and were dedicated to actas security, primarily for the tax leasing structures entered into with respectto the FPSOs *Uisge Gorm* and *Glas Dowr* and the process facilities onboard the FPSO *Bleo Holm* (seenote 5). These deposits are released to free cash based on an agreed uponscheme between the contract parties.

The deposits secure rent and termination paymentsunder the leasing transactions. Subject to certain conditions under which thelessor must be satisfied that the value of its overall security is maintained(as described in the various lease documents) and the lessees and sub lesseesare not in breach of their lease obligations, the Company shall be entitledperiodically to a return of cash surplus to the required collateral amount. Therequired collateral amount is based on a cash flow driven by financialassumptions. Those are revised from time to time. The assumptions include, butare not limited to: the borrowing investment rate of the lessor; reserve assetcosts; the lessor’s year end; corporation tax level; VAT recoverability andzero rating on lease supplies; 25% writing down allowances; rental paymentdates; the sale of the leased asset at the higher of fair market value and taxwritten down value; receipt of stipulated loss value in the same period as thesale and for a price at least equal to its then tax written down value; thelessor’s interest on funding its net investment is available as a tradingdeduction; no change in the nature, method or application of UK tax laws oraccounting practice; the period over which corporation tax relief is given tothe lessor; the lessor’s after tax profit; the rate of reinvestment; risk assetweighting percentage; method of accrual; pooling tax benefits; and others.

F-22

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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.*In addition, the tax lease benefitsliability has been released to other operating income and restricted depositswere fully discharged and proceeds were used for repayment of the corporatecredit facility.

**13.   TangibleFixed Assets**
|                              | ** ** | **FPSOs**                          | ** ** | **Hulls** | ** ** | **Machinery  and  Equipment** | ** ** | **Office  Equipment  and Other  Tangible  Fixed Assets** | ** ** |
|------------------------------|------------|------------------------------------|------------|-----------|------------|-------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                   | ** ** | **(in U.S.$ thousands)** | ** ** |
| **Cost**                     |       |                               |       |      |       |                          |       |                                                               |       |   |   |   |   |
| January 1               |       | 1,322,214                          |       | 54,797    |       |                          | 38,389     |                                                               |       |   | 5,152 |   |   |
| Additions                    |       | 386,313                            |       | —    |       |                          | —     |                                                               |       |   | 1,440 |   |   |
| Disposal                     |       | —                             |       | —    |       |                          | —     |                                                               |       |   | (29 | ) |   |
| Translation  result          |       | (250                               | )          | —    |       |                          | —     |                                                               |       |   | (178 | ) |   |
| December 31             |       | 1,708,277                          |       | 54,797    |       |                          | 38,389     |                                                               |       |   | 6,385 |   |   |
| **Accumulated depreciation** |       |                               |       |      |       |                          |       |                                                               |       |   |   |   |   |
| January 1               |       | 400,607                            |       | —    |       |                          | 38,389     |                                                               |       |   | 4,096 |   |   |
| Depreciation for  the year   |       | 94,342                             |       | —    |       |                          | —     |                                                               |       |   | 611 |   |   |
| Disposal                     |       | —                             |       | —    |       |                          | —     |                                                               |       |   | (2 | ) |   |
| Translation  result          |       | (204                               | )          | —    |       |                          | —     |                                                               |       |   | (128 | ) |   |
| December 31             |       | 494,745                            |       | —    |       |                          | 38,389     |                                                               |       |   | 4,577 |   |   |
| Net book value               |       | 1,213,532                          |       | 54,797    |       |                          | —     |                                                               |       |   | 1,808 |   |   |

 
|                              | ** ** | **Fixed Assets  under  Construction** | ** ** | **Total 2005** | ** ** | **Total 2004** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                   | ** ** | **(in U.S.$ thousands)**         | ** ** |
| **Cost**                     |       |                                       |       |                |       |                |       |   |   |
| January 1               |       |                                       | 301        |                |       | 1,420,853           |       | 1,410,096 |   |
| Additions                    |       |                                       | 4,523      |                |       | 392,276             |       | 25,391 |   |
| Disposal                     |       |                                       | —     |                |       | (29                 | )          | (14,802 | ) |
| Translation  result          |       |                                       | —     |                |       | (428                | )          | 168 |   |
| December 31             |       |                                       | 4,824      |                |       | 1,812,672           |       | 1,420,853 |   |
| **Accumulated depreciation** |       |                                       |       |                |       |                |       |   |   |
| January 1               |       |                                       | —     |                |       | 443,092             |       | 383,344 |   |
| Depreciation for  the year   |       |                                       | —     |                |       | 94,953              |       | 72,995 |   |
| Disposal                     |       |                                       | —     |                |       | (2                  | )          | (13,326 | ) |
| Translation  result          |       |                                       | —     |                |       | (332                | )          | 79 |   |
| December 31             |       |                                       | —     |                |       | 537,711             |       | 443,092 |   |
| Net book value               |       |                                       | 4,824      |                |       | 1,274,961           |       | 977,761 |   |

 

During 2005, one hull was not in service and wastherefore not depreciated. The hull is held for use in future FPSO projects.Considering the tight ship yard capacity for new built hulls around the world,and considering the level of tender activity for new FPSO projects, the hull isstated at historic cost and is not impaired.

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As of December 31, 2005, an amount of U.S.$53,072(2004—U.S.$55,973) relating to capitalized interest is included in the costvalue of the FPSOs and the hulls. Interest capitalized for the years 2005, 2004and 2003 amounts to U.S.$ nil, U.S.$385 and U.S.$6,062 respectively.

All FPSOs are subject to operating leases as disclosedin note 4.

During 2004 and part of 2005 certain FPSOs were heldunder tax lease structures as described in note 5.

As of December 31, 2005, the gross carryingamount of certain machinery and equipment amounting to U.S.$38,389 and ofcertain office equipment amounting to U.S.$2,919 is fully depreciated. As of December 31,2005, all these items are still in active use.

