UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
20-F





[   ]
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, 2009





OR





[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For the
transition period from ____ to ____





OR





[ ] SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Date of
event requiring this shell company report:





Commission
file number: 001-34667




SEADRILL
      LIMITED(Exact
      name of Registrant as specified in its
charter)
 
 (Translation
      of Registrant's name into English)(Address
      of principal executive offices)
 Bermuda(Jurisdiction
      of incorporation or
organization)





Par-la-Ville
      Place, 4th Floor, 14 Par-la-Ville Road, Hamilton, HM 08
      Bermuda(Address
      of principal executive offices)





Georgina
      Sousa
              Par-la-Ville
      Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
              Tel:
      +1 (441) 295-9500, Fax: +1 (441) 295-3494(Name,
      Telephone, E-mail and/or Facsimile number and Address of Company Contact
      Person








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





Common
      stock, $2.00 par value
            
            New
      York Stock ExchangeTitle
      of class
            
            Name
      of exchange on which registered





1


Securities
registered or to be registered pursuant to Section 12(g) of the
Act:  None





Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None






Indicate
the number of outstanding shares of each of the issuer's classes of capital or
common stock as of the close of the period covered by the annual
report:





As of
December 31, 2009, there were 399,023,016 shares of the Registrant's common
stock, $2.00 par value, outstanding.





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





[   ]
      Yes
            [ X
      ] No


If this
report is an annual report or transition report, indicate by check mark if the
Registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.





[   ]
      Yes
            [ X
      ] No


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





[   ]
      Yes
            [ X
      ] No


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months





[   ]
      Yes
            [   ]
      No





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  [   ]
            Accelerated
      filer  [   ]





Non-accelerated
      filer   [X]
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting
  company  [   ]





Indicate
      by check mark which basis of accounting the Registrant has used to prepare
      the financial statements included in this filing:[ X
      ]  U.S. GAAP[   ]  International
      Financial Reporting Standards as issued by the International Accounting
      Standards Board[   ]  OtherIf
      "Other" has been checked in response to the previous question, indicate by
      check mark which
              financial
      statement item the Registrant has elected to follow.[   ]  Item
      17[   ]  Item
      18





If this
is an annual report, indicate by check mark whether the Registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).





[   ]  Yes
            [ X
      ]  No


2







FORWARD
LOOKING STATEMENTS





Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance, and underlying assumptions and other statements,
which are other than statements of historical or present facts or
conditions.





This
Annual Report and any other written or oral statements made by us or on our
behalf may include forward-looking statements which reflect our current views
with respect to future events and financial performance. The words "believe,"
"anticipate," "intend," "estimate," "forecast," "project," "plan," "potential,"
"may," "should," "expect" and similar expressions identify forward-looking
statements.





The
forward-looking statements in this document are based upon various assumptions,
many of which are based, in turn, upon further assumptions, including without
limitation, management's examination of historical operating trends, data
contained in our records and other data available from third parties. Although
we believe that these assumptions were reasonable when made, because these
assumptions are inherently subject to significant uncertainties and
contingencies which are difficult or impossible to predict and are beyond our
control, we cannot assure you that we will achieve or accomplish these
expectations, beliefs or projections.





In
addition to these important factors and matters discussed elsewhere in this
Annual Report, and in the documents incorporated by reference in this Annual
Report, important factors that, in our view, could cause actual results to
differ materially from those discussed in the forward-looking statements include
factors related to the offshore drilling market, including supply and demand,
utilization rates, dayrates, customer drilling programs, commodity prices,
effects of new rigs on the market and effects of declines in commodity prices
and downturn in global economy on market outlook for our various geographical
operating sectors and classes of rigs, customer contracts, including contract
backlog, contract commencements, contract terminations, contract option
exercises, contract revenues, contract awards and rig mobilizations,
newbuildings, upgrades, shipyard and other capital projects, including
completion, delivery and commencement of operations dates, expected downtime and
lost revenue, the level of expected capital expenditures and the timing and cost
of completion of capital projects, liquidity and adequacy of cash flow for our
obligations, including our ability and the expected timing to access certain
investments in highly liquid instruments, our results of operations and cash
flow from operations, including revenues and expenses, uses of excess cash,
including debt retirement and share repurchases under our share repurchase
program, timing and proceeds of asset sales, tax matters, including our
effective tax rate, changes in tax laws, treaties and regulations, tax
assessments and liabilities for tax issues, including those associated with our
activities in Bermuda, Norway and the United States, legal and regulatory
matters, including results and effects of legal proceedings and governmental
audits and assessments, outcome and effects of internal and governmental
investigations, customs and environmental matters, insurance matters, debt
levels, including impacts of the financial and credit crisis, effects of
accounting changes and adoption of accounting policies, investments in
recruitment, retention and personnel development initiatives, pension plan and
other postretirement benefit plan contributions, the timing of severance
payments and benefit payments and other important factors described from time to
time in the reports filed by us with the Securities and Exchange Commission, or
the Commission, and the New York Stock Exchange, or NYSE. We caution readers of
this Annual Report not to place undue reliance on these forward-looking
statements, which speak only as of their dates.




3




TABLE
OF CONTENTS




PART I





ITEM
      1.
            IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
            5ITEM
      2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE
            5ITEM
      3.
            KEY
      INFORMATION
            5ITEM
      4.
            INFORMATION
      ON THE COMPANY
            17ITEM
      4A.
            UNRESOLVED
      STAFF COMMENTS
            28ITEM
      5.
            OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
            28ITEM
      6.
            DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
            45ITEM
      7.
            MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
            49ITEM
      8.
            FINANCIAL
      INFORMATION
            51ITEM
      9.
            THE
      OFFER AND LISTING
            52ITEM
      10.
            ADDITIONAL
      INFORMATION
            53ITEM
      11.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            62ITEM
      12.
            DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
            64PART IIITEM
      13.
            DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
            65ITEM
      14.
            MATERIAL  MODIFICATIONS  TO  THE  RIGHTS  OF  SECURITYHOLDERS
      AND
              USE
      OF PROCEEDS
            65ITEM
      15.
            CONTROLS
      AND PROCEDURES
            65ITEM
      16.
            RESERVED
            65ITEM
      16A.
            AUDIT
      COMMITTEE FINANCIAL EXPERT.
            65ITEM
      16B.
            CODE
      OF ETHICS
            65ITEM
      16C.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            65ITEM
      16D.
            EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDITCOMMITTEES
            66ITEM
      16E.
            PURCHASES
      OF EQUITY  SECURITIES  BY  THE ISSUER ANDAFFILIATED
      PURCHASERS
            66ITEM
      16F.
            CHANGE
      IN REGISTRANT'S CERTIFYING ACCOUNTANT
            67ITEM
      16G.
            CORPORATE
      GOVERNANCE
            67PART IIIITEM
      17.
            FINANCIAL
      STATEMENTS
            68ITEM
      18.
            FINANCIAL
      STATEMENTS
            68ITEM
      19.
            EXHIBITS
            69





4


PART
1.





As used
in this Annual Report, unless the context otherwise requires, references to
"Seadrill Limited," the "Company," "we," "us," "Group," "our" and words of
similar import refer to Seadrill Limited, its subsidiaries and its other
consolidated entities. Unless otherwise indicated, all references to "USD",
"US$" and "$" in this report are to, and amounts are represented in, U.S.
Dollars.





ITEM
1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS





Not
applicable.





ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE





Not
applicable.





ITEM
3. KEY INFORMATION





A.
SELECTED FINANCIAL DATA





The
selected statement of operations and cash flow statement data of the Company
with respect to the fiscal years ended December 31, 2009, 2008 and 2007 and the
selected balance sheet data of the Company with respect to the fiscal years
ended December 31, 2009 and 2008 have been derived from the Company's
Consolidated Financial Statements included in Item 18 of this annual report,
prepared in accordance with accounting principles generally accepted in the
United States, or U.S. GAAP.





The
selected statement of operations and cash flow statement data for the fiscal
year ended December 31, 2006 and the period from May 10, 2005 (date of
incorporation) to December 31, 2005 and the selected balance sheet data with
respect to the fiscal years ended December 31, 2007 and 2006 and the period from
May 10, 2005 (date of incorporation) to December 31, 2005 have been derived from
audited consolidated financial statements of the Company not included
herein.





The
following table should be read in conjunction with Item 5. "Operating and
Financial Review and Prospects" and the Company's Consolidated Financial
Statements and Notes thereto, which are included herein. The Company's accounts
are maintained in U.S. Dollars. We refer you to the notes to our consolidated
financial statements for a discussion of the basis on which our consolidated
financial statements are presented.





Year
      ended December 31,
            
            
            Period
      from
              May
      10, 2005
              (inception)
      to
              December
      31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(in
      millions of U.S. dollars except common share and per share
      data)Statement
      of Operations Data:Total
      operating revenues
            
            
            3,254
            
            
            
            2,106
            
            
            
            1,552
            
            
            
            1,155
            
            
            
            27Net
      operating income
            
            
            1,372
            
            
            
            649
            
            
            
            489
            
            
            
            226
            
            
            
            (15
            )Net
      income (loss)
            
            
            1,353
            
            
            
            (123
            )
            
            
            515
            
            
            
            245
            
            
            
            (8
            )Earnings
      per share, basic
            
            $
            3.16
            
            
            $
            (0.41
            )
            
            $
            1.28
            
            
            $
            0.62
            
            
            $
            (0.04
            )Earnings
      per share, diluted
            
            $
            3.00
            
            
            $
            (0.41
            )
            
            $
            1.20
            
            
            $
            0.61
            
            
            $
            (0.04
            )Dividends
      declared
            
            
            199
            
            
            
            688
            
            
            
            -
            
            
            
            -
            
            
            
            -Dividends
      declared per share
            
            $
            0.50
            
            
            $
            1.75
            
            
            
            -
            
            
            
            -
            
            
            
            -  5
  Year
      ended December 31,
            
            
            Period from
              May
      10, 2005
              (inception)
      to
              December
      31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(in
      millions of U.S. dollars except common share and per share
      data)Balance
      Sheet Data (at end of period):Cash
      and cash equivalents
            
            
            460
            
            
            
            376
            
            
            
            997
            
            
            
            210
            
            
            
            52Drilling
      units
            
            
            7,515
            
            
            
            4,645
            
            
            
            2,452
            
            
            
            2,293
            
            
            
            178Newbuildings
            
            
            1,431
            
            
            
            3,661
            
            
            
            3,340
            
            
            
            2,025
            
            
            
            439Investment
      in associated companies
            
            
            321
            
            
            
            240
            
            
            
            176
            
            
            
            238
            
            
            
            153Goodwill
            
            
            1,596
            
            
            
            1,547
            
            
            
            1,510
            
            
            
            1,256
            
            
            
            -Total
      assets
            
            
            13,831
            
            
            
            12,305
            
            
            
            9,293
            
            
            
            6,743
            
            
            
            1,149Interest
      bearing debt
              (including
      current portion)
            
            
            7,396
            
            
            
            7,437
            
            
            
            4,601
            
            
            
            2,815
            
            
            
            314Share
      capital
            
            
            798
            
            
            
            797
            
            
            
            797
            
            
            
            766
            
            
            
            458Shareholders'
      equity
            
            
            4,813
            
            
            
            3,222
            
            
            
            3,728
            
            
            
            2,927
            
            
            
            802Common
      shares outstanding, in millions
            
            
            399.0
            
            
            
            398.4
            
            
            
            398.5
            
            
            
            383.1
            
            
            
            229.1Weighted
      average common shares outstanding
            
            
            398.5
            
            
            
            398.3
            
            
            
            392.8
            
            
            
            352.1
            
            
            
            190.9Other
      Financial Data:Net
      cash provided by operating activities
            
            
            1,452
            
            
            
            401
            
            
            
            486
            
            
            
            174
            
            
            
            11Net
      cash used in investing
              Activities
            
            
            (924
            )
            
            
            (3,847
            )
            
            
            (1,868
            )
            
            
            (3,180
            )
            
            
            (256
            )Net
      cash provided by financing activities
            
            
            (454
            )
            
            
            2,826
            
            
            
            2,168
            
            
            
            3,162
            
            
            
            294Capital
      expenditure
            
            
            (1,369
            )
            
            
            (2,768
            )
            
            
            (1,738
            )
            
            
            (1,196
            )
            
            
            (269
            )




B.
CAPITALIZATION AND INDEBTEDNESS





Not
applicable.





C.
REASONS FOR THE OFFER AND USE OF PROCEEDS





Not
applicable.





D.
RISK FACTORS





Our
assets are primarily engaged in offshore contract drilling for the oil and gas
industry in benign and harsh environments worldwide, including ultra-deepwater
environments. The following summarizes some of the risks that may materially
affect our business, financial condition or results of operations. Unless
otherwise indicated in this Annual Report on Form 20-F for the year ended
December 31, 2009, all information concerning our business and our assets is as
at April 26, 2010.






Risks
Relating to Our Industry





Our
business, financial condition, results of operations and our ability to pay
dividends depend on the level of activity in the offshore oil and gas industry,
which is significantly affected by, among other things, volatile oil and gas
prices and may be materially and adversely affected by a decline
in  offshore oil and gas exploration, development and
production.





The
offshore contract drilling industry is cyclical and volatile. Our business
depends on the level of activity in oil and gas exploration, as well as the
identification and development of oil and gas reserves and production in
offshore areas worldwide. The availability of quality drilling prospects,
exploration success, relative production costs, the stage of reservoir
development, political concerns and regulatory requirements all affect
customers' levels of activity and drilling campaigns. Accordingly, oil and gas
prices and market expectations of potential changes in these prices
significantly affect the level of activity and demand for our drilling units and
well services.





Oil and
gas prices are extremely volatile and are affected by numerous factors beyond
our control, including the following:





·
            worldwide
      demand for oil and gas;






6





·
            the
      cost of exploring for, developing, producing and delivering oil and
      gas;





·
            expectations
      regarding future energy prices;





·
            advances
      in exploration and development
technology;





·
            the
      ability of the Organization of Petroleum Exporting Countries, or OPEC, to
      set and maintain production levels and
pricing;





·
            the
      level of production in non-OPEC
countries;





·
            government
      laws and regulations, including environmental protection laws and
      regulations;





·
            local
      and international political, economic and weather
    conditions;





·
            domestic
      and foreign tax policies;





·
            the
      development and exploitation of alternative
  fuels;





·
            the
      policies of various governments regarding exploration and development of
      their oil and gas reserves;





·
            political
      and military conflicts in oil-producing and other countries;
      and





·
            volatility
      in the exchange rate of the U.S Dollar against other
      currencies.