The carrying amount of tangible fixed assets soldduring December 31, 2005 amounted to U.S.$27 (2004—U.S.$1,467).

On April 4, 2005Bluewater Oil and Gas Investments Ltd. (“BOGI”) obtained an interest of 2% in aNigerian Oil Processing Block OPL229, operated by Emerald, at a price ofU.S.$400. During 2005, BOGI invested U.S.$86 in OPL 229. This investmentconsists of expenditures in connection with the development of OPL 229. Theworking interest 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.

**14.   Debt ArrangementFees**

Debt arrangement fees asof December 31, 2005 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, 2005, the net book value ofthe debt arrangement fees relating to the corporate credit facility, the 101¤4%Senior Notes due 2012 and the loan agreement amount to U.S.$6,185, U.S.$7,213and U.S.$929 respectively. These fees are amortized on a straight line basis tointerest expenses over the term of the facilities, 8 years for thecorporate credit facility, 10 years for the 101¤4%Senior Notes due 2012, and 61¤4 yearsfor the loan agreement.

**15.   Otherliabilities and accrued expenses**

Other liabilities andaccrued expenses are specified as follows:

| ** **                                           | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                           | ** ** | **(in U.S.$ thousands)** | ** ** |
| Accrued interest                                     |       | 14,092                             |       | 13,235   |       |
| Deferred revenues                                    |       | 12,014                             |       | 15,909   |       |
| Accrued expenses                                     |       | 44,646                             |       | 27,430   |       |
| Accrued loss on forward  currency exchange contracts |       | 7,417                              |       | —   |       |
| Short term portion of  pension liability             |       | 2,240                              |       | 2,925    |       |
| Provision project loss                               |       | 4,305                              |       | —   |       |
| Other                                                |       | 1,052                              |       | 731      |       |
| Total                                                |       | 85,766                             |       | 60,230   |       |

 

**16.   Lines of Credit**

The Company has lines of credit with banks availableamounting to U.S.$320,000 ( 2004—U.S. $400,000), which are substantiallydenominated in U.S. dollars. At December 31, 2005, these facilities were 

F-24

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unused to an amount ofU.S.$.203,146 (2004—U.S.$192,642). The used portion of these credit facilitiesis presented as long-term loans in the balance sheet.

The conditions to thelines of credit are disclosed with the related borrowings as presented undernote 17.

**17.   Long-Term BankLoans**

Long-term bank loans at December 31, 2005 and2004 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.

At January 28, 2002, the Company refinanced itsoutstanding debt under a U.S.$450,000 revolving credit facility with fundsdrawn under an 8-year, U.S.$600,000 corporate credit facility. Thecorporate credit facility can be used to finance the construction of new FPSOsand, to a limited extent, for general corporate purposes. Interest is payableat a rate that is equal to a specified margin over LIBOR. The margin, which iscurrently 1.400%, varies from 1.300% to 1.700% depending, among other factors,on the amount outstanding under the facility. At December 31, 2005 theinterest rate was 5.67%. The costs incurred in arranging the corporate creditfacility have been capitalized as debt arrangement fees under non-currentassets and will be amortized over the term of the facility.

The facility is primarily secured with mortgages overthe FPSOs and assignments of incoming cash flows generated from contracts withclients concerning the FPSOs.

On July 1, 2005, the Company entered into aU.S.$175,000 loan agreement to finance the acquisition of a 55% ownership in PRJotun DA. The loan will amortize to zero over a period of six years and aquarter, by September 2011. Interest equals 0.60% over LIBOR. The averageinterest during the six months ended December 31, 2005 was 4.4%. To limitits interest exposure after July 3, 2006, 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 hasa starting 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 costs incurred in arranging the loan agreementhave been capitalized as debt arrangement fees under non-current assets andwill be amortized over the term of the loan. The non-recourse loan is securedwith a mortgage over the FPSO and an assignment of the bareboat chartercontract with the Jotun field partners to the 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 over a period of six years and a quarter, by September 2011.Interest equals 5%.

As of December 31,2005 the consolidated amount of debt borrowed in connection with PR Jotun DAwas U.S.$291,500. During the six months ended December 31, 2005 repaymentsof the borrowed debt were made of U.S.$26,654.

**18.   10**1¤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 each of its directand indirect subsidiaries (other than Bluewater Finance Limited and BrightfieldCorporation (a subsidiary in liquidation with no 

F-25

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material assets,liabilities or operations) and PR Jotun DA) have fully and unconditionallyguaranteed 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 and each other subsidiary of the Company is wholly-owned,directly or indirectly, by the Company. The Company has no independent assetsor operations. There are no significant restrictions on the ability of theCompany 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, 2005 amounts to U.S.$.360,125 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 enables 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 will receive paymentsthat are calculated at a fixed rate of 101¤4% and makesinterest payments that are calculated at a floating rate that is 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 willincur fair value fluctuations through the statement of income from the date ofcancellation until August 15, 2007. After that date the interest willcontinue floating at LIBOR + 6.44%. The Company paid U.S.$6,898 on November 4,2005 which represented its net loss from the cancellation of the swap transaction.The Company has deferred this loss which will debited it to the statement ofincome over the remaining duration of the 101⁄4% Senior Notes due 2012.

The unamortized premiumand discount of the 101¤4%Senior Notes due 2012 amounts to U.S.$(4,282) as of December 31, 2005.

F-26

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**19.   Long-Term LoansRelated 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 (2004—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, 2005 and 2004 amounted to U.S.$147,193 andU.S.$153,630, respectively. The fair value as of December 31, 2005 and2004 has been determined, based on the discounted cash flow method assumingredemption in 5 equal annual installments as from December 2012. On September 14,2005 U.S.$5.0 million of interest was repaid.