An
over-supply of drilling units may lead to a reduction in dayrates, which are the
amounts earned per day per drilling unit, which may materially impact our
profitability.





In
response to improved market conditions in 2007 and 2008 which were associated
with historically high oil and gas prices, offshore drilling contractors ordered
new drilling units to meet their customers' then increasing demand for services.
In the past significant spikes in oil and gas prices have led to high levels of
rig construction orders. This is often followed by a period of sharp and sudden
declines in oil and gas prices and an oversupply of drilling units, which in
turn results in declines in utilization and dayrates, and an increase in the
number of idle drilling units without long-term contracts.The worldwide fleet of
dynamically positioned deepwater drilling units currently consists of 65 units.
An additional 69 deepwater units are under construction or on order, which would
bring the expected total fleet to 134 units in 2013 when the last of the
currently ordered units are scheduled to be delivered. The strong growth in
deepwater units is due to the increased focus of oil companies on existing and
new deepwater regions for exploration and production, and the inability to
upgrade or modify the existing mid-water fleet to undertake deepwater drilling
campaigns. At the same time, there are 60 jack-up rigs currently under
construction, while the existing worldwide fleet of jack-up rigs contains 459
units with an average age of approximately 25 years. The growth in newbuilding
jack-up rigs is targeted at oil companies with the need for more advanced and
effective jack-up rigs. However, the majority of the newbuilding jack-up rigs
have been ordered on speculation, i.e. without fixed employment, and not all of
these rigs have secured contracts for future work. This could intensify price
competition as scheduled delivery dates come closer, resulting in a reduction in
dayrates. Lower utilization and dayrates could adversely affect our revenues and
profitability. Prolonged periods of low utilization and dayrates could also have
a material adverse effect on the value of our assets.


The
market value of our current drilling units and those we acquire in the future
may decrease, which could cause us to incur losses if we decide to sell them
following a decline in their market values.





If the
offshore contract drilling industry suffers adverse developments in the future,
the fair market value of our drilling units may decline. The fair market value
of the drilling units we currently own or may acquire in the future may increase
or decrease depending on a number of factors, including:





·
            general
      economic and market conditions affecting the offshore contract drilling
      industry, including competition from other offshore contract drilling
      companies;





·
            types,
      sizes and ages of drilling units;





·
            supply
      and demand for drilling units;





·
            costs
      of newbuildings;






7





·
            prevailing
      level of drilling services contract
dayrates;





·
            governmental
      or other regulations; and





·
            technological
      advances.





If we
sell any drilling unit when drilling unit prices have fallen, the sale may be at
a loss. Such loss could materially and adversely affect our business prospects,
financial condition, liquidity, results of operations, and our ability to pay
dividends to our shareholders.





Consolidation
of suppliers may limit our ability to obtain supplies and services when we need
them, at an acceptable cost, or at all.


We rely
on a significant supply of consumables, spare parts and equipment to operate,
maintain, repair and upgrade our fleet of drilling rigs. During the last decade
the number of available suppliers has been reduced, resulting in fewer
alternatives for sourcing key supplies and services. In addition, certain key
equipment used in our business is protected by patents and other intellectual
property of our suppliers. This may limit our ability to obtain supplies and
services at an acceptable cost, at the times we need them, or at all. Cost
increases, delays or unavailability could negatively impact our future
operations and result in higher rig downtime due to delays in the repair and
maintenance of our fleet.





Our
international operations involve additional risks associated with operating
outside the U.S.


We
operate in various regions throughout the world which may expose us to political
and other uncertainties, including risks of:





·
            terrorist
      acts, war, civil disturbances and
piracy;





·
            seizure,
      nationalization or expropriation of property or
  equipment;





·
            political
      unrest;





·
            labor
      unrest and strikes;





·
            foreign
      and U.S. monetary policy and foreign currency fluctuations and
      devaluations;





·
            the
      inability to repatriate income or
capital;





·
            complications
      associated with repairing and replacing equipment in remote
      locations;




·
            import-export
      quotas, wage and price controls, imposition of trade barriers and other
      forms of government regulation and economic conditions that are beyond our
      control;





·
            regulatory
      or financial requirements to comply with foreign bureaucratic actions;
      and





·
            changing
      taxation policies.





In
addition, international contract drilling operations are subject to the various
laws and regulations in countries in which we operate, including laws and
regulations relating to:





·
            the
      equipping and operation of drilling
units;





·
            repatriation
      of foreign earnings;





·
            oil
      and gas exploration and
development;





·
            taxation
      of offshore earnings and the earnings of expatriate
    personnel;





·
            customs
      duties on the importation of drilling rigs and related
      equipment;





·
            requirements
      for local registration or ownership of drilling rigs by nationals of the
      country of operations in certain countries;
and





·
            the
      use and compensation of local employees and suppliers by foreign
      contractors.






8





Some
foreign governments favor or effectively require (i) the awarding of drilling
contracts to local contractors or to drilling rigs owned by their own citizens,
(ii) the use of a local agent or (iii) foreign contractors to employ citizens
of, or purchase supplies from, a particular jurisdiction. These practices may
adversely affect our ability to compete in those regions. It is difficult to
predict what governmental regulations may be enacted in the future that could
adversely affect the international drilling industry. The actions of foreign
governments, including initiatives by OPEC, may adversely affect our ability to
compete. Failure to comply with applicable laws and regulations, including those
relating to sanctions and export restrictions, may subject us to criminal
sanctions or civil remedies, including fines, denial of export privileges,
injunctions or seizures of assets.





We
may be subject to liability under environmental laws and regulations, which
could have a material adverse effect on our results of operations and financial
condition.





Our
operations are subject to regulations controlling the discharge of materials
into the environment, requiring removal and clean-up of materials that may harm
the environment or otherwise relating to the protection of the environment. For
example, as an operator of mobile drilling units offshore Brazil, the United
States and other countries, we may be liable for damages and costs incurred in
connection with spills of oil and other chemicals and substances related to our
operations, and we may also be subject to significant fines in connection with
spills. Laws and regulations protecting the environment have become more
stringent in recent years, and may in some cases impose strict liability,
rendering a person liable for environmental damage without regard to negligence.
These laws and regulations may expose us to liability for the conduct of or
conditions caused by others, or for acts that were in compliance with all
applicable laws at the time they were performed. The application of these
requirements or the adoption of new requirements could have a material adverse
effect on our financial position, results of operations or cash flows. We have
generally been able to obtain some degree of contractual indemnification
pursuant to which our clients agree to protect, hold harmless and indemnify us
against liability for pollution, well and environmental damage; however, there
is no assurance that we can obtain such indemnities in all of our contracts or
that, in the event of extensive pollution and environmental damage, our clients
would have the financial capability to fulfill their contractual obligations to
us. Also, these indemnities may be held to be unenforceable in certain
jurisdictions, as a result of public policy or for other reasons.


Our
ability to operate our drilling units in the U.S. Gulf of Mexico could be
restricted by governmental regulation.





Hurricanes
Ivan, Katrina, Rita, and Ike have caused damage to a number of drilling units
unaffiliated to us in the U.S. Gulf of Mexico. In June 2009, the Minerals
Management Service, or MMS, of the U.S. Department of the Interior issued the
latest guidelines for jack-up drilling rig fitness requirements for the 2009
hurricane season. Also in June 2009, the MMS issued the latest guidelines for
tie-downs on any drilling units and permanent equipment and facilities attached
to an outer continental shelf production platform, and guidelines for moored
drilling rig fitness requirements for the 2009 hurricane season. These
guidelines continued requirements on the offshore oil and gas industry, in an
attempt to improve the stations that house the moored units and increase the
likelihood of survival of jack-up rigs and other offshore drilling units during
a hurricane. The guidelines also provided for enhanced information and data
requirements from oil and gas companies operating properties in the U.S. Gulf of
Mexico.  We do not have any jack-up rigs or moored drilling units
operating in the U.S. Gulf of Mexico. However, we currently have operating in
the U.S. Gulf of Mexico one ultra-deepwater semi-submersible drilling rig that
is self propelled and equipped with thrusters and other machinery, which enable
the rig to move between drilling locations and remain in position while drilling
without the need for anchors. Nevertheless, it is possible that the MMS may
issue guidelines for future hurricane seasons and may take other steps which
could increase the cost of operations and implementation of such guidelines, or
reduce the area of operations for our ultra-deepwater drilling
unit.





Public
health threats could have an adverse effect on our operations and our financial
results.





Public
health threats, such as swine flu, bird flu, Severe Acute Respiratory Syndrome
and other highly communicable diseases, outbreaks of which have already occurred
in various parts of the world in which we operate, could adversely impact on our
operations, the operations of our customers and the global economy, including
the worldwide demand for oil and gas, and ultimately on the level of demand for
our services and could adversely affect our financial results.





We
may be subject to litigation that could have an adverse effect on
us.





We are
currently involved in various litigation matters, none of which we expect to
have a material adverse effect on us. We anticipate that we will be involved in
litigation matters from time to time in the future. The operating hazards
inherent in our business expose us to litigation, including personal injury
litigation, environmental litigation, contractual litigation with clients,
intellectual property litigation, tax or securities litigation, and maritime
lawsuits including the possible arrest of our drilling units.  We
cannot predict with certainty the outcome or effect of any claim or other
litigation matter. Any future litigation may have an adverse effect on our
business, financial position, results of operations and our ability to pay
dividends, because of potential negative outcomes, the costs associated with
prosecuting or defending such lawsuits, and the diversion of management's
attention to these matters.






9


Fluctuations
in exchange rates and non-convertibility of currencies could result in losses to
us.





As a
result of our international operations, we are exposed to fluctuations in
foreign exchange rates due to revenues being received and operating expenses
paid in currencies other than U.S. Dollars. Accordingly, we may experience
currency exchange losses in situations where we have not fully hedged our
exposure to a foreign currency, or if revenues are received in currencies that
are not readily convertible. We may also incur losses as a result of an
inability to collect revenues because of a shortage of convertible currency
available to the country of operation, controls over currency exchange or
controls over the repatriation of income or capital. A discussion of our policy
and exposure to exchange rate fluctuations is given in Item 11 "Quantitative and
Qualitative Disclosures about Market Risk".





Our business
involves numerous operating hazards.





Our
operations are subject to hazards inherent in the drilling industry, such as
blowouts, reservoir damage, loss of production, loss of well control, lost or
stuck drill strings, equipment defects, punch throughs, craterings, fires,
explosions and pollution. Contract drilling and well servicing require the use
of heavy equipment and exposure to hazardous conditions, which may subject us to
liability claims by employees, customers and third parties. These hazards can
cause personal injury or loss of life, severe damage to or destruction of
property and equipment, pollution or environmental damage, claims by third
parties or customers and suspension of operations. Our offshore fleet is also
subject to hazards inherent in marine operations, either while on-site or during
mobilization, such as capsizing, sinking, grounding, collision, damage from
severe weather and marine life infestations. Operations may also be suspended
because of machinery breakdowns, abnormal drilling conditions, and failure of
subcontractors to perform or supply goods or services, or personnel shortages.
We customarily provide contract indemnity to our customers for claims that could
be asserted by us relating to damage to or loss of our equipment, including rigs
and claims that could be asserted by us or our employees relating to personal
injury or loss of life.





Damage to
the environment could also result from our operations, particularly through
spillage of fuel, lubricants or other chemicals and substances used in drilling
operations, or extensive uncontrolled fires. We may also be subject to property,
environmental and other damage claims by oil and gas companies. Our insurance
policies and contractual rights to indemnity may not adequately cover losses,
and we do not have insurance coverage or rights to indemnity for all risks.
Consistent with standard industry practice, our clients generally assume, and
indemnify us against, well control and subsurface risks under dayrate contracts.
These are risks associated with the loss of control of a well, such as blowout
or cratering, the cost to regain control of or re-drill the well and associated
pollution. However, there can be no assurance that these clients will be willing
or financially able to indemnify us against all these risks. We maintain
insurance coverage for property damage, occupational injury and illness, and
general and marine third-party liabilities. We have no insurance coverage for
named storms in the U.S. Gulf of Mexico and war perils worldwide. Furthermore,
pollution and environmental risks generally are not totally
insurable.





We
maintain a portion of deductibles for damage to our offshore drilling equipment
and third-party liabilities. With respect to hull and machinery we generally
maintain a deductible per occurrence up to $1.7 million. However, in the event
of a total loss or a constructive total loss of a drilling unit, such loss is
fully covered by our insurance with no deductible. For general and marine
third-party liabilities we generally maintain up to $250,000 deductible per
occurrence on personal injury liability for crew claims as well as non-crew
claims and per occurrence on third-party property damage.


If a
significant accident or other event occurs and is not fully covered by our
insurance or an enforceable or recoverable indemnity from a client, it could
adversely affect our consolidated statement of financial position, results of
operations or cash flows. The amount of our insurance may be less than the
related impact on enterprise value after a loss. Our insurance coverage will not
in all situations provide sufficient funds to protect us from all liabilities
that could result from our drilling operations. Our coverage includes annual
aggregate policy limits. As a result, we retain the risk through self-insurance
for any losses in excess of these limits. Any such lack of reimbursement may
cause us to incur substantial costs. In addition, we could decide to retain
substantially more risk through self-insurance in the future. Moreover, no
assurance can be made that we will be able to maintain adequate insurance in the
future at rates we consider reasonable or be able to obtain insurance against
certain risks.





As of
April 26, 2010, all of the drilling units that we owned or operated were covered
by existing insurance policies.





Technology
disputes involving our suppliers could impact our operations or increase our
costs.





The
majority of the intellectual property rights relating to our drilling rigs and
related equipment are owned by our suppliers. In the event that one of our
suppliers becomes involved in a dispute over infringement of intellectual
property rights relating to equipment owned by us, we may lose access to repair
services, replacement parts, or could be required to cease use of some
equipment. We could also be required to pay royalties for the use of equipment.
These consequences of technology disputes involving our suppliers could
adversely affect our financial results and operations.  We have
provisions in most of our supply contracts to provide indemnity from the
supplier against intellectual property lawsuits.  However, we cannot
be assured that our suppliers will be willing or financially able to honor their
indemnity obligations, or that the indemnities will fully protect us from the
adverse consequences of such technology disputes.  We also have
provisions in some of our client contracts to require the client to share some
of these risks on a limited basis, but we cannot be assured that these
provisions will fully protect us from the adverse consequences of such
technology disputes.






10





We
may not be able to keep pace with the continual and rapid technological
developments that characterize the market for our services, and our failure to
do so may result in our loss of market share.





The
market for our services is characterized by continual and rapid technological
developments that have resulted in, and will likely continue to result in,
substantial improvements in equipment functions and performance. As a result,
our future success and profitability will be dependent in part upon our ability
to:





·
            improve
      our existing services and related
equipment;





·
            address
      the increasingly sophisticated needs of our customers;
  and





·
            anticipate
      changes in technology and industry standards and respond to technological
      developments on a timely basis.





If we are
not successful in acquiring new equipment or upgrading our existing equipment on
a timely and cost-effective basis in response to technological developments or
changes in standards in our industry, we could lose market share. In addition,
current competitors or new market entrants may develop new technologies,
services or standards that could render some of our services or equipment
obsolete, which could have a material adverse effect on our
operations.





Risks
Relating to Our Company





The
amount of our debt could limit our liquidity and flexibility in obtaining
additional financing and in pursuing other business opportunities.





As of
December 31, 2009, we had $7.4 billion in principal amount of debt, representing
approximately 61% of our total capitalization. Our current indebtedness and
future indebtedness which we may incur could affect our future operations, as a
portion of our cash flow from operations will be dedicated to the payment of
interest and principal on such debt and will not be available for other
purposes. Covenants contained in our debt agreements require us to meet certain
financial tests, which may affect our flexibility in planning for, and reacting
to, changes in our business and may limit our ability to dispose of assets or
place restrictions on the use of proceeds from such dispositions, withstand
current or future economic or industry downturns and compete with others in our
industry for strategic opportunities, and our ability to obtain additional
financing for working capital, capital expenditures, acquisitions, general
corporate and other purposes may be limited. Our ability to meet our debt
service obligations and to fund planned expenditures, including construction
costs for our newbuilding projects, will be dependent upon our future
performance, which will be subject to general economic conditions, industry
cycles and financial, business and other factors affecting our operations, many
of which are beyond our control. Our future cash flows may be insufficient to
meet all of our debt obligations and contractual commitments, and any
insufficiency could negatively impact our business. To the extent that we are
unable to repay our indebtedness as it becomes due or at maturity, we may need
to refinance our debt, raise new debt, sell assets or repay the debt with the
proceeds from equity offerings. Additional indebtedness or equity financing may
not be available to us in the future for the refinancing or repayment of
existing indebtedness, and we may not be able to complete asset sales in a
timely manner sufficient to make such repayments.





If
we are unable to comply with the restrictions and the financial covenants in the
agreements governing our indebtedness, there could be a default under the terms
of these agreements, which could result in an acceleration of repayment of funds
that we have borrowed.





If we are
unable to comply with the restrictions and covenants in the agreements governing
our indebtedness or in current or future debt financing agreements, there could
be a default under the terms of those agreements. Our ability to comply with
these restrictions and covenants, including meeting financial ratios and tests,
is dependent on our future performance and may be affected by events beyond our
control. If a default occurs under these agreements, lenders could terminate
their commitments to lend or accelerate the outstanding loans and declare all
amounts borrowed due and payable. Borrowings under other debt instruments that
contain cross-acceleration or cross-default provisions may also be accelerated
and become due and payable. If any of these events occur, we cannot guarantee
that our assets will be sufficient to repay in full all of our outstanding
indebtedness, and we may be unable to find alternative financing. Even if we
could obtain alternative financing, that financing might not be on terms that
are favorable or acceptable.





We
rely heavily on a small number of customers.





Our
contract drilling business is subject to the risks associated with having a
limited number of customers for our services. As of December 31, 2009, our five
largest customers accounted for approximately 79% of our future contracted
revenues, or order backlog. Our results of operations could be materially
adversely affected if any of our major customers failed to compensate us for our
services, were to terminate our contracts with or without cause, failed to renew
its existing contracts or refused to award new contracts to us and we are unable
to enter into contracts with new customers at comparable dayrates.






11


Newbuilding projects and surveys are
subject to risks which could cause delays or cost overruns.





Rig
construction projects are subject to risks of delay or cost overruns inherent in
any large construction project from numerous factors, including shortages of
equipment, materials or skilled labor, unscheduled delays in the delivery of
ordered materials and equipment or shipyard construction, failure of equipment
to meet quality and/or performance standards, financial or operating
difficulties experienced by equipment vendors or the shipyard, unanticipated
actual or purported change orders, inability to obtain required permits or
approvals, unanticipated cost increases between order and delivery, design or
engineering changes and work stoppages and other labor
disputes,  adverse weather conditions or any other events of force
majeure. Significant cost overruns or delays could adversely affect our
financial position, results of operations and cash flows. Additionally, failure
to complete a project on time may result in the delay of revenue from that rig.
New drilling rigs may experience start-up difficulties following delivery or
other unexpected operational problems that could result in uncompensated
downtime, which also could adversely affect our financial position, results of
operations and cash flows or the cancellation or termination of drilling
contracts.





Some
of our offshore drilling contracts may be terminated early due to certain
events.





Some of
our customers have the right to terminate their drilling contracts upon the
payment of an early termination fee.  However, such payments may not
fully compensate us for the loss of the contract. Under certain circumstances
our contracts may permit a customer to terminate their contract early without
the payment of any termination fee, as a result of non-performance, longer
periods of downtime or impaired performance caused by equipment or operational
issues, or sustained periods of downtime due to force majeure events. Many of
these events are beyond our control. During periods of challenging market
conditions, we may be subject to an increased risk of our clients seeking to
repudiate their contracts, including through claims of non-performance. Our
customers' ability to perform their obligations under their drilling contracts
with us may also be negatively impacted by the prevailing uncertainty
surrounding the development of the world economy and the credit markets. If our
customers cancel some of our contracts, and we are unable to secure new
contracts on a timely basis and on substantially similar terms, or if contracts
are suspended for an extended period of time or if a number of our contracts are
renegotiated, it could adversely affect our consolidated statement of financial
position, results of operations or cash flows.





Our
operating and maintenance costs will not necessarily fluctuate in proportion to
changes in operating revenues.





Our
operating and maintenance costs will not necessarily fluctuate in proportion to
changes in operating revenues. Operating revenues may fluctuate as a function of
changes in supply and demand for contract drilling services, which in turn
affect dayrates, and the operational performance of our fleet of drilling rigs.
However, our operating costs are generally related to the number of units in
operation and the cost level in each country or region where the units are
located. In addition, equipment maintenance costs fluctuate depending upon the
type of activity the unit is performing and the age and condition of the
equipment. In connection with new assignments, we might incur expenses relating
to preparation for operations under a new contract. The expenses may vary based
on the scope and length of such required preparations and the duration of the
firm contractual period over which such expenditures are amortized. In
situations where our rigs incur idle time between assignments, the opportunity
to reduce the size of our crews on those rigs is limited as the crews will be
engaged in preparing the rig for its next contract. In a situation where a rig
faces longer idle periods, reductions in costs may not be immediate as some of
the crew may be required to prepare drilling units for stacking and maintenance
in the stacking period. Should rigs be idle for a longer period, we will seek to
redeploy crew members, who are not required to maintain the rigs, to active rigs
to the extent possible. However, there can be no assurance that we will be
successful in reducing our costs.


The provisions of
the majority of our offshore rig contracts that are term contracts at
fixed dayrates may not
permit us fully to recoup our costs in the event of a rise in our
expenses.





Most of
the units in our fleet have long-term contracts. The average contract length as
of December 31, 2009, is 36 months for our deepwater units, 25 months for our
tender rigs and ten months for our jack-up rigs, excluding the four jack-up rigs
under construction. The majority of these contracts have dayrates that are fixed
over the contract term. In order to mitigate the effects of inflation on
revenues from term contracts, most of our contracts include escalation
provisions. These provisions allow us to adjust the dayrates based on stipulated
costs increases including wages, insurance and maintenance cost. However,
because these escalations are normally performed on a semi-annual or annual
basis, the timing and amount awarded as a result of such adjustments may differ
from our actual cost increases, which could adversely affect our financial
performance. Shorter term contracts normally do not contain escalations
provisions.





We
may not be able to renew or obtain new and favorable contracts for drilling
units whose contracts are expiring or are terminated, which could adversely
affect our revenues and profitability.





We have
six contracts that expire in 2010, six contracts that expire in 2011 and seven
contracts that expire in 2012. Our ability to renew these contracts or obtain
new contracts will depend on the prevailing market conditions. In cases where we
are not able to obtain new contracts in direct continuation, or where new
contracts are entered into at dayrates substantially below the existing dayrates
or on terms less favorable compared to existing contracts terms, our revenues
and profitability could be adversely affected.






12





Our
future contracted revenue for our fleet of drilling units may not be ultimately
realized.





As of
December 31, 2009, the future contracted revenue for our fleet of drilling
units, or contract drilling backlog, was approximately $10.4 billion under firm
commitments. We may not be able to perform under these contracts due to events
beyond our control, and our customers may seek to cancel or renegotiate our
contracts for various reasons, including adverse conditions resulting in lower
dayrates. Our inability or the inability of our customers to perform under our
or their contractual obligations may have a material adverse effect on our
financial position, results of operations and cash flows.





Competition
within the oilfield services industry may adversely affect our ability to market
our services.





The
oilfield services industry is highly competitive and fragmented and includes
several large companies that compete in many of the markets we serve, as well as
numerous small companies that compete with us on a local basis. Our larger
competitors' greater resources could allow them to better withstand industry
downturns, compete more effectively on the basis of technology and geographic
scope and retain skilled personnel. We believe the principal competitive factors
in the market areas we serve are price, product and service quality,
availability of crews and equipment and technical proficiency. Our operations
may be adversely affected if our current competitors or new market entrants
introduce new products or services with better features, performance, prices or
other characteristics than our products and services, or expand into service
areas where we operate. Competitive pressures or other factors also may result
in significant price competition, particularly during industry downturns, which
could have a material adverse effect on our results of operations and financial
condition. In addition, competition among oilfield services and equipment
providers is affected by each provider's reputation for safety and
quality.


Uncertainty
relating to the development of the world economy may reduce demand for our
drilling services or result in contract delays or cancellations.





We depend
on our customers' willingness and ability to make operating and capital
expenditures to explore, develop and produce oil and gas, and to purchase
drilling and related equipment. Recent deterioration of the world economy has
caused a decline in oil and gas prices from previous high levels, which in turn
has caused a number of oil and gas producers to adjust future capital budgets.
Limitations on the availability of capital or higher costs of capital for
financing expenditures, or the desire to preserve liquidity, may cause these and
other customers to make additional reductions in future capital budgets and
outlays. Such adjustments could reduce demand for our products and services,
which could adversely affect our results of operations and cash flows. We cannot
assure you that our customers will increase their capital budgets in response to
the recent recovery in crude oil prices, which were approximately $83 per barrel
as of April 26, 2010, after hitting a low of approximately $40 per barrel in
late 2008 and early 2009.





Failure
to obtain or retain highly skilled personnel could adversely affect our
operations.





We
require highly skilled personnel to operate and provide technical services and
support for our business. Competition for skilled and other labor required for
our drilling operations has increased in recent years as the number of rigs
activated or added to worldwide fleets has increased. The recent drop in energy
prices and utilization rate has to some extent reduced the need for people
related to international jack-up rigs. For deepwater operations utilization
rates remain high and the number of deepwater units in operation is growing as a
result of the delivery of units ordered in the period 2005 to 2008. This is
expected to increase the demand for qualified personnel with deepwater
experience in particular. If this expansion continues and is coupled with
improved demand for drilling services in general, shortages of qualified
personnel could develop, creating upward pressure on wages and making it more
difficult to staff and service our rigs. Such developments could adversely
affect our financial results and cashflow.





Our
labor costs and the operating restrictions which apply to us could increase as a
result of collective bargaining negotiations and changes in labor laws and
regulations.





Some of
our employees are represented by collective bargaining agreements. The majority
of these employees work in Brazil, Nigeria, Norway and the U.K. In addition,
some of our contracted labor works under collective bargaining agreements. As
part of the legal obligations in some of these agreements, we are required to
contribute certain amounts to retirement funds and pension plans and have
restricted ability to dismiss employees. In addition, many of these represented
individuals are working under agreements that are subject to salary negotiation.
These negotiations could result in higher personnel costs, other increased costs
or increased operating restrictions that could adversely affect our financial
performance.


The
failure to consummate or integrate acquisitions of other businesses and assets
in a timely and cost-effective manner could have an adverse effect on our
financial condition and results of operations.





Acquisition
of assets or businesses that expand our drilling and well services operations is
an important component of our business strategy. We believe that acquisition
opportunities may arise from time to time, and any such acquisition could be
significant. Any acquisition could involve the payment by us of a substantial
amount of cash, the incurrence of a substantial amount of debt or the issuance
of a substantial amount of equity. Certain acquisition and investment
opportunities may not result in the consummation of a transaction.  In
addition, we may not be able to obtain acceptable terms for the required
financing for any such acquisition or investment








13





that
arises. We cannot predict the effect, if any, that any announcement or
consummation of an acquisition would have on the trading price of our common
stock. Our future acquisitions present a number of risks, including the risk of
incorrect assumptions regarding the future results of acquired operations or
assets or expected cost reductions or other synergies expected to be realized as
a result of acquiring operations or assets, the risk of failing to successfully
and timely integrate the operations or management of any acquired businesses or
assets and the risk of diverting management's attention from existing operations
or other priorities. If we fail to consummate and integrate our acquisitions in
a timely and cost-effective manner, our financial condition and results of
operations will be adversely affected.





In
order to execute our growth strategy, we may require additional capital in the
future, which may not be available to us.