**20.   Tax LeaseBenefits Liability**

On November 3, 2005all 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.*In addition, the tax lease benefitsliability has been released to other operating income and restricted depositswere discharged and proceeds were used for repayment of the corporate creditfacility. As a result, for the year ended December 31, 2005, the liabilityto repay tax lease benefits declined by U.S.$34,422 (2004—U.S. $7,072). Othermovements in the tax lease benefits liability result from fluctuations incurrency exchange rates. Payments received from/made to the lessor as a resultof changes in underlying variables such as market interest rates and corporateincome taxes are accounted for in the consolidated statement of income as otheroperating income/expense.

**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 group determined its transitional liability fordefined benefit plan as the present value of the obligation at the date ofadoption minus the fair value of plan assets minus past service cost. Theresulting transitional liability was more than the liability that had beenrecognized on the same date under the enterprise’s previous accounting policy.The companies have chosen to recognize that increase as an expense on astraight-line basis over 5 years. As of January 1, 1998, the entiretransitional liability was expensed as pension costs in prior years.

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 

F-27

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recognized as income(expense) over the expected remaining service life of the active employees,when these gains or losses exceed the 10% corridor of the pension benefitobligation. There were no plan terminations, curtailments or settlements forthe year ended December 31, 2005 or 2004

Plan assets are incorporated in the insurance company’sprofit sharing plan, which is based on the fictitious yield of Dutch StateBonds. The insurer guarantees a minimum yield of 4%.

The movement in thedefined benefit obligations is as follows:

| ** **                              | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                              | ** ** | **(in U.S.$ thousands)** | ** ** |
| Benefit  obligation at January 1   |       | 21,959                             |       | 16,577   |       |
| Service cost                            |       | 2,595                              |       | 2,394    |       |
| Interest cost                           |       | 955                                |       | 816      |       |
| Plan  participants’ contributions  |       | 55                                 |       | 51       |       |
| Actuarial  gain/(loss)                  |       | (4,343                             | )          | 620      |       |
| Benefits paid                           |       | (363                               | )          | (278     | )          |
| Translation  result                     |       | (2,850                             | )          | 1,779    |       |
| Benefit obligation at  December 31 |       | 18,008                             |       | 21,959   |       |

 

Themovement in plan assets is as follows:
|                                                | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                     | ** ** | **(in U.S.$ thousands)** | ** ** |
| Fair value of  plan assets at January 1   |       | 20,481                             |       | 15,806   |       |
| Actual return on  plan assets                  |       | (6,599                             | )          | 904      |       |
| Employer  contribution                         |       | 2,239                              |       | 2,343    |       |
| Plan  participants’ contributions         |       | 55                                 |       | 51       |       |
| Benefits paid                                  |       | (363                               | )          | (278     | )          |
| Translation  result                            |       | (2,457                             | )          | 1,655    |       |
| Fair value of plan  assets at December 31 |       | 13,356                             |       | 20,481   |       |

 

Thefollowing table reconciles the funded items of defined benefit plans to theamounts recognized in the balance sheet:

| ** **                       | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|----------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                       | ** ** | **(in U.S.$ thousands)** | ** ** |
| Benefit  obligation              |       | 18,008                             |       | 21,959   |       |
| Fair value of  plan assets       |       | (13,356                            | )          | (20,481  | )          |
| Funded status                    |       | 4,652                              |       | 1,478    |       |
| Unrecognized net  actuarial loss |       | 1,031                              |       | 2,235    |       |
| Accrued benefit cost             |       | 3,621                              |       | 3,713    |       |

 

Componentsof net periodic benefit cost:

| ** **                      | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(in U.S.$ thousands)** | ** ** |
| Service cost                    |       | 2,595                              |       | 2,394    |       | 1,267    |       |
| Interest cost                   |       | 955                                |       | 816      |       | 532      |       |
| Expected return  on plan assets |       | (885                               | )          | (754     | )          | (453     | )          |
| Recognized net  actuarial gain  |       | (3                                 | )          | (79      | )          | (113     | )          |
| Net periodic benefit  cost      |       | 2,662                              |       | 2,377    |       | 1,233    |       |

 

F-28

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Principalactuarial assumptions used to determine pension obligations as of December 31,2005 and 2004 were as follows:

| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Discount rate                   |       | 4.75     | %          | 4.75     | %          |
| Expected return  on plan assets |       | 4.75     | %          | 4.50     | %          |
| Wage and salary  increases      |       |     |       |     |       |
| 25-34                           |       | 2.0      | %          | 3.0      | %          |
| 35-44                           |       | 1.5      | %          | 2.5      | %          |
| 45-54                           |       | 1.0      | %          | 2.0      | %          |
| 55-64                           |       | 0.5      | %          | 1.5      | %          |
| Retirement  benefit increases   |       | 1.75     | %          | 1.80     | %          |
| Average employee  turnover      |       |     |       |     |       |
| 25-34                           |       | 7.0      | %          | 7.0      | %          |
| 35-44                           |       | 6.0      | %          | 6.0      | %          |
| 45-54                           |       | 4.0      | %          | 4.0      | %          |
| 55-65                           |       | 0.0      | %          | 0.0      | %          |

 

The accumulated benefitobligation as at December 31, 2005 amounted to U.S.$15,975 (2004—U.S.$19,316),of which U.S.$11,915 (2004—U.S.$16,251) is for active members. The benefits tobe paid in the next four years together amount to U.S.$476 annually, and forthe following six years together U.S.$1,080. All measurement dates are December 31,2005. The expected contribution for 2006 amounts to U.S.$2,203. All benefitsare insured conform Dutch pension law and no significant transactions haveoccurred between the Company and the plan during the period.

***(b)*   *DefinedContribution 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 2005, 2004 and 2003 contributionscharged to income amount to U.S.$218, U.S.$426 and U.S.$453 respectively.

**22.   OperationsExpenses**

Operationsexpenses are specified as follows:

| ** **     | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **(in U.S.$ thousands)** | ** ** |
| SPM contracts  |       | 99,312                             |       | 66,664   |       | 38,720   |       |
| FPSO contracts |       | 156,285                            |       | 247,409  |       | 147,035  |       |
|           |       | 255,597                            |       | 314,073  |       | 185,755  |       |

 

F-29

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**23.   Selling,General and Administrative Expenses**

Selling,general and administrative expenses are specified as follows:

| ** **                  | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **                  | ** ** | **(in U.S.$ thousands)** | ** ** |
| Personnel                   |       | 6,775                              |       | 5,917    |       | 5,842    |       |
| Marketing/Advertising       |       | 455                                |       | 493      |       | 573      |       |
| Professional  advisory fees |       | 1,334                              |       | 1,187    |       | 1,171    |       |
| Rent                        |       | 450                                |       | 354      |       | 362      |       |
| Other                       |       | 2,296                              |       | 1,803    |       | 1,852    |       |
|                        |       | 11,310                             |       | 9,754    |       | 9,800    |       |

 

**24.   PersonnelExpenses and Number of Personnel**

Personnelexpenses are specified as follows:

| ** **                               | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(in U.S.$ thousands)** | ** ** |
| Personnel on  payroll:                   |       |                               |       |     |       |     |       |
| Wages and salaries                       |       | 26,374                             |       | 29,491   |       | 26,311   |       |
| Pension costs                            |       | 3,535                              |       | 3,360    |       | 2,334    |       |
| Other social security contributions      |       | 2,243                              |       | 2,769    |       | 2,282    |       |
|                                     |       | 32,152                             |       | 35,620   |       | 30,927   |       |
| Personnel costs  from temporary agencies |       | 11,178                             |       | 14,436   |       | 12,111   |       |
|                                     |       | 43,330                             |       | 50,056   |       | 43,038   |       |

 

Theaverage number of personnel employed by the group was 745 (2004—590, 2003—532)and is specified as follows:

| ** **                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Personnel on  payroll:     |       |     |       |     |       |     |       |   |   |   |   |   |   |   |
| Engineers                  |       |     | 528        |     |       |     | 357        |   |   |   | 289 |   |   |   |
| Sales                      |       |     | 19         |     |       |     | 17         |   |   |   | 20 |   |   |   |
| General and administrative |       |     | 123        |     |       |     | 102        |   |   |   | 104 |   |   |   |
|                       |       |     | 670        |     |       |     | 476        |   |   |   | 413 |   |   |   |
| Temporary  agencies        |       |     | 75         |     |       |     | 114        |   |   |   | 119 |   |   |   |
|                       |       |     | 745        |     |       |     | 590        |   |   |   | 532 |   |   |   |

 

**25.   Other Operating 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 as disclosed in note 20.

**26.   Income Taxes**

The income tax receivable relates to prepaid incometaxes in the United Kingdom primarily, originating from 1995 which arecollectable from the local tax authorities.

F-30

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Theincome tax liability at December 31, 2005 and 2004 is specified asfollows:

| ** **                                       | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                       | ** ** | **(in U.S.$ thousands)** | ** ** |
| Current:                                         |       |                               |       |     |       |   |   |   |   |
| The Netherlands Antilles                         |       |                               | 258        |     |       |   | 129 |   |   |
| United Kingdom                                   |       |                               | 30         |     |       |   | 10 |   |   |
| Other countries (the Netherlands, Malta, Norway) |       |                               | 722        |     |       |   | 597 |   |   |
|                                             |       |                               | 1,010      |     |       |   | 736 |   |   |
| Deferred                                         |       |                               | —     |     |       |   | — |   |   |
|                                             |       |                               | 1,010      |     |       |   | 736 |   |   |

 

Theprovision for income taxes is as follows:

| ** **      | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **      | ** ** | **(in U.S.$ thousands)** | ** ** |
| Current taxes:  |       |                               |       |     |       |     |       |
| Domestic        |       | 116                                |       | (1,098   | )          | 123      |       |
| Foreign         |       | 3,264                              |       | 2,060    |       | 1,482    |       |
|            |       | 3,380                              |       | 962      |       | 1,605    |       |
| Deferred taxes: |       |                               |       |     |       |     |       |
| Foreign         |       | (19,801                            | )          | (1,431   | )          | (2,668   | )          |
| Total provision |       | (16,421                            | )          | (469     | )          | (1,063   | )          |

 

Thereconciliation of the computation of the provision for income taxes atstatutory tax rates to the effective provision for income taxes is as follows:

| ** **                                                 | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                 | ** ** | **(in U.S.$ thousands)** | ** ** |
| Income before  income taxes:                               |       |                               |       |     |       |     |       |
| Domestic                                                   |       | 93,062                             |       | 84,676   |       | 88,473   |       |
| Foreign                                                    |       | (91,017                            | )          | (78,756  | )          | (76,959  | )          |
|                                                       |       | 2,045                              |       | 5,920    |       | 11,514   |       |
| The Netherlands  Antilles statutory tax rate               |       | 3                                  | %          | 3        | %          | 3        | %          |
| Expected  provision for income taxes at statutory tax rate |       | 61                                 |       | 178      |       | 345      |       |
| Increase/(reduction)  in income taxes from:                |       |                               |       |     |       |     |       |
| Difference  between statutory tax rate and tax ruling      |       | 55                                 |       | (1,276   | )          | (222     | )          |
| Foreign taxes                                              |       | 3,264                              |       | 2,060    |       | 1,482    |       |
| Deductions in  foreign jurisdictions                       |       | (19,801                            | )          | (1,431   | )          | (2,668   | )          |
| Provision for income  taxes                                |       | (16,421                            | )          | (469     | )          | (1,063   | )          |

 

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(c). Thechange in 2004 resulted primarily from a change in the statutory tax rate inthe Netherlands from 34.5% to 30.0%.

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.