Our
business is capital intensive and, to the extent we do not generate sufficient
cash from operations, we may need to raise additional funds through public or
private debt or equity financings to execute our growth strategy and to fund
capital expenditures. Adequate sources of capital funding may not be available
when needed or may not be available on favorable terms. If we raise additional
funds by issuing additional equity securities, dilution to the holdings of
existing equity holders may result. If funding is insufficient at any time in
the future, we may be unable to fund maintenance requirements and acquisitions,
take advantage of business opportunities or respond to competitive pressures,
any of which could adversely impact our financial condition and results of
operations.





Interest
rate fluctuations could affect our profitability, earnings and cash
flow.





In order
to finance our growth we have incurred significant amounts of debt. With the
exception of our convertible bonds, the large majority of our debt
arrangements have floating interest rates. As such, significant movements in
interest rates could have an adverse effect on our profitability, earnings and
cash flow. In order to manage our exposure to interest rate fluctuations, we use
interest rate swaps to effectively fix some of our floating rate debt
obligations. The principal amount covered by interest rate swaps is evaluated
continuously and determined based on our debt level, our expectations regarding
future interest rates and our overall financial risk exposure. As of December
31, 2009, our total net floating rate debt amounted to $5.0 billion and we had
entered into interest rate swaps in order to effectively fix the interest rate
for a principal amount of $4.1billion.





A
change in tax laws of any country in which we operate could result in a higher
tax expense or a higher effective tax rate on our worldwide
earnings.





We
conduct our operations through various subsidiaries in countries throughout the
world. Tax laws and regulations are highly complex and subject to
interpretation. Consequently, we are subject to changing tax laws, treaties and
regulations in and between countries in which we operate, including treaties
between the United States and other nations. Our income tax expense is based
upon our interpretation of the tax laws in effect in various countries at the
time that the expense was incurred. A change in these tax laws, treaties or
regulations, including those in and involving the United States, or in the
interpretation thereof, or in the valuation of our deferred tax assets, which is
beyond our control could result in a materially higher tax expense or a higher
effective tax rate on our worldwide earnings.


A
loss of a major tax dispute or a successful tax challenge to our operating
structure, intercompany pricing policies or the taxable presence of our
subsidiaries in certain countries could result in a higher tax rate on our
worldwide earnings, which could result in a significant negative impact on our
earnings and cash flows from operations.





Our
income tax returns are subject to review and examination. We do not recognize
the benefit of income tax positions we believe are more likely than not to be
disallowed upon challenge by a tax authority. If any tax authority successfully
challenges our operational structure, intercompany pricing policies or the
taxable presence of our subsidiaries in certain countries; or if the terms of
certain income tax treaties are interpreted in a manner that is adverse to our
structure; or if we lose a material tax dispute in any country, our effective
tax rate on our worldwide earnings could increase substantially and our earnings
and cash flows from operations could be materially adversely
affected.





While
we believe that we are not currently a PFIC and do not anticipate becoming a
PFIC, United States tax authorities could treat us as a "passive foreign
investment company," which could have adverse United States federal income tax
consequences to United States holders.


A foreign
corporation will be treated as a "passive foreign investment company," or PFIC,
for United States federal income tax purposes if either (1) at least 75 percent
of its gross income for any taxable year consists of certain types of "passive
income" or (2) at least 50 percent of the average value of the corporation's
assets produce or are held for the production of those types of "passive
income."  For purposes of these tests, "passive income" includes
dividends, interest, and gains from the sale or exchange of investment property
and rents and royalties other than rents and royalties which are received from
unrelated parties in connection with the active conduct of a trade or business
but does not include income derived from the performance of
services.






14





If
the IRS were to find that we are or have been a PFIC for any taxable year, our
United States shareholders will face adverse United States tax
consequences.





Under the
PFIC rules, unless those shareholders make an election available under the Code
(which election could itself have adverse consequences for such shareholders, as
discussed below under "Tax Considerations – United States Federal Income
Taxation of U.S. Holders"), such shareholders would be liable to pay United
States federal income tax at the then prevailing income tax rates on ordinary
income plus interest upon excess distributions and upon any gain from the
disposition of our common shares, as if the excess distribution or gain had been
recognized ratably over the shareholder's holding period of our common
shares.  See "Tax Considerations— United States Federal Income
Taxation of U.S. Holders" for a more comprehensive discussion of the United
States federal income tax consequences to United States shareholders if we are
treated as a PFIC.





Risks
Relating to Our Common Shares





There
is no assurance that an active and liquid trading market for our common shares
will be sustained in the United States.





Our
common shares were listed on the NYSE on April 15, 2010 under the symbol "SDRL".
Our common shares have been listed on the Oslo Stock Exchange since November
2005, also under the symbol "SDRL".  There is no assurance that an
active and liquid trading market for our common shares will be sustained in the
United States.





Our
common share price may be highly volatile.





The
market price of our common shares has historically fluctuated over a wide range
and may continue to fluctuate significantly in response to many factors, such as
actual or anticipated fluctuations in our operating results, changes in
financial estimates by securities analysts, economic and regulatory trends,
general market conditions, rumors and other factors, many of which are beyond
our control. Over the last year the stock market has experienced extreme price
and volume fluctuations. Such volatility could adversely affect the market price
of our common shares and impact a potential sale price if holders of our common
shares decide to sell their shares.





Because
we are a foreign corporation, you may not have the same rights that a
shareholder in a U.S. corporation may have.





We are a
Bermuda exempted company. Our Memorandum of Association and Bye-laws and The
Companies Act, 1981 of Bermuda, or the Companies Act, govern our affairs. The
Companies Act does not as clearly establish your rights and the fiduciary
responsibilities of our directors as do statutes and judicial precedent in some
U.S. jurisdictions. Therefore, it may be more difficult to protect your
interests as a shareholder in relation to the actions of management, directors
or controlling shareholders, than it would be for shareholders of U.S.
corporations. There is a statutory remedy under Section 111 of the Companies Act
which provides that a shareholder may seek redress in the courts as long as such
shareholder can establish that our affairs are being conducted, or have been
conducted, in a manner oppressive or prejudicial to the interests of some part
of the shareholders, including such shareholder.





We
are incorporated in Bermuda and it may not be possible for our investors to
enforce U.S. judgments against us.





We are
incorporated in Bermuda and substantially all of our assets are located outside
the U.S. In addition, all of our directors and all but one of our executive
officers are non-residents of the U.S., and all or a substantial portion of the
assets of these non-residents are located outside the U.S. As a result, it may
be difficult or impossible for U.S. investors to serve process within the U.S.
upon us or our directors and executive officers, or to enforce a judgment
against us for civil liabilities in U.S. courts. In addition, you should not
assume that courts in the countries in which we are incorporated or where our
assets are located (1) would enforce judgments of U.S. courts obtained in
actions against us based upon the civil liability provisions of applicable U.S.
federal and state securities laws or (2) would enforce, in original actions,
liabilities against us based on those laws.


We
are subject to certain anti-takeover provisions in our constitutional
documents.





Several
provisions of our bye-laws may have anti-takeover effects. These provisions are
intended to avoid costly takeover battles, lessen our vulnerability to a hostile
change of control and enhance the ability of our board of directors to maximize
shareholder value in connection with any unsolicited offer to acquire us.
However, these anti-takeover provisions could also discourage, delay or prevent
the merger, amalgamation or acquisition of our company by means of a tender
offer, a proxy contest or otherwise, that a shareholder may consider to be in
its best interest. For more detailed information reference is made to Item 10
"Additional Information" of this Annual Report.





We
depend on directors who are associated with affiliated companies which may
create conflicts of interest.





Our
principal shareholder Hemen Holding Ltd., which we refer to as Hemen, is
controlled by trusts established by John Fredriksen, our President and Chairman,
for the benefit of his immediate family. Hemen also has significant
shareholdings in two companies affiliated with us, Frontline Ltd. (NYSE: FRO),
or Frontline, and Ship Finance International Limited (NYSE: SFL), or Ship
Finance.  In addition, Hemen owns approximately 6.6% of our
majority-owned subsidiary Seawell Limited, or Seawell.  One of our
directors, Kate Blankenship is also a director of Frontline, Ship Finance and
Seawell and another of our directors, Kathrine Fredriksen, the daughter of








15





John
Fredriksen, is also a director of Frontline. Mr. Fredriksen, Mrs. Blankenship
and Ms. Fredriksen owe fiduciary duties to each of Seadrill, Frontline and Ship
Finance and may have conflicts of interest in matters involving or affecting us
and our customers. In addition they may have conflicts of interest when faced
with decisions that could have different implications for Frontline or Ship
Finance than they do for us. We cannot assure you that any of these conflicts of
interest will be resolved in our favor.





Investor
confidence may be adversely impacted if we are unable to comply with Section 404
of the Sarbanes-Oxley Act of 2002.





We will
become subject to Section 404 of the Sarbanes-Oxley Act of 2002, which will
require us to include in our annual report on Form 20-F our management's report
on, and assessment of, the effectiveness of our internal controls over financial
reporting. In addition, our independent registered public accounting firm will
be required to attest to and report on management's assessment of the
effectiveness of our internal controls over financial reporting, which
requirement we expect will first apply to our annual report on Form 20-F for the
year ended December 31, 2010.  If we fail to maintain the adequacy of
our internal controls over financial reporting, we will not be in compliance
with all of the requirements imposed by Section 404. Any failure to comply with
Section 404 could result in an adverse perception of the Company in the
financial marketplace.


If
we enter into drilling contracts with countries or government-controlled
entities that are subject to restrictions imposed by the U.S. government, our
reputation and the market for our common stock could be adversely
affected.


From time
to time, we may enter into drilling contracts with countries or
government-controlled entities that are subject to sanctions and embargoes
imposed by the U.S. government and/or identified by the U.S. government as state
sponsors of terrorism. Although these sanctions and embargoes do not prevent us
from entering into drilling contracts with these countries or
government-controlled entities, potential investors could view such drilling
contracts negatively, which could adversely affect our reputation and the market
for our common stock. In addition, certain institutional investors may have
investment policies or restrictions that prevent them from holding securities of
companies that have contracts with countries identified by the U.S. government
as state sponsors of terrorism. The determination by these investors not to
invest in or to divest our common shares may adversely affect the price at which
our common shares trade. Investor perception of the value of our common stock
may be adversely affected by the consequences of war, the effects of terrorism,
civil unrest and governmental actions in these and surrounding
countries.






ITEM
4.  INFORMATION ON THE COMPANY





A.
HISTORY AND DEVELOPMENT OF THE COMPANY





The
Company





We were
incorporated under the laws of Bermuda on May 10 ,2005, and our shares of common
stock have been listed on the Oslo Stock Exchange under the symbol "SDRL" since
November 2005. Our principal executive offices are located at Par-la-Ville
Place, 4th Floor, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda and our
telephone number is +1 (441) 295-6935.


We are an
offshore drilling contractor providing worldwide offshore drilling services to
the oil and gas industry. Our primary business is the ownership and operation of
jack-up rigs, tender rigs, semi-submersible rigs and drillships, which operate
in shallow, mid and deepwater areas as well as benign and harsh environments. A
description of our different types of drilling units is given in Item 4.B
"Business Overview".  We operate through subsidiaries located
throughout the world, including in Bermuda, Norway, the Cayman Islands, the
British Virgin Islands, Cyprus, Nigeria, Liberia, Hungary, Singapore, Brazil,
Hong Kong, Panama, the United Kingdom, Denmark, Malaysia, Brunei and the United
States.  We own and operate a fleet of 36 offshore drilling units,
including eight units under construction, which consist of 10 jack-up rigs, 10
semi-submersible rigs, four drillships and 12 tender rigs. The units under
construction consist of two semi-submersible rigs, one drillship, one tender rig
and four jack-up rigs, including one jack-up rig for which we have a purchase
option that  we intend to exercise. Four of the above units were sold
to and leased back from wholly-owned subsidiaries of Ship Finance, a related
party, and these subsidiaries are fully consolidated in our financial statements
as variable interest entities, or VIEs, in which we hold the primary interest
(see Note 33 to the Consolidated Financial Statements). In addition we operate
five tender rigs in association with Varia Perdana Sdn Bhd, or Varia Perdana, a
Malaysian company in which we have a 49% ownership interest. We have a
contractual right not to take delivery of one of the four newbuilding jack-up
rigs currently under construction. If we exercise this right we will forfeit the
installment paid to date on the newbuilding.


We own a
73.8% interest in the well services company Seawell. Seawellprovidesservices inplatform drilling,
facility engineering, modular rig, well intervention and oilfield technologies,
and drilling and well services and has approximately 2,600 employees.Seawell currently operates
on nearly 50 installations in the North Sea and has offices in Stavanger and
Bergen in Norway, Aberdeen and Newcastle in the United Kingdom, Houston in the
United States, Esbjerg in Denmark, Rio de Janeiro in Brazil and Kuala Lumpur in
Malaysia.






16





We also
hold investments in several other companies in our industry that we consider to
be strategic investments, including





- 9.4%
equity interest in Pride International Inc. (NYSE: PDE), or Pride, a United
States offshore drilling company,





- 23.6%
equity interest in SapuraCrest Bhd, or SapuraCrest, a Malaysian oil services
company, and





-
      40.0% equity interest in Scorpion Offshore Limited, or Scorpion, a Bermuda
      jack-up rig company. In April 2010 we acquired 1.3 million shares in
      Scorpion, which increased our shareholding from 38.6% to 40.0%. This
      acquisition triggered an obligation to make a mandatory cash offer for
      Scorpion's remaining shares or reduce our shareholding below
      40%.  On April 12, 2010, we announced that we plan to make a
      cash offer for the remaining shares in
Scorpion.





We
consider strategic investments to be investments in companies that own and/or
operate offshore drilling rigs with similar characteristics to our own fleet of
rigs and that provide us with additional exposure to market segments in which we
operate or a new market segment.  Further, we view investments as
strategic that potentially advance the development of our Company in accordance
with our business strategy, particularly relating to consolidation in the
offshore drilling rig industry.





Development
of the Company





We were
established in May 2005 as a Bermuda company. On May 11, 2005 we entered into a
Purchase and Subscription Agreement with three affiliated companies: Greenwich
Holdings Limited, or Greenwich, Seatankers Management Co Limited, or Seatankers,
and Hemen.  Pursuant to agreements we acquired an offshore drilling
fleet of three jack-up rigs and two floating production, storage and offloading
vessels, or FPSOs, from Greenwich for an aggregate consideration of $310
million, and contracts for the construction of two new jack-up rigs from
Seatankers for a total consideration of $67 million. In addition, Hemen
subscribed for 84,994,000 of our shares at a subscription price of $2.03 per
share and acquired all of Greenwich's and a part of Seatankers' claim for the
purchase price for the assets referred to above. Greenwich, Seatankers and Hemen
are controlled by trusts established by Mr. John Fredriksen, our President and
Chairman, for the benefit of his immediate family. As a result of the related
party nature of this transaction, the acquisition of these assets was accounted
for as a transfer of assets under common control and recorded by Seadrill at the
historical carrying values in the financial statements of Greenwich and
Seatankers.


Subsequent
to the above initial acquisitions, we have entered into further contracts for
newbuildings and acquired other companies engaged in offshore drilling and
related industries. As a result, our operations have expanded considerably and
we now have approximately 7,600 skilled employees and an active fleet of 28
units, consisting of six jack-up rigs, eight semi-submersible rigs, three
drillships and 11 tender rigs.





Acquisitions,
Disposals and Other Transactions





Acquisitions
and other transactions





In the
year ended December 31, 2007, we acquired the following drilling units and
entities involved in offshore drilling:





·
            In
      January 2007, we took delivery of the new jack-up rig West Prospero from
      Keppel FELS Limited in Singapore for a total cost of $208 millionand subsequently
      sold the unit to an affiliated company that is a subsidiary of Ship
      Finance, and leased the rig back.





·
            In
      May 2007, we entered into an agreement with the Jurong Shipyard in
      Singapore for the construction of a new semi-submersible rig, West Orion,which we
      expect to be delivered in the second quarter of 2010 for a total cost of
      $675 million.





·
            In
      June 2007, we entered into an agreement with Keppel FELS Limited in
      Singapore for the construction of a new tender rig, West Vencedor,which we
      expect to be delivered in the first quarter of 2010 for a total cost of
      $201 million.





·
            In
      July 2007, we entered into a contract with the Samsung Shipyard in South
      Korea for the construction of a new drillship, West Gemini, which we
      expect to be delivered in the second quarter of 2010 for a total cost of
      $716 million.





·
            In
      September 2007, we took delivery of the new jack-up rig West Atlas from Keppel
      FELS Limited in Singapore for a total cost of $155 million.





·
            In
      September 2007, we established Seawell as a company providing drilling and
      well services. Our ownership interest in Seawell is currently
      approximately 73.8%. Seawell has entered into an agreement with the
      Norwegian Stock Broker Association, which provides an over-the-counter
      ("OTC") market for its shares.





In the
year ended December 31, 2008, we acquired the following drilling units and
entities involved in offshore drilling:





·
            In
      the first quarter of 2008, the new semi-submersible rig West Phoenix was
      delivered from the Samsung Shipyard in South Korea and the new
      semi-submersible rig West Sirius was
      delivered from the Jurong Shipyard in Singapore, at total costs of $804
      million and $561 million, respectively.  Also in the first
      quarter of 2008, the new jack-up rig West Triton was
      delivered from the PPL Shipyard in Singapore at a total cost of $155
      million.







17





·
            In
      January 2008, Seawell acquired Noble Corporation's North Sea platform
      drilling division, a labor contract well services business, for an
      aggregate purchase price of $54 million. This purchase included labor
      contracts to service the drilling operations on 11 platforms in the UK
      sector of the North Sea.





·
            In
      February 2008, we entered into a construction contract with Malaysia
      Marine and Heavy Engineering Sdn Bnd for the construction of a new tender
      rig T12,which we
      expect to be delivered in the first quarter of 2010 for a total cost of
      $123 million.





·
            In
      February 2008, Seawell entered into an agreement for the construction of a
      new modular well service unit. The unit is expected to be delivered in
      the second half 2010 and will be primarily marketed for operations on
      platforms on the UK and Norwegian continental
  shelves.





·
            In
      March 2008, we acquired all of the outstanding shares in Peak Well
      Solutions AS, a company which specializes in the production, manufacturing
      and installation of equipment for drilling rigs, for the aggregate
      purchase price of $85 million.





·
            In
      April 2008, we announced that we had acquired beneficial ownership of
      200,000 of the issued shares of Pride and had forward purchase contracts
      for a further 16,300,000 shares, totaling 9.5% of the issued share
      capital. Pride is one of the largest offshore drilling contractors listed
      on the NYSE. The aggregate purchase price of the investment in Pride was
      approximately $558 million. In August 2009, Pride spun off its
      mat-supported jack-up rigs into a new company, Seahawk Drilling Inc, which
      is listed on Nasdaq. In that connection we received a dividend in the form
      of shares in Seahawk Drilling Inc, corresponding to a 9.5% equity interest
      which we currently hold.





·
            In
      April 2008, we acquired 8,100,000 shares of Scorpion Offshore Limited, or
      Scorpion, at a price of NOK80 per share, which increased our shareholding
      in Scorpion to 36% of Scorpion's outstanding shares, which is above the
      33.3% threshold for making a mandatory tender offer for the remaining
      shares under the rules of the Oslo Stock Exchange. We conducted the
      mandatory tender offer at the offering price of NOK80 per share, which
      offer expired in June 2008. As a result of the tender offer, we registered
      acceptances for a further 1.1% of Scorpion's shares. As of January 20,
      2010, we held a 39.6% equity interest in Scorpion, for which we paid an
      aggregate amount of $343 million. Scorpion is a drilling contractor listed
      on the Oslo Stock Exchange, with six recently completed newbuilding
      jack-up rigs and one additional newbuilding jack-up rig under
      construction. Under the Oslo Stock Exchange's mandatory offer rules, if we
      increase our equity interest in Scorpion to 40% or more, we will be
      required to make another tender offer for Scorpion's shares. Currently, we
      do not expect to trigger any further mandatory offerings or compulsory
      acquisitions. Please see "Subsequent Events" and
      "Summary of Oslo Stock
      Exchange Mandatory Offer Rules'
below:





·
            In
      May 2008, Seawell acquired Tecwel AS, a company which provides logging
      services to the oil industry worldwide, for an aggregate purchase price of
      $34 million.





·
            In
      June 2008, we entered into agreements with Keppel FELS Limited in
      Singapore and the PPL Shipyard in Singapore for the construction of two
      new jack-up rigs each, all of which are scheduled for delivery in the
      second half of 2010.  In January 2009 the terms of the
      agreements with the PPL Shipyard and Keppel FELS Limited were amended to
      include the option on our part not to take delivery of the second rig
      scheduled for delivery from each yard, while the PPL Shipyard had the
      option to terminate the construction contract for the second rig scheduled
      for delivery by them. In October 2009, the PPL Shipyard exercised its
      option to terminate the construction of one rig. The total cost of the
      three rigs currently remaining to be delivered is $658
      million.





·
            In
      June 2008, we entered into agreement with Keppel FELS Limited in Singapore
      for the construction of one new tender rig, West Berani III,with
      delivery expected in the first quarter of 2011 at a total cost of $119
      million. Also in June
      2008, we entered into agreement with the Jurong Shipyard in Singapore for
      the construction of one new semi-submersible drilling rig, West Capricorn, with
      delivery expected in fourth quarters of 2011 at a total cost of $771
      million.





·
            In
      the second quarter of 2008, we took delivery of the new tender rig T11 from Malaysia
      Marine and Heavy Engineering Sdn Bnd at a total cost of $96 million, and
      the new jack-up rig West
      Ariel from Keppel FELS Limited in Singapore at a total cost of $177
      million.





·
            In
      September 2008, following a series of transactions beginning in 2006, we
      acquired 22.7% of the total outstanding shares of SapuraCrest for a total
      purchase price of $124 million. SapuraCrest owns 51% of each of Varia
      Perdana and Tioman.





·
            In
      the third quarter of 2008, we took delivery of the new drillship West Polarisfrom
      Samsung Heavy Industries in South Korea for a total cost of $695 million,
      and sold the unit  to a subsidiary of Ship Finance, an
      affiliated company, and leased the rig
back.








18





·
            In
      the fourth quarter of 2008, we took delivery of the new semi-submersible
      rig West Hercules
      from the DSME Shipyard in South Korea and the new semi-submersible rig
      West Taurus from
      the Jurong Shipyard in Singapore, at total costs of $630 million and $531
      million, respectively. These two rigs were sold to Ship Finance, an
      affiliated company, and leased back. Also in the fourth quarter of 2008,
      we took delivery of the new drillship West Capellafrom
      Samsung Heavy Industries in South Korea at a total cost of $640
      million.





In
the year ended December 31, 2009 we acquired the following drilling units and
investments in entities involved in offshore drilling:





·
            In
      the first quarter of 2009, we took delivery of the new semi-submersible
      rig West Aquarius
      from the DSME Shipyard in South Korea and the new semi-submersible rig
      West Eminence
      from the Samsung Shipyard in South Korea, at total costs of $630 million
      and $707 million, respectively.





·
            In
      March 2009, we acquired an 81% interest in a bond issued by Petromena AS
      in the amount of NOK2.00 billion, at a cost of $183 million. The bond was
      secured by construction contracts for two new deepwater rigs scheduled for
      delivery later in 2009. Both rigs have subsequently been sold and as at
      December 31, 2009, we have received a partial repayment of the bond
      amounting to $101 million, including premium and accrued interest. Based
      on the achieved sales price of the rigs and the priority of the bonds, we
      expect to receive payments that equal 100% of the principal bond amount
      plus a 7% early redemption fee and accrued interests including penalty
      interests.





The total
cost shown for the above drilling units consists of the accumulated historic
cost paid to the shipyards, including amounts paid by entities prior to their
acquisition by us. The cost shown includes capitalized interest and other
ancillary costs.





Disposals





In
February 2007, we sold our two FPSOs Crystal Ocean and Crystal Sea for $90 million
and $80 million, respectively, recording gains totaling $124
million.





In July
2007, we entered into an agreement to sell the jack-up rig West Titania for a total
consideration of $134 million. The jack-up rig was delivered to its new owner in
the second quarter of 2008 and a gain on sale of $80 million was
recorded.





In
October 2007, we entered into an agreement to sell our entire holding of shares
in Apexindo to third parties for a net consideration of approximately $220
million. The gain from the disposal was recorded in the first quarter of 2008
and amounted to approximately $150 million.





In July
2009, we exercised our option to repurchase the jack-up rig West Ceres from Rig Finance
Ltd., a subsidiary of Ship Finance, an affiliated party, at the option price of
$135.5 million. In July 2009, we sold the jack-up rig West Ceres to a third party
for $175 million, recording a gain on sale of $21 million.





On
November 30, 2009 our jack-up rig West Atlas was confirmed a
constructive total loss following the damage caused by a blow-out and later fire
on the Montara production platform in Australia where the rig was working for
PTTEPA. The compensation from our insurers amounting to $200 million was
received in December 2009. We have a contractual obligation to PTTEPA for
removing the West Atlas
wreck from the Montara field. Our insurance coverage provides for reimbursement
of the costs related to such removal operations which are expected to be
completed during 2010.





Subsequent
Events





·
            In
      the first quarter of 2010 we took delivery of the new tender rigs West Vencedor and T12 from the Keppel
      FELS shipyard in Singapore and Malaysia Marine and Heavy Engineering Sdn
      Bnd, at total costs of $209 million and $123 million,
      respectively.





·
            In
      April 2010 we announced that we have acquired a purchase option from the
      Jurong shipyard in Singapore for a high specification, harsh environment
      jack-up rig of the CJ70 design. We have announced our intention to
      exercise this option and the rig is expected to be delivered in the first
      quarter of 2011 at an acquisition cost of $356 million, excluding
      capitalized interest and ancillary
costs.





·
            In
      April 2010 we took delivery of the new semi-submersible rig West Orion from the
      Jurong shipyard in Singapore. The rig will reported under newbuildings
      until it commences operations in Brazil in July
  2010.





·
            In
      April 2010, Seadrill Limited successfully completed a private placement of
      a total of 12.5 million shares, representing 3.1% of the issued capital,
      to a price of NOK151.50 per share.  Gross proceeds amounted to
      NOK1,894 million (approximately US$322
million).





·
            In
      April 2010 we acquired 1.3 million shares in Scorpion at a price of
      NOK36.00 per share, which increased our shareholding from 38.6% to 40.0%.
      The acquisition triggered an obligation on us to make a mandatory cash
      offer for Scorpion's remaining shares or to reduce our shareholding below
      40%. We have announced that we will make a mandatory cash offer for the
      remaining shares in Scorpion. Please see "Summary of Oslo Stock Exchange
      Mandatory Offer Rules"
below:




·
              On
      April 30, 2010, the Company received a partial payment of the Petromena
      bond amounting to $165 million.






19






Summary
of Oslo Stock Exchange Mandatory Offer Rules





·
            Generally,
      under the rules of the Oslo Stock Exchange, a shareholder who acts in its
      own name or in concert with others, and who acquires shares representing
      more than 1/3 of the votes of an Oslo Stock Exchange listed company is
      obligated to make an offer for the Company's remaining shares. The
      obligation to make a mandatory offer is triggered again if the shareholder
      subsequent to the initial mandatory offer acquires further shares in the
      Company and through such acquisition becomes the owner of shares
      representing either 40% or more or 50% or more of the votes in the
      Company.




·
            Before
      January 1 2008 the threshold of ownership required to trigger the initial
      mandatory offer requirement was
40%.





·
            There
      are various procedural and substantive rules, including a best price rule
      that relates to the price that the offeror must pay for the
      shares.





·
            There
      is also a procedure for certain Oslo Stock Exchange companies to obtain
      exemptions from the rules.





B.
BUSINESS OVERVIEW


We are an
offshore drilling contractor providing global offshore drilling services to the
oil and gas industry. We have a versatile fleet of drilling units that is
outfitted to operate in shallow water, mid-water and deepwater areas, in benign
and harsh environments. Our customers are national, international and
independent oil companies. The various types of drilling units in our fleet are
as follows:





Semi-submersible
drilling rigs


Semi-submersible
drilling rigs consist of an upper working and living quarters deck resting on
vertical columns connected to lower hull pontoons. Such rigs operate in a
"semi-submerged" floating position, in which the lower hull is below the
waterline and the upper deck protrudes above the surface. The rig is situated
over a wellhead location and remains stable for drilling in the semi-submerged
floating position, due in part to its wave transparency characteristics at the
water line.