F-31

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At December 31, 2005and 2004, the tax effects of temporary differences and carry forwards that gaverise to the Company’s deferred income tax assets and liabilities are asfollows:

| ** **                                 | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(in U.S.$ thousands)** | ** ** |
| Tax loss carry  forwards                   |       | 106,200                            |       | 86,400   |       |
| Interest rate  swaps and forward contracts |       | 583                                |       | 86       |       |
| Net deferred tax assets                    |       | 106,783                            |       | 86,486   |       |

 

The tax loss carry forwards available to the Companyrelate primarily to the group companies in the Netherlands and do not expire.These tax loss carry forwards result primarily from the amortization ofgoodwill and interest expense on intercompany debt which resulted from theinternal restructuring as disclosed in note 30(c). While the internalrestructuring and Dutch tax treatment of the group companies remains subject toreview by the Dutch tax authorities, based on ongoing discussions with theDutch tax authorities, as disclosed in note 30(c), the amount of goodwillthat will ultimately result from the internal restructuring and be amortizedfor income tax purposes, and the amount of interest bearing intercompany debtrelating thereto, is potentially subject to decrease from the amounts that wereoriginally applied in connection with the restructuring. Although the Companybelieves that its position with respect to the tax consequence of the internalrestructuring remains strong, and while it continues to contend that it shouldbe entitled to take advantage of the full amount of goodwill and deductibleinterest relating to the internal restructuring, the Company cannot record thefull amount of the tax loss carry forwards relating thereto. Accordingly, theCompany has recorded the minimum amount of tax loss carry forwards that itconsiders probable to result from its discussions with the Dutch tax authorities.No assurance can be given, however, that the Company will ultimately be able torealize the estimated amounts. Based on the Company’s history of earnings, andbecause the tax loss carry forwards do not expire, the Company believes that itis more likely than not that the estimated amount of tax loss carry forwardsand the deferred tax asset relating thereto will be fully realized and,accordingly, has not accounted for a valuation allowance**.**

**27.**   Segment Information

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.

F-32

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Thesegment information per business segment is as follows:

| ** **                    | ** ** | **2005**                           | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------|------------|------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                    | ** ** | **(in U.S.$ thousands)** | ** ** |
| **FPSO**                      |       |                               |       |      |       |      |       |
| Revenues                      |       | 333,828                            |       | 370,241   |       | 258,182   |       |
| Segment net income            |       | 48,545                             |       | 6,161     |       | 14,519    |       |
| Identifiable assets           |       | 1,484,571                          |       | 1,249,003 |       | 1,273,136 |       |
| Capital expenditures          |       | 388,712                            |       | 24,771    |       | 76,611    |       |
| Depreciation and amortization |       | 94,902                             |       | 72,940    |       | 61,653    |       |
| Interest income and (expense) |       | (50,949                            | )          | (41,629   | )          | (41,576   | )          |
| Income taxes                  |       | (14,698                            | )          | (94       | )          | (831      | )          |
| **SPM**                       |       |                               |       |      |       |      |       |
| Revenues                      |       | 65,162                             |       | 67,424    |       | 37,598    |       |
| Segment net income/(loss)     |       | (35,242                            | )          | 228       |       | (1,942    | )          |
| Identifiable assets           |       | 44,480                             |       | 54,034    |       | 47,770    |       |
| Capital expenditures          |       | 3,564                              |       | 620       |       | 1,367     |       |
| Depreciation and amortization |       | 51                                 |       | 55        |       | 323       |       |
| Interest income and (expense) |       | 35                                 |       | 44        |       | (14       | )          |
| Income taxes                  |       | (1,723                             | )          | (375      | )          | (232      | )          |
| **Other**                     |       |                               |       |      |       |      |       |
| Revenues                      |       | —                             |       | —    |       | —    |       |
| Segment net income            |       | —                             |       | —    |       | —    |       |
| Identifiable assets           |       | 634                                |       | 483       |       | 630       |       |
| Capital expenditures          |       | —                             |       | —    |       | —    |       |
| Depreciation and amortization |       | —                             |       | —    |       | —    |       |
| Interest income and (expense) |       | —                             |       | —    |       | —    |       |
| Income taxes                  |       | —                             |       | —    |       | —    |       |
| **Consolidated**              |       |                               |       |      |       |      |       |
| Revenues                      |       | 398,990                            |       | 437,665   |       | 295,780   |       |
| Segment net income            |       | 13,303                             |       | 6,389     |       | 12,577    |       |
| Identifiable assets           |       | 1,529,685                          |       | 1,303,520 |       | 1,321,536 |       |
| Capital expenditures          |       | 392,276                            |       | 25,391    |       | 77,978    |       |
| Depreciation and amortization |       | 94,953                             |       | 72,995    |       | 61,976    |       |
| Interest income and (expense) |       | (50,914                            | )          | (41,585   | )          | (41,590   | )          |
| Income taxes                  |       | (16,421                            | )          | (469      | )          | (1,063    | )          |

 

Included in the 2003 SPM revenues is the revenuegenerated by the sale of the hull Paradise for an amount of U.S.$9,714.

Customersaccounting for 10% or more of consolidated revenue all relate to the FPSOsegment and are as follows:

| ** **   | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003**                             | ** ** |
|--------------|------------|--------------------------------------|------------|----------|------------|--------------------------------------|------------|
| ** **   | ** ** | **(in U.S.$   thousands)** | ** ** | **%**    | ** ** | **(in U.S.$   thousands)** | ** ** | **%** | ** ** | **(in U.S.$   thousands)** | ** ** | **%** | ** ** |
| Amerada Hess |       |                                 | 47,849     |     |       | 12                                   |       |   | 45,544 |   |   | 10 |   |   | 46,204 |   |   | 16 |   |
| Talisman     |       |                                 | 73,674     |     |       | 18                                   |       |   | 74,084 |   |   | 17 |   |   | 73,063 |   |   | 25 |   |
| Shell        |       |                                 | 86,549     |     |       | 22                                   |       |   | 163,477 |   |   | 37 |   |   | 75,514 |   |   | 26 |   |
| PetroSA      |       |                                 | 60,249     |     |       | 15                                   |       |   | 67,813 |   |   | 16 |   |   | 40,261 |   |   | 14 |   |