There are
two types of semi-submersible rigs, moored and dynamically positioned. Moored
semi-submersible rigs are positioned over the wellhead location with anchors,
while the dynamically positioned semi-submersible rigs are positioned over the
wellhead location by a computer-controlled thruster system. Semi-submersible
rigs generally operate with crews of 65 to 100 people.





Drillships





Our
drillships are self-propelled ships equipped for drilling in deep waters, and
are positioned over the well through a computer-controlled thruster system
similar to that used on semi-submersible rigs. Drillships are suitable for
drilling in remote locations because of their mobility and large load-carrying
capacity. Depending on region, drillships operate with crews of 65 to 100
people.





Jack-Up
Rigs





Jack-up
rigs are mobile, self-elevating drilling platforms equipped with legs that are
lowered to the ocean floor. A jack-up rig is towed to the drill site with its
hull riding in the sea as a vessel and its legs raised. At the drill site, the
legs are lowered until they penetrate the sea bed and the hull is elevated until
it is above the surface of the water. After completion of the drilling
operations, the hull is lowered until it rests on the water, the legs are raised
and the rig can be relocated to another drill site. Jack-ups are generally
suitable for water depths of 400 feet or less and operate with crews of 40 to 60
people.





Tender
Rigs


Self-erecting
tender rigs conduct production drilling from fixed or floating platforms. During
drilling operations, the tender rig, is moored next to the platform rig. The
modularized drilling package is lifted from the unit onto the platform prior to
commencement of operations. The tender rig contains living quarters, helicopter
deck, storage for drilling supplies, power machinery for running the drilling
equipment and well completion equipment. There are two types of tender rigs,
barge type and semi-submersible (semi-tender) type. Tender barges and
semi-tenders are equipped with similar equipment but the semi-tender's
semi-submersible hull structure allows the unit to operate in rougher weather
conditions. Self-erecting tender rigs allow for drilling operations to be
performed from platforms without the need for permanently installed drilling
packages. Self-erecting tender rigs generally operate with crews of 60 to 85
people.






20





Seawell
Limited





In
addition to owning and operating offshore drilling units, we provide well
services through Seawell, our majority owned subsidiary.  Seawell
provides platform drilling, facility engineering, modular rig, well intervention
and oilfield technologies. Seawell currently operates on nearly 50 installations
in the North Sea and has offices in Stavanger and Bergen in Norway, Aberdeen and
Newcastle in the United Kingdom, Houston in the United States, Esbjerg in
Denmark, Rio de Janeiro in Brazil and Kuala Lumpur in Malaysia.


We report
our business in the following three operating segments:





·
            Mobile
      units: We offer services encompassing drilling, completion and maintenance
      of offshore wells. The drilling contracts relate to semi-submersible rigs,
      jack-up rigs and drillships.





·
            Tender
      Rigs: We operate self-erecting tender rigs and semi-submersible tender
      rigs, which are used for production drilling and well maintenance in
      Southeast Asia and West Africa.





·
            Well
      Services: We provide services using platform drilling, facility
      engineering, modular rig, well intervention and oilfield
      technologies.





Information
regarding our revenues, segment operating profit or loss and total assets
attributable to each operating segment for the last three fiscal years is
presented in Note 3 to our consolidated financial statements included in this
Annual Report. Information regarding our operating revenues and identifiable
assets attributable to each of our geographic areas of operations for the last
three fiscal years is also presented in Note 3 to our consolidated financial
statements included in this Annual Report. For information about revenues,
operating income, assets and other information relating to our business, our
segments and the geographic areas in which we operate, see also Item 5
"Operating and Financial Review and Prospects".





Our
Business Strategy





Our
primary objective is to profitably grow our business to increase long-term
distributable cash flow per share to our shareholders.





Our
business strategy is to focus our company on modern state-of-the-art offshore
drilling units with our main focus on deepwater operations. We believe we have
one of the most modern fleets in the industry and believe that by combining
quality assets and experienced and skilled employees we will be able to provide
our customers with safe and effective operations, and establish, develop and
maintain a position as a preferred provider of offshore drilling services for
our customers. We believe that a combination of quality assets and highly
skilled employees will facilitate the procurement of term contracts and premium
dayrates. We have grown our company significantly since its incorporation in
2005 and have strong ambitions to continue the growth. We believe that the
combination of term contracts and quality assets will provide us with the
opportunity to obtain debt financing for such growth, and allow us to increase
the return on our invested equity.





The key
elements in our strategy are as follows:





·
            commitment
      to provide customers with safe and effective
operations;·
            combine
      state-of-the-art mobile drilling units with experienced and skilled
      employees;


·
            growth
      through targeted alliances, purchase of newbuildings, mergers and
      acquisitions;·
            develop
      our strong position in deepwater and harsh
  environments;


·
            develop
      our strong position in the tender rig market and pursue further growth in
      conventional waters as well as deepwater areas; and·
            offer
      a diversified range of well
services.





We
believe that consolidation in the offshore drilling rig industry would improve
the pricing and earnings visibility for our services. Such consolidation
activities may be in the form of transactions for specific offshore drilling
units or companies. We actively look for growth opportunities and intend to take
part in the future consolidation of our industry if we determine that potential
transactions are in the best interest of our shareholders.





Market
Overview





Our
customers include oil super-majors and major integrated oil and gas companies,
state-owned national oil companies and independent oil and gas companies. Our
customers have experienced higher oil prices and significantly increased
revenues over the last decade. The increase has been related to higher demand
for oil and limited increase in available oil production to offset the growth in
demand. Over the same period the depletion rate for existing oil production has
risen and replacement rates for oil reserves have fallen for most oil producers,
highlighting the shortfall in exploration and production spending to meet future
demand. In response to this development, oil








21




producers,
particularly super-majors, majors and national oil companies, have devoted more
of their activities to identifying replacements for existing production in new
geographical areas at increasing water depths. This has translated into an
increased focus on frontier deepwater and ultra-deepwater areas, not only in
existing offshore regions such as Brazil, U.S. Gulf of Mexico, Europe and West
Africa but also expanding to India, Southeast Asia, China, East Africa, Mexican
Gulf of Mexico, Australasia and the Mediterranean.





Mobile
units





Developments
in the oil and gas industry discussed above have caused a strong increase in
demand for offshore drilling services, resulting in materially increased
dayrates for drilling units.





For
dynamically positioned deepwater units, dayrates increased from $290,000 in May
2005 at the inception of our Company to more than $600,000 in September 2008
just prior to the financial downturn in world markets. The increase in dayrates
made it attractive for existing drilling contractors as well as new market
participants to order new units to meet mounting demand. As a result, the
worldwide fleet of dynamically positioned deepwater drilling units is expected
to increase from 29 units in 2005 to 134 units in 2013, if all of the new units
ordered between 2005 and 2008 are delivered. Most of these newbuildings were
ordered on speculation, meaning that no drilling contract in place at the time
the construction contract was entered into. As a result of favorable market
developments, the majority of these units have secured term contracts on
attractive terms. However, due to the sudden and immediate deterioration of
overall market conditions in October 2008, there remain a significant number of
units under construction that have not yet secured employment. Although the
majority of these units will not be delivered before the end of 2010 or later,
some of the owners of these units have limited or no operating experience in
deepwater drilling, and there is a risk that they could be willing to accept
contract conditions that deviate from prevailing market terms, in order to
secure employment for their units and the financing necessary to take delivery
of their newbuilds. This could adversely affect dayrates for deepwater drilling
units in the short-term. Since October 2008, the number of new contracts entered
into for dynamically positioned deepwater units has been limited.  The
most recent fixture was reported at approximately $450,000 per day. However,
dayrate levels are typically dependant on country of operation, length of
contract and overall contract terms


Since
2005 we have taken delivery of nine dynamically positioned ultra-deepwater units
and have a further two ultra-deepwater units under construction. We believe the
long-term prospects for deepwater drilling are positive given the expected
growth in oil consumption from developing nations, limited or negative growth in
oil reserves, and high depletion rates of mature oil fields. We believe that
these factors will continue to provide incentives for the exploration and
development of deepwater fields, particularly in view of recent geologic
successes in Brazil, US Gulf of Mexico, West Africa and elsewhere, along with
improving access to promising offshore areas and new, more efficient
technologies.





For
jack-up rigs, dayrates increased from $90,000 from May 2005 to more than
$200,000 per day in September 2008 as a consequence of a significant undersupply
of available jack-ups in a period when oil and gas prices were increasing
rapidly, thereby making extremely lucrative the drilling of new and previous oil
and gas discoveries with a tie-back to the existing infrastructure. In response
to this development, approximately 145 new jack-ups have been ordered bringing
the total worldwide fleet of jack-ups up to 519, assuming all the ordered units
are delivered. The majority of these newbuildings were ordered on speculation
and the majority of the 61 jack-up rigs remaining to be delivered have at
present not secured initial employment. In a period of considerable uncertainty
relating to the development of the world economy and the direction of oil and
gas prices, this could intensify price competition as scheduled delivery dates
come closer, possibly impacting adversely on dayrates for jack-up rigs. Since
October 2008, the utilization rate has been significantly reduced for the
jack-up fleet bringing dayrates down sharply as well. As of April 2010, we
believe market dayrates for new jack-up rigs are approximately $120,000 per day,
depending on country of operation, length of contract and overall contract
terms, and below $100,000 per day for older jack-up rigs.  We believe
that the industry will require more modern and more effective jack-ups, as
approximately 70% of the current worldwide jack-up fleet is more than 20 years
old. We expect operators to gradually replace older and incumbent drilling units
with new, more modern and efficient rigs due to wells becoming increasingly
technically challenging and consequently demanding with respect to rig
equipment. This replacement could however take longer than previously
anticipated, given the uncertainty surrounding the global economy.





Tender
rigs





From May
2005 to September 2008 dayrates increased for barge-type tender rigs from
$45,000 to $130,000 and for semi-submersible tender rigs from $70,000 to more
than $200,000. The increase was due to a significant undersupply of available
tender rigs and reduced competition from jack-ups due to the overall increase in
offshore drilling activity. The tender rig market is a specialized niche, with
the world fleet consisting of 29 units, including four units under construction.
We are the largest operator in this segment with our fleet of 17 units,
including the five units we operate in association with Varia Perdana and the
unit we have under construction. Tender rigs are primarily used for development
drilling based on term contracts, and this has historically made this market
segment more resilient to the volatility in activity levels seen in the shallow
water market and experienced by benign environment jack-ups. Nevertheless, the
sharp drop in shallow water activity in 2008 and 2009 had an adverse impact on
the tender rig market. The short-term effect is that tender rigs that have come
off contracts since October 2008 have been warm stacked, as oil companies have
postponed drilling activity in response to lower oil and gas prices.
Accordingly, there were no tender rig fixtures in 2009. The most recent fixture
in 2010 was at approximately $90,000 per day. We believe the market uncertainty
is diminishing in response to more stable oil prices, and the long-term outlook
for








22





tender
rigs remains favorable, due to their versatility and lower construction costs
compared to jack-up rigs. In addition, in recent years a combination of tender
rigs and floating platforms, such as mini tension-leg platforms and spar
platforms has been used in the development of deepwater oilfields, which has
increased the market for tender rigs. Based on this we expect the market to
continue to offer opportunities to build additional order backlog and earnings
visibility.


Well
services





Seawell
is mainly involved in oil production activities in existing mature fields. The
level of activity is therefore related to the development and level of the oil
price. We believe that when oil prices are above $70 per barrel, oil companies
will focus on maintaining their production from mature fields. Based on current
market conditions, demand for drilling and well services is expected to remain
high over the next few years. However, the activity level in 2010 will depend on
the outcome of ongoing tendering activities, employment of the modular rig we
have under construction, and our success in expanding our main products and
services into new regions. We have also in response to the oil price
developments in 2008 and the beginning of 2009 experienced pressure on pricing
from our customers. This has resulted in lower contract rates, which in turn has
causes us to emphasize our focus on cost control and utilization of synergies in
order to maintain and grow profit levels.





The above
overview of the various offshore drilling sectors is based on previous market
developments and current market conditions. Future markets conditions and
developments cannot be predicted and may well differ from our current
expectations.





Customers





Our
customers are oil and gas exploration and production companies, including major
integrated oil companies, independent oil and gas producers and government-owned
oil and gas companies. In the year ended December 31, 2009 our five largest
customers have been:





-
            Statoil
      ASA, or Statoil, accounting for approximately 17% of
    revenues;-
            Total
      S.A. Group, or Total, accounting for approximately 13% of
      revenues;-
            Exxon
      Mobil Corp, or Exxon, accounting for approximately 12% of
      revenues;-
            Royal
      Dutch Shell, or Shell, accounting for approximately 10% of revenues;
      and-
            Petròleo
      Brasileiro S.A., or Petrobras, accounting for approximately 10% of
      revenues.





No other
customers have accounted for more than ten percent of our revenues in any period
since inception. In the year ended December 31, 2008, our two largest customers
were Statoil and Shell, who provided approximately 32% and 7% of our contract
revenues, respectively. Statoil and Shell were also our largest customers in the
year ended December 31, 2007, providing approximately 33% and 13% of our
contract revenues, respectively. The loss of any of these significant customers
could have a material adverse effect on our results of operations if they were
not replaced by other customers.





Most of
our drilling units are contracted to customers for periods between one and five
years ahead, and our forward contracted revenue, or backlog, at December 31,
2009 totaled approximately $10.4 billion, with $8.6 billion of this amount
attributable to our semi-submersible rigs and drillships. We expect
approximately $3.1 billion of this backlog to be realized in 2010. Backlog for
our drilling fleet is calculated as the contract dayrate multiplied by the
number of days remaining on the contract, assuming full utilization. Backlog
excludes revenues for mobilization and demobilization, contract preparation and
customer reimbursables. The amount of actual revenues earned and the actual
periods during which revenues are earned will be different from the backlog
projections due to various factors. Downtime, caused by unscheduled repairs,
maintenance, weather and other operating factors, may result in lower applicable
dayrates than the full contractual operating dayrate.