 

F-33

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Revenuesper geographical area are as follows:

| ** ** | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** ** | ** ** | **(in U.S.$ thousands)** | ** ** |
| **FPSO**   |       |                               |       |     |       |     |       |
| Europe     |       | 241,706                            |       | 285,775  |       | 197,000  |       |
| Asia       |       | 31,851                             |       | 19,395   |       | 20,921   |       |
| Africa     |       | 60,250                             |       | 65,071   |       | 40,261   |       |
| Other      |       | 21                                 |       | —   |       | —   |       |
| Total FPSO |       | 333,828                            |       | 370,241  |       | 258,182  |       |
| **SPM**    |       |                               |       |     |       |     |       |
| Europe     |       | 5,935                              |       | 31,826   |       | 11,004   |       |
| Asia       |       | 31,719                             |       | 21,295   |       | 16,473   |       |
| Africa     |       | 24,565                             |       | 6,229    |       | 8,440    |       |
| America    |       | 2,886                              |       | 7,956    |       | 1,681    |       |
| Other      |       | 57                                 |       | 118      |       | —   |       |
| Total SPM  |       | 65,162                             |       | 67,424   |       | 37,598   |       |
| Total      |       | 398,990                            |       | 437,665  |       | 295,780  |       |

 

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:

| ** ** | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|------------|------------|------------------------------------|------------|----------|------------|
| ** ** | ** ** | **(in U.S.$ thousands)** | ** ** |
| Europe     |       | 832,343                            |       | 503,486  |       |
| Asia       |       | 90,314                             |       | 96,837   |       |
| Africa     |       | 352,304                            |       | 377,438  |       |
| Total      |       | 1,274,961                          |       | 977,761  |       |

 

**28.   Financial Instruments**

The Company uses (in the normal course of business)various types of financial instruments. Financial instruments include thoserecognized in the balance sheet (on-balance sheet) and off-balance sheetfinancial instruments.

The fair value of a financial instrument is the amountfor which an asset could be exchanged, or a liability settled, betweenknowledgeable, willing parties in an arm’s length transaction. Fair values aredetermined from listed market prices, price quotations from banks or frompricing 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 exposure to concentrations of credit or market risk. TheCompany’s management is involved in the risk management process.

F-34

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TheCompany attempts to minimize the counterparty credit risk associated with thefinancial instruments used by selecting counterparties that it believes to becreditworthy.

***(a)******          On-balance sheet instruments***

Financial instruments inthe balance sheet substantially include accounts receivable trade, cash,deposits, long-term loans, short-term loans and accounts payable trade. Thefair value of these financial instruments approximates their carrying value,unless indicated otherwise.

***(b)******           Interest Rate Swaps***

The Company has enteredinto interest rate swap agreements to mitigate interest rate risks on specificexternal debt. Interest rate swap agreements which convert floating interestrate exposures into fixed interest rate are designated as cash flow hedges. Thecash flow hedge contract outstanding at December 31, 2005 is a fixedinterest rate payable—3.46%—and a U.S.$ denominated floating interest ratereceivable which will mature in January 2006. Its fair value amounts to anasset of U.S.$11. A corresponding amount is recorded as a positive component ofaccumulated other comprehensive income at December 31, 2005 which will bereclassified as a benefit to income in the future as interest is paid on theunderlying debt. Based on the nominal value of the swap at December 31,2005, U.S.$1 is expected to be recorded as a charge to interest expense in theincome statement for the year ending December 31, 2006. The fair value ofthe interest rate swap is based on quotes from an independent bank.

In connection with thecash flow hedging activities, the Company has recorded a net transitional lossof U.S.$2,500 in other comprehensive income on adoption of Statement ofFinancial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS 133”), at January 1, 2001.There was no significant ineffectiveness relating to designated cash flowhedges during 2005, 2004 and 2003, and no component of the derivativeinstruments’ gain or loss was excluded from the assessment of hedgeeffectiveness. As of July 17, 2003 the Company entered into a fixed-to-floatinginterest rate swap transaction, with terms identical to those of the previousswap transaction, that enables the Company to swap the equivalents of the fixedrate amount of interest that is payable on U.S.$335,000 aggregate principalamount of the 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, which is designatedand accounted for as a fair value hedge, the Company receives payments that arecalculated at a fixed rate of 101¤4%and makes interest payments that are calculated at a floating rate that isequal to a margin of 6.32% over LIBOR. As of February 15, 2005 the marginchanged to 6.44%. The Company recorded a net transitional loss of U.S.$17,258on the balance sheet, being the fair value of the fixed-to-floating interestrate swap transaction.

On November 4, 2005the Company partially cancelled the fixed-to-floating interest rate swaptransaction in relation to the 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 willincur fair value fluctuations through the statement of income from the date ofcancellation until August 15, 2007. The company has recordedineffectiveness as a result of the partial cancellation of U.S.$6,650. After August 15,2007 the interest will continue floating at LIBOR + 6.44%. The Company paidU.S.$6,900 on November 4, 2005 which represented its net loss from thecancellation of the swap transaction. The Company has deferred this loss andwill debit it to the statement of income over the remaining duration of the101⁄4% Senior Notes due 2012. The Company has recorded  the fair value of the partially cancelledswap amounting to U.S.$6,650 under financial instruments and recognized acorresponding gain under interest expense.

To limit the interestexposure after July 3, 2006 on the long-term bank loan entered into on July 1,2005 for financing of the acquisition of the 55% ownership in PR Jotun DA,  the Company purchased an interest rate cap.This interest rate cap has a strike rate of 4.4%, limiting the maximum interestcosts 

F-35

----

includingmargin to 5%. The interest rate cap has a starting notional amount ofU.S.$143,900 and the reduction schedule of the notional amount of the cap isaligned with the repayment schedule of the loan. The Company has recorded theincrease of the fair value of the interest rate cap amounting to U.S.$2,125under financial instruments and the corresponding amount in other comprehensiveincome.

Forderivative financial instruments designated and that qualify as fair valuehedges, changes in the fair value of the financial instrument and the change inthe fair value of the hedged component offset each other in the incomestatement. The net result of the interest rate swap is recognized in the incomestatement. There was no significant ineffectiveness relating to the designatedfair value hedge during 2005 and 2004 and no component of the derivativeinstruments’ gain or loss was excluded from the assessment of hedgeeffectiveness.

***(c)******            Exchange Rate Sensitivity***

The Company’s revenues areprimarily denominated in U.S. dollars and, to a lesser extent, sterling andEuro. In 2005, approximately £37,736 (U.S.$64,921) of the Company’s revenueswas denominated in sterling and approximately €3,130(U.S.$3,707) was denominated in Euro. Our expenses are denominated primarily inU.S. dollars and to a lesser degree, euro and sterling. 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 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 Companymanages its outstanding currency exposure on a regular basis and nets theseexposures across its operations as a group. Gains and losses related tospecific currency transactions are recognized as part of its income fromfinancing activities. In the year 2005 the Company entered into foreigncurrency exchange contracts in relation to projects to hedge against the riskof 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 ouraccumulated other comprehensive income/(loss).

Thetotal contract/notional amount and the value of our foreign currency exchangecontracts as of December 31, 2005 are as follows:

| ** **                       | ** ** | **Expected  Maturity Date  As of December 31, 2005** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Total**                                                                     | ** ** | **Fair Value** | ** ** |
| ** **                       | ** ** | **(in U.S.$ thousands)**                                            | ** ** |
| **Forward  Exchange Agreements** |       |                                                                          |       |   |   |   |   |
| (Receive €/Pay  U.S.$)      |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                 |       | 86,113                                                                        |       |   | (5,715 | ) |   |
| (Receive ZAR/Pay  U.S.$)         |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                 |       | 4,258                                                                         |       |   | 197 |   |   |
| (Receive £/Pay  U.S.$)      |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                 |       | 38,193                                                                        |       |   | (1,900 | ) |   |
|                             |       | 128,564                                                                       |       |   | (7,418 | ) |   |

 

These foreign currency exchange contracts mature onvarious dates through fiscal year 2006.

F-36

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Thetotal contract/notional amount and the value of our foreign currency exchangecontracts as of December 31, 2005 accounted for as cash flow hedges underFAS 133 are as follows:

| ** **                      | ** ** | **Expected  Maturity Date  As of December 31, 2005** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                                                     | ** ** | **Fair Value** | ** ** |
| ** **                      | ** ** | **(in U.S.$ thousands)**                                            | ** ** |
| **Forward Exchange Agreements** |       |                                                                          |       |   |   |   |   |
| (Receive €/Pay  U.S.$)     |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                |       | 29,350                                                                        |       |   | (2,480 | ) |   |
| (Receive £/Pay U.S.$)      |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                |       | 5,505                                                                         |       |   | (136 | ) |   |
|                            |       | 34,855                                                                        |       |   | (2,616 | ) |   |

 

These foreign currencyexchange contracts mature on various dates through 2006 and are included atfair value in the other liabilities and accrued expenses.

***(d)   Repayment schedule for debt***

Thefollowing is a schedule of future repayments of debt for the next 5 years:

| ** ** | ** ** | **Year ending  December 31,  2005** | ** ** |
|------------|------------|-----------------------------------------------|------------|
| 2006       |       |                                          | 52,116     |   |   |
| 2007       |       |                                          | 51,100     |   |   |
| 2008       |       |                                          | 86,994     |   |   |
| 2009       |       |                                          | 132,602    |   |   |
| 2010       |       |                                          | 51,612     |   |   |
| Thereafter |       |                                          | 368,958    |   |   |
| Total      |       |                                          | 743,382    |   |   |

 

**29.   Commitments**

***(a)***   Rent obligationsand 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, 2005** | ** ** |
|------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **(in U.S.$ thousands)**                | ** ** |
| 2006       |       |                                              | 1,505      |   |   |
| 2007       |       |                                              | 2,137      |   |   |
| 2008       |       |                                              | 2,269      |   |   |
| 2009       |       |                                              | 2,269      |   |   |
| 2010       |       |                                              | 2,264      |   |   |
| Thereafter |       |                                              | 8,324      |   |   |
|       |       |                                              | 18,768     |   |   |

 

Lease expenses for theyears ended December 31, 2005, 2004 and 2003 under all operating leasesamounted to approximately U.S.$3,120, U.S.$2,625 and U.S.$2,330 respectively.No contingent rental 

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paymentsor clauses regarding any terms of renewal, purchase options, escalation clauseor restrictions exist.

***(b)***   Guarantees

The Company has guaranteefacilities with banks available amounting to U.S.$73,690. At December 31,2005, these facilities were used for a total amount of U.S.$18,062 (2004—U.S.$17,549)to provide bank guarantees 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 31,2005 there are no significant purchase commitments in connection with theacquisition of tangible fixed assets.

**30.**   LossContingencies

***(a)***   Claims

From time to time, theCompany is subject to various claims arising out of the ordinary course ofbusiness. At December 31, 2005, a significant claim existed against theCompany involving aggregate damages of U.S.$16 million. This claim relatesto the alleged breach of a contract for the design of equipment. Since theoutcome of this claim is uncertain the Company cannot estimate a possible lossor range of loss. In addition, the Company is subject to injunction proceedingsinitiated by certain of our competitors in the district court in The Hague inrespect of an alleged infringement of intellectual property rights. The courtrejected the claim, and currently the court’s rejection of the claim is underappeal in the Court of Appeal. While the ultimate result of all such matters isnot presently determinable, based upon current knowledge and facts, managementdoes not expect that their resolution will have a material adverse effect onthe Company’s consolidated financial position or results of operation.

***(b)***   Internalrestructuring and tax audit

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 prepared by an independentinvestment bank. The sales of these economic interests resulted in intercompanyprofits at the level of the selling companies and the creation of acorresponding amount of (amortizable) goodwill and intercompany indebtedness atthe level of Bluewater Holding B.V. Although extensive discussions were heldwith the tax authorities on the internal restructuring, the tax consequences ofour internal restructuring became subject to a tax audit and remain subject tofurther review by the tax authorities.

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 €137.9 million(U.S.$163.3 million), based on the position that these group companies,prior to and at the time of the restructuring, were residents of theNetherlands for Dutch tax purposes or had a taxable presence in theNetherlands. We filed a letter of objection to these assessments and engaged infurther discussions with the Dutch tax authorities, in response to which theseassessments 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 

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of €23.3 million(U.S.$27.6 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 these additionaltax assessment amounts, thereby reducing the assessments to the amounts thatare equal 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. We continue tovigorously contest the imposition of any additional taxes and have startedlegal proceedings to have the assessments reviewed. Such judicial review in theNetherlands may take a considerable period of time. As is permitted under Dutchlaw and regulations, we intend to withhold payment of amounts in respect ofcontested tax assessments pending final resolution of the issue.

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 31,2004 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 in respect of periods prior to December 31, 2004. As thedisallowed portion of the interest deduction depends significantly on thedebt-equity ratio of the relevant entity at the beginning and the end of anyfinancial year, it is clear that the outcome of the dispute with the Dutch taxauthorities concerning the relevant goodwill amount (and the annualamortization amount resulting therefrom) and the corresponding intercompanydebt amount will have a significant impact on the effect of the thin cap rules onBluewater Holding B.V.

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. Based upon current facts andcircumstances, applicable tax law, regulation and precedent, discussions withrelevant tax authorities and professional advisers and other relevant criteria,however, we estimate that it is currently probable that we will realizebenefits relating to at least U.S.$434.0 million of amortizable goodwilland at least U.S.$724.0 million of interest bearing inter-companydebt in connection with our internal restructuring at January 1, 2000 andthat such amounts will result in tax losses which may be carried forward forDutch income tax purposes, subject to the potential application of the thin caprules as of 2004. 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 anticipated legal proceedings,as well as the outcome of such proceedings. In addition, in December 2001,U.S.$379.5 million of the inter-company indebtedness of BluewaterHolding B.V. relating to the internal 

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restructuringwas converted to share capital, thereby reducing the amount of tax benefitsthat we may take advantage of in subsequent periods, at the same timeincreasing the equity amount for application of the thin cap rules as of2004. While we believe that it is probable that we will realize tax benefits inamounts that are not less than the foregoing estimates as set forth above andthat it is unlikely that the outcome of these discussions and the pendingproceedings relating thereto will have a material adverse effect on ourfinancial position, there can be no assurance in this regard and we could losesome or all of the future anticipated tax savings associated with our internalrestructuring.

***(c)***   Operational risks—notinsured 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, 2005,no uninsured events existed that will have a material adverse effect on theconsolidated financial position or operations of the Company.

**31.**   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 aninterim dividend by way of an advance on dividends expected. No dividend isproposed to be paid for 2005.

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 2005 and 2004.

**32.**   MinorityInterest

Minority interests inconsolidated companies represent the third-party shareholding of 45% by SMNASin the underlying net assets of PR Jotun DA.

**33.**   Reclassificationof prior year cash flow statement

In our consolidated cashflow statement for the year 2005, we changed the classification of changes inrestricted cash balances to present such changes as an investing activity. Wepreviously presented such changes as a financing activity. In the accompanyingconsolidated cash flow statements for the year 2004 and 2003, we reclassifiedchanges in restricted cash balances to be consistent with our 2005 presentationwhich resulted in respectively a U.S.$13.1 million and a U.S.$4.9 millionincrease to investing cash flows and a corresponding decrease to financing cashflows from the amounts previously reported.

**34.**   SubsequentEvents

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* willbe converted into an FPSO*.*Under theagreement with 

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Nexen Petroleum U.K. Ltd.we will receive a fixed daily hire rate of U.S.$112,500 per day plus aproduction tariff per barrel of oil produced. Nexen has agreed to pay us aminimum tariff based on 27 million barrels of oil produced during the fiveyear contract term. All operating costs will be reimbursed by Nexen, includinga profit mark-up.

On February 10, 2006 the London Court ofInternational Arbitration issued its decision regarding a claim against theCompany relating to alleged failure of the Company to pay for additional workperformed by a subcontractor, by which the company was ordered to payU.S.$15.9 million to the subcontractor. Further issues remain outstandingin connection with this dispute, including interest costs, legal costs and thetreatment of exchange rates. These matters are likely to be subject of furthernegotiations between the parties and/or adjudication by the Tribunal.Considering the Tribunal’s ruling and the remaining uncertainty regarding theoutstanding matters, the Company recorded a provision its 2005 statement ofincome amounting to U.S.$17 million.

On February 9, 2006, Bluewater entered intoan agreement to purchase the shuttle tanker MT “Hanne Knutsen” for an amount ofU.S.$129,500,000. The vessel was built in Spain at Astilleros de Sestau and wasdelivered to Knutsen OAS in 2000. It has been designed as a typical North Seatanker and has since been trading in the Baltic ice regions as well asproviding services as shuttle tanker. The “Hanne Knutsen” was specificallychosen for its overall design and its excellent suitability for future FloatingProduction, Storage and Offloading Unit (FPSO) conversion projects. “HanneKnutsen” is a double hull vessel of 123.600 dwt and has a storage capacityof 860,000 bbls. The vessel is rated Ice Class 1A which is optimalfor harsh environments and additionally has DP2 class Dynamic Positioningcapability. Delivery and payment for the shuttle tanker are scheduled for theend of June 2006. Thereafter Bluewater intends to time-charter the vesselon the spot market until the vessel is used for a new FPSO project.

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