The
following table shows the percentage of rig days committed by year as of
December 31 2009. The percentage of rig days committed is calculated as the
ratio of total days committed under firm contracts to total available days in
the period. Total available days for our units under construction are based on
their expected delivery dates.





Year ending December 31,%
      of rig-days committed
            
            2010
            
            
            2011
            
            
            2012Jack-up
      rigs
            
            
            62
            %
            
            
            7
            %
            
            
            0
            %Semi-submersible
      rigs
            
            
            100
            %
            
            
            94
            %
            
            
            55
            %Drillships
            
            
            88
            %
            
            
            75
            %
            
            
            70
            %Tender
      rigs
            
            
            84
            %
            
            
            69
            %
            
            
            40
            %





Competition





The
offshore drilling industry is highly competitive, with market participants
ranging from large multinational companies to small locally-owned
companies.




23





The
demand for offshore drilling services is driven by oil and gas companies'
exploration and development drilling programs. These drilling programs are
affected by oil and gas companies' expectations regarding oil and gas prices,
anticipated production levels, worldwide demand for oil and gas products and
many other factors. The availability of quality drilling prospects, exploration
success, availability of qualified rigs and operating personnel, relative
production costs, availability and lead time requirements for drilling and
production equipment, the stage of reservoir development and political and
regulatory environments also affect our customers' drilling programs. Oil and
gas prices are volatile, which has historically led to significant fluctuations
in expenditures by our customers for drilling services. Variations in market
conditions during cycles impact us in different ways, depending primarily on the
length of drilling contracts in different regions. For example, contracts in
shallow waters for jack-up rig activities are shorter term, so a deterioration
or improvement in market conditions for such units tends to quickly impact
revenues and cash flows from those operations. On the other hand, contracts in
deepwater for semi-submersible rigs and drillships tend to be longer term, so a
change in market conditions tends to have a delayed impact. Accordingly,
short-term changes in these markets may have a minimal short-term impact on
revenues and cash flows, unless the timing of contract renewals coincides with
short-term movements in the market.





Offshore
drilling contracts are generally awarded on a competitive bid basis. In
determining which qualified drilling contractor is awarded a contract, the key
factors are pricing, rig availability and sustainability, rig location,
condition of equipment, operating integrity, safety performance record, crew
experience, reputation, industry standing and client relations.





Competition
for offshore drilling rigs is generally on a global basis, as rigs are highly
mobile. However, the cost associated with mobilizing rigs between regions is
sometimes substantial, as entering a new region could necessitate upgrades of
the unit and its equipment to specific regional requirements. In particular, for
rigs to operate in harsh environments, such as offshore Norway and Canada, as
opposed to benign environments, such as the Gulf of Mexico, West Africa, Brazil,
the Mediterranean and Southeast Asia, more demanding weather conditions would
require more costly investment in the outfitting and maintenance of the drilling
units.


We
believe that the market for drilling contracts will continue to be highly
competitive for the foreseeable future.





Risk
of Loss and Insurance





Our
operations are subject to hazards inherent in the drilling of oil and gas wells,
including blowouts and well fires, which could cause personal injury, suspend
drilling operations, or seriously damage or destroy the equipment involved.
Offshore drilling contractors such as us are also subject to hazards particular
to marine operations, including capsizing, grounding, collision and loss or
damage from severe weather. Our marine insurance package policy provides
insurance coverage for physical damage to our rigs, liability due to
control-of-well events and loss of hire insurance.





We
maintain a portion of deductibles for damage to our offshore drilling equipment.
With respect to hull and machinery, we currently have a deductible per
occurrence of up to $1.7 million. However, a total loss or a constructive total
loss of a drilling unit is covered by our insurance with no deductible. For
general and marine third-party liabilities we generally maintain a deductible of
up to $250,000 per occurrence on personal injury liability for crew claims,
non-crew claims and third-party property damage. Furthermore, we purchase
insurance to cover the loss of hire on our fleet due to physical damage.
However, we have a deductible period up to 60 days after the occurrence of
physical damage. Thereafter our insurance policies are limited to between 100
days and 290 days. If the repair period for any physical damage exceeds the
number of days permitted under our loss of hire policy, we will be responsible
for the costs in such period.





Environmental
and Other Regulations in the Offshore Drilling Industry





Our
offshore drilling operations include activities that are subject to numerous
international, federal, state and local laws and regulations, including the
International Convention for the Prevention of Pollution from Ships, or MARPOL,
the International Convention on Civil Liability for Bunker Oil Pollution Damage,
or Bunker Convention, the U.S. Oil Pollution Act, or OPA, the Comprehensive
Environmental Response, Compensation and Liability Act, or CERCLA, the U.S.
Outer Continental Shelf Lands Act, and Brazil's National Environmental Policy
Law (6938/81), Environmental Crimes Law (9605/98) and Law 9966/2000 relating to
pollution in Brazilian waters. These laws govern the discharge of materials into
the environment or otherwise relate to environmental protection. In certain
circumstances, these laws may impose strict liability, rendering us liable for
environmental and natural resource damages without regard to negligence or fault
on our part.





For
example, the United Nations' International Maritime Organization, or IMO,
adopted MARPOL and Annex VI to MARPOL to regulate the discharge of harmful air
emissions from ships, which include rigs and drillships. Rigs and drillships
must comply with MARPOL limits on sulfur oxide and nitrogen oxide emissions,
chlorofluorocarbons, and the discharge of other air pollutants, except that the
MARPOL limits do not apply to emissions that are directly related to drilling,
production, or processing activities.





Our
drilling units are subject not only to MARPOL regulation of air emissions, but
also to the Bunker Convention's strict liability for pollution damage caused by
discharges of bunker fuel in ratifying states. We believe that all of our
drilling units are currently compliant in all material respects with these
regulations. In October 2008, IMO's Maritime Environment Protection Committee,
or MEPC, adopted







24





amendments
to the Annex VI regulations that will require a progressive reduction of sulfur
oxide levels in heavy bunker fuels and create more stringent nitrogen oxide
emissions standards for marine engines in the future. We may incur costs to
comply with these revised standards.


Furthermore,
any drillships we may operate in the waters of the U.S.,
including  the U.S. territorial sea and the 200 nautical mile
exclusive economic zone around the U.S., would have to comply with OPA and
CERCLA regulations, as described above, that impose liability (unless the spill
results solely from the act or omission of a third party, an act of God or an
act of war) for all containment and clean-up costs and other damages arising
from discharges of oil or other hazardous substances, other than discharges
related to drilling.





The
Minerals Management Service of the U.S. Department of the Interior ("MMS")
periodically issues guidelines for jack-up rig fitness requirements in the U.S.
Gulf of Mexico and may take other steps that could increase the cost of
operations or reduce the area of operations for our jack-up rigs, thus reducing
their marketability. Implementation of MMS guidelines or regulations may subject
us to increased costs or limit the operational capabilities of our rigs and
could materially and adversely affect our operations and financial condition.
Please read "Risk Factors — Our ability to operate our drilling units in the
U.S. Gulf of Mexico could be restricted by government regulation" in Item 3.D of
this Annual Report.





Numerous
governmental agencies issue such regulations to implement and enforce the laws
of the applicable jurisdiction, which often involve lengthy permitting
procedures, impose difficult and costly compliance measures, particularly in
ecologically sensitive areas, and subject operators to substantial
administrative, civil and criminal penalties or may result in injunctive relief
for failure to comply. Some of these laws contain criminal sanctions in addition
to civil penalties. Changes in environmental laws and regulations occur
frequently, and any changes that result in more stringent and costly compliance
or limit contract drilling opportunities could adversely affect our financial
results. While we believe that we are in substantial compliance with the current
laws and regulations, there is no assurance that compliance can be maintained in
the future.





In
addition to the MARPOL, OPA, and CERCLA requirements described above, our
international operations in the offshore drilling segment are subject to various
laws and regulations in countries in which we operate, including laws and
regulations relating to the importation of and operation of drilling units and
equipment, currency conversions and repatriation, oil and gas exploration and
development, environmental protection, taxation of offshore earnings and
earnings of expatriate personnel, the use of local employees and suppliers by
foreign contractors and duties on the importation and exportation of drilling
units and other equipment. New environmental or safety laws and regulations
could be enacted, which could adversely affect our ability to operate in certain
jurisdictions. Governments in some countries have become increasingly active in
regulating and controlling the ownership of concessions and companies holding
concessions, the exploration for oil and gas and other aspects of the oil and
gas industries in their countries. In some areas of the world, this governmental
activity has adversely affected the amount of exploration and development work
done by major oil and gas companies and may continue to do so. Operations in
less developed countries can be subject to legal systems that are not as mature
or predictable as those in more developed countries, which can lead to greater
uncertainty in legal matters and proceedings.





Implementation
of new environmental laws or regulations that may apply to ultra-deepwater
drilling units may subject us to increased costs or limit the operational
capabilities of our drilling units and could materially and adversely affect our
operations and financial condition. A discussion of risks relating to
environmental regulations can be found in Item 3.D "Risk Factors" of this Annual
Report.


C.
ORGANIZATIONAL STRUCTURE





We were
incorporated on May 10, 2005, under the laws of Bermuda. We are engaged, with
our subsidiaries and consolidated companies, in the ownership and operation of a
diversified fleet of offshore drilling units and in the provision of well
services. Our operations are split into three reporting segments – mobile units
(world-wide), tender rigs (mainly in south-east Asia and Africa) and well
services (mainly in the North Sea).





Overall
responsibility for the management of Seadrill Limited and its subsidiaries rests
with the Board of Directors. The Board has organized the provision of management
services through two subsidiaries incorporated in Norway, Seadrill Management
AS, or Seadrill Management, and Seawell Management AS, or Seawell Management.
The Board has defined the scope and terms of the services to be provided by
these two companies and has provided authority for them to run day to day
operations. The Board must be consulted on all matters of material importance
and/or of an unusual nature, and for such matters will provide specific
authorization to personnel in Seadrill Management and/or Seawell Management to
act on the Company's behalf.





A full
list of our significant management, operating and rig-owning subsidiaries is
shown in Exhibit 8.1.





D.
PROPERTY, PLANT AND EQUIPMENT





We own a
substantially modern fleet of drilling units. The following table sets forth the
units that we own or have contracted for delivery as of April 26,
2010:






25





Year
            Water
      depth
            Drilling
      depth
            Current
      location
            Month
      ofUnit
            built
            (feet)
            (feet)
            
            contract
      expiryJack-up
      rigsWest
      Larissa
            1984
            300
            21,000
            Vietnam
            December
      2010West
      Janus
            1985
            330
            21,000
            Malaysia
            August
      2011West
      Epsilon
            1993
            400
            30,000
            Norway
            January
      2015West
      Prospero(SF)
            2007
            400
            30,000
            Red
      Sea
            July
      2010West
      Triton
            2008
            375
            30,000
            South
      East Asia
            September
      2010West
      Ariel
            2008
            400
            30,000
            Vietnam
            October
      2010West
      Callisto (NB)
            2010
            400
            30,000
            
            April
      2011West
      Juno (NB)
            2010
            400
            30,000West
      Leda (NB)
            2010
            375
            30,000
            
            November
      2010CJ70
      (NB)(1)
            2011
            450
            40,000
            
            August
      2016Tender
      rigsT4
            1981
            410
            20,000
            Thailand
            July
      2013T8
            1982
            410
            20,000
            Malaysia
      (warm stacked *)T7
            1983
            410
            20,000
            Thailand
            October
      2011West
      Pelaut
            1994
            6,500
            30,000
            Brunei
            March
      2012West
      Menang
            1999
            6,500
            30,000
            Namibia
      (warm stacked *)
            December
      2010West
      Alliance
            2001
            6,500
            30,000
            Malaysia
            January
      2015West
      Setia
            2005
            6,500
            30,000
            Angola
            August
      2012West
      Berani
            2006
            6,500
            30,000
            Indonesia
            December
      2011T11
            2008
            6,500
            30,000
            Thailand
            May
      2013T12
            2010
            6,500
            30,000
            Thailand
            April
      2011West
      Vencedor
            2010
            6,500
            30,000
            Angola
            April
      2015West
      Jaya (NB)
            2011
            6,500
            30,000Semi-submersible
      rigsWest
      Alpha
            1986
            2,000
            23,000
            Norway
            June
      2012West
      Venture
            2000
            6,000
            30,000
            Norway
            August
      2015West
      Phoenix
            2008
            10,000
            30,000
            Norway
            January
      2012West
      Hercules (SF)
            2008
            10,000
            35,000
            China
            November
      2011West
      Sirius
            2008
            10,000
            35,000
            Gulf
      of Mexico
            July
      2014West
      Taurus (SF)
            2008
            10,000
            35,000
            Brazil
            February
      2015West
      Eminence
            2009
            10,000
            30,000
            Brazil
            July
      2015West
      Aquarius
            2009
            10,000
            35,000
            Indonesia
            February
      2013West
      Orion (NB)
            2010
            10,000
            35,000
            In
      transit to Brazil
            July
      2016West
      Capricorn (NB)
            2011
            10,000
            35,000DrillshipsWest
      Navigator
            2000
            7,500
            35,000
            Norway
            December
      2012West
      Polaris (SF)
            2008
            10,000
            35,000
            Brazil
            October
      2012West
      Capella
            2008
            10,000
            35,000
            Nigeria
            April
      2014West
      Gemini (NB)
            2010
            10,000
            35,000
            
            September
      2012





NB –
Newbuilding.


SF  –
Unit owned by subsidiary of Ship Finance (see Note 33 to Consolidated Financial
Statements).


(1)  –
We have an option to purchase this jack-up rig and have announced that we intend
to exercise that option.


*  -   Warm
stacked means that the unit is not operating, but is being maintained in a state
of readiness for future operations.





In
addition to the drilling units listed above, as at December 31, 2009 we have
buildings, plant and equipment with a net book value of $115 million, including
an office building in Bergen, a modular rig under construction for Seawell, and
office equipment.  Our offices in Stavanger in Norway, Singapore,
Houston in the United States, Rio de Janeiro in Brazil and Aberdeen in the
United Kingdom are leased and aggregate office rental costs were $13.7 million
in 2009, and are expected to be approximately $20.0 million in
2010.





We do not
have any material intellectual property rights




26




ITEM 4A. UNRESOLVED STAFF
COMMENTS





Not
applicable.




ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS





The
following should be read in conjunction with Item 3.A "Selected Financial Data",
Item 4 "Information on the Company" and our Consolidated Financial Statements
and Notes thereto included herein.





Overview





We were
established in May 2005 with an operating fleet of five units. Since then,
through investment in newbuildings and the acquisition of other companies, we
have expanded our operations and now have approximately 7,600 skilled employees
and an operating fleet of 28 drilling units. In addition, we have construction
contracts for eight new units, including an option to purchase a jack-up rig
which we intend to exercise, and we operate a further five units in association
with Varia Perdana. A full fleet list is provided in Item 4.D "Information on
the Company – Property, Plant and Equipment".


In
addition to owning and operating offshore drilling units, we provide drilling
and well services through Seawell, our majority owned subsidiary.


We have
also made investments in other companies that are viewed as strategic
investments, including Pride (9.4%), SapuraCrest (23.6%), Varia Perdana (49%)
and Scorpion (40.0%). In compliance with the rules of the Oslo Stock Exchange,
we have announced that we will make a mandatory cash offer for the remaining
shares in Scorpion.





Fleet
Development





The
following table summarizes the development of our active fleet of drilling
units, based on the dates when the units began operations:





Unit
      type
            Mobile
      units segment
            Tender
      rigs
            Total
      unitsFPSOs
            Jack-up
      rigs
            Drillships
            Semi-submersible
      rigsAt
      December 31, 2005
            2
            3
            -
            -
            -
            5additions
      in 2006
            
            +2
            +1
            +2
            +7
            +12At
      December 31, 2006
            2
            5
            1
            2
            7
            17additions
      in 2007
            
            +2
            
            
            +1
            +3disposals
      in 2007
            -2
            
            
            
            
            -2At
      December 31, 2007
            -
            7
            1
            2
            8
            18additions
      in 2008
            
            +2
            +1
            +2
            +1
            +6disposals
      in 2008
            
            -1
            
            
            
            -1At
      December 31, 2008
            -
            8
            2
            4
            9
            23additions
      in 2009
            
            
            +1
            +4
            
            +5disposals
      in 2009
            
            -2
            
            
            
            -2At
      December 31, 2009
            -
            6
            3
            8
            9
            26





The
following rigs under construction are scheduled to be delivered after December
31, 2009:





·
            In
      2010: three jack-up rigs, two tender rigs, one semi-submersible rig and
      one drillship.





·
            In
      2011: one tender rig, one semi-submersible rig and one jack-up
      rig.





Factors
Affecting our Results of Operations





The
principal factors which have affected our results since 2005 and are expected to
affect our future results of operations and financial position
include:





·
            the
      number and operating availability of our drilling
  units;





·
            the
      daily operating revenues earned under our term
  contracts;





·
            the
      daily operating expenses of our drilling
units;





·
            administrative
      expenses;






27







·
            interest
      and other financial items; and





·
            tax
      expenses.





Revenues


Our
revenues are derived primarily from the operation of our drilling units on
short, medium and long-term contracts at fixed daily rates. Revenues from well
services are derived from drilling on our client's fixed installations and from
carrying out a wide range of engineering and down-hole services.





In
general, each of our drilling units is contracted for a period of time to an oil
and gas company to provide offshore drilling services at an agreed daily rate. A
unit will be stacked if it has no contract in place. Daily rates can vary from
$50,000 per day to over $600,000 per day, depending on the type of drilling unit
and its capabilities, operating expenses, taxes and other factors. An important
factor determining the revenue is the technical utilization of the drilling rig.
To the extent that our operations are interrupted due to equipment breakdown or
operational failures, we do not generally receive dayrate compensation for the
period of the interruption.


The terms
and conditions of the contracts allow for compensation when factors influencing
the drilling operation are outside our control, for example, weather, and also
in some cases for compensation when we perform planned maintenance activities.
In many of our contracts we are entitled to cost escalation to compensate for
industry specific cost increases as reflected in publicly available cost
indices.





In
addition to contracted day-rate revenue, customers may pay mobilization and
demobilization fees for units before and after their drilling assignments, and
may also pay reimbursement of costs incurred by the Company at their request for
supplies, personnel and other services.





The
following table summarizes our average daily revenues and economic utilization
percentage by rig type for the periods under review:





Year
      ended December 31,2009
            
            
            2008
            
            
            2007Average
      daily revenues
            
            
            Economic
      utilization
            
            
            Average
      daily revenues
            
            
            Economic
      utilization
            
            
            Average
      daily revenues
            
            
            Economic
      utilization$
            
            
            
            %
            
            
            $
            
            
            
            %
            
            
            $
            
            
            
            %Jack-up
      rigs
            
            
            130,000
            
            
            
            70
            
            
            
            196,000
            
            
            
            92
            
            
            
            172,000
            
            
            
            85Semi-submersible
      rigs
            
            
            445,000
            
            
            
            92
            
            
            
            345,000
            
            
            
            93
            
            
            
            247,000
            
            
            
            99Drillships
            
            
            497,000
            
            
            
            94
            
            
            
            251,000
            
            
            
            66
            
            
            
            206,000
            
            
            
            83Tender
      rigs
            
            
            115,000
            
            
            
            93
            
            
            
            95,000
            
            
            
            98
            
            
            
            78,000
            
            
            
            99





Note:
Average daily revenues are the weighted average revenues for each type of unit,
based on the actual days available for each unit of that
type.  Economic utilization is calculated as the total days worked
divided by the total days in the period.





Expenses





Our
expenses consist primarily of rig operating expenses, reimbursable expenses,
depreciation and amortization, administration expenses, interest and other
financial expenses and tax expenses.





Rig
operating expenses are related to the drilling units we have in operation and
include the remuneration of offshore crews and onshore rig supervision staff, as
well as expenses for repairs and maintenance. Reimbursable expenses are incurred
at the request of customers, and include provision of supplies, personnel and
other services. Depreciation and amortization costs are based on the historical
cost of our drilling units and other equipment. Administration expenses include
the costs of offices in various locations, as well as the remuneration and other
compensation of the directors and employees engaged in the management and
administration of the Company.





Our
interest expenses depend on the overall level of debt and prevailing interest
rates. However, these expenses may be reduced as a consequence of capitalization
of interest expenses for drilling units under construction. Other financial
items include income from associated companies and may reflect various
mark-to-market adjustments to the value of our interest rate and forward
currency swaps and other derivative financial instruments.


Tax
expenses reflect payable and deferred tax related to our rig owning and
operating activities and may vary significantly depending on jurisdictions and
contractual arrangements. In most cases the tax is based on net income or deemed
income based on gross turnover.





28





Critical
Accounting Estimates





The
preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures about contingent
assets and liabilities. We base these estimates and assumptions on historical
experience and on various other information and assumptions that we believe to
be reasonable under the circumstances.  Our critical accounting
estimates are important to the portrayal of both our financial condition and
results of operations and require us to make difficult, subjective or complex
assumptions or estimates about matters that are
uncertain.  Significant accounting policies are discussed in our Notes
to Consolidated Financial Statements – Note 2: Accounting policies. We believe
that the following are the critical accounting estimates used in the preparation
of our consolidated financial statements. In addition, there are other items
within our consolidated financial statements that require
estimation.





Drilling
Units


Rigs,
vessels and equipment are recorded at historical cost less accumulated
depreciation. The cost of these assets less estimated residual value is
depreciated on a straight-line basis over their estimated remaining economic
useful lives. The estimated economic useful life of the Company's mobile units
and tender rigs, when new, is 30 years.





Significant
investments are capitalized and depreciated in accordance with the nature of the
investment. Significant investments that are deemed to increase an asset's value
for its remaining useful life are capitalized and depreciated over the remaining
life of the asset.


We
determine the carrying value of these assets based on policies that incorporate
our estimates, assumptions and judgments relative to the carrying value,
remaining useful lives and residual values. The assumptions and judgments we use
in determining the estimated useful lives of our drilling units reflect both
historical experience and expectations regarding future operations, utilization
and performance. The use of different estimates, assumptions and judgments in
establishing estimated useful lives would probably result in materially
different net book values of our drilling units and results of
operations.





The
useful lives of rigs and related equipment are difficult to estimate due to a
variety of factors, including technological advances that impact the methods or
cost of oil and gas exploration and development, changes in market or economic
conditions and changes in laws or regulations affecting the drilling industry.
We evaluate the remaining useful lives of our drilling units when certain events
occur which directly impact our assessment of their remaining useful lives and
include changes in operating condition, functional capability and market and
economic factors.





The
carrying values of our long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may no longer be appropriate. We assess recoverability of the carrying value of
the asset by estimating the undiscounted future net cash flows expected to
result from the asset, including eventual disposition. If the undiscounted
future net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the asset's carrying
value and fair value. In general, impairment analyses are based on expected
costs, utilization and dayrates for the estimated remaining useful lives of the
asset or group of assets being assessed. An impairment loss is recorded in the
period in which it is determined that the aggregate carrying amount is not
recoverable. Asset impairment evaluations are, by nature, highly subjective.
They involve expectations about future cash flows generated by our assets, and
reflect management's assumptions and judgments regarding future industry
conditions and their effect on future utilization levels, dayrates and costs.
The use of different estimates and assumptions could result in materially
different carrying values of our assets and could materially affect our results
of operations.


Income
Taxes


We are a
Bermuda company and currently we are not required to pay taxes in Bermuda on
ordinary income or capital gains. We have received written assurance from the
Minister of Finance in Bermuda that we will be exempt from taxation until March
2016. Certain subsidiaries operate in other jurisdictions where taxes are
imposed. Consequently income taxes have been recorded in these jurisdictions
when appropriate. Our income tax expense is based on our income, statutory tax
rates and tax planning opportunities available to us in the various
jurisdictions in which we operate. We provide for income taxes based on the tax
laws and rates in effect in the countries in which operations are conducted and
income is earned. The income tax rates and methods of computing taxable income
vary substantially between jurisdictions. Our income tax expense is expected to
fluctuate from year to year as our operations are conducted in different taxing
jurisdictions and the amount of pre-tax income fluctuates.





The
determination and evaluation of our annual group income tax provision involves
the interpretation of tax laws in various jurisdictions in which we operate and
requires significant judgment and the use of estimates and assumptions regarding
significant future events, such as the amount, timing and character of income,
deductions and tax credits. There are certain transactions for which the
ultimate tax determination is unclear due to uncertainty in the ordinary course
of business. We recognize tax liabilities based on our assessment of whether our
tax positions are sustainable and on estimates of taxes that will ultimately be
due. Changes in tax laws, regulations, agreements, treaties, foreign currency
exchange restrictions or our levels of operations or profitability in each
jurisdiction may impact our tax liability in any given year. While our annual
tax provision is based on the information available to us at the time, a number
of years may elapse before the ultimate tax liabilities in certain tax
jurisdictions are determined. Current income tax expense reflects an estimate of
our income tax liability for the current year, withholding taxes, changes in
prior year tax estimates as returns are filed, or from tax audit adjustments.
Our deferred tax expense or benefit represents the change in the balance of
deferred tax assets or liabilities as







29





reflected
on the balance sheet. Valuation allowances are determined to reduce deferred tax
assets when it is more likely than not that some portion or all of the deferred
tax assets will not be realized. To determine the amount of deferred tax assets
and liabilities, as well as of the valuation allowances, we must make estimates
and certain assumptions regarding future taxable income, including where our
drilling units are expected to be deployed, as well as other assumptions related
to our future tax position. A change in such estimates and assumptions, along
with any changes in tax laws, could require us to adjust the deferred tax
assets, liabilities, or valuation allowances.





Contingencies


We
establish reserves for estimated loss contingencies when we believe a loss is
probable and the amount of the loss can be reasonably estimated. Our contingent
liability reserves relate primarily to litigation, indemnities and potential
income and other tax assessments (see also "Income Taxes" above). Revisions to
contingent liability reserves are reflected in income in the period in which
different facts or information become known or circumstances change that affect
our previous assumptions with respect to the likelihood or amount of loss.
Reserves for contingent liabilities are based upon our assumptions and estimates
regarding the probable outcome of the matter and include our costs to defend any
action. In situations where we expect insurance proceeds to offset contingent
liabilities, we record a receivable for all probable recoveries until the net
loss is zero. We recognize contingent gains when the contingency is resolved and
the gain has been realized. Should the outcome differ from our assumptions and
estimates or other events result in a material adjustment to the accrued
estimated contingencies, revisions to the estimated contingency amounts would be
required and would be recognized in the period when the new information becomes
known.


Goodwill


We
allocate the cost of acquired businesses to the identifiable tangible and
intangible assets and liabilities acquired, with any remaining amount being
capitalized as goodwill. We perform an annual test of goodwill impairment as of
December 31 for each reporting segment or a component of an operating segment
that constitutes a business for which financial information is available and is
regularly reviewed by management., based on a discounted cash flow model. When
testing for impairment we use expected future cash flows using contract dayrates
during the contract periods. For periods after expiry of the contract periods,
dayrates are projected based on estimates regarding future market conditions,
including zero escalation of dayrates. The estimated future cash flows are
calculated based on remaining asset lives and are discounted using a weighted
average cost of capital. We had no impairment of goodwill for the years ended
December 31, 2009, 2008 and 2007, as the net present value of the estimated
future cash flows supports the book value of goodwill. We have also performed
sensitivity analyses using different scenarios regarding future cash flows,
remaining asset lives and discount rates showing acceptable tolerance to changes
in underlying assumptions in the impairment model before changes in assumptions
would result in impairment. The use of different estimates and assumptions could
result in materially different carrying value of goodwill and could materially
affect our results of operations.





Defined
benefit pension plans


The
Company has several defined benefit plans which provide retirement, death and
termination benefits. The Company's net obligation is calculated separately for
each plan by estimating the amount of the future benefit that employees have
earned in return for their cumulative service. Pension and postretirement costs
and obligations are actuarially determined and are affected by assumptions
including expected return on plan assets, discount rates, compensation increases
and employee turnover. The use of different estimates and assumptions could
result in materially different carrying value pension obligations and could
materially affect our results of operations.





The
projected future benefit obligation is discounted to its present value, and the
fair value of any plan assets is deducted. The discount rate is the market yield
at the balance sheet date on government bonds in the currency and based on terms
consistent with the post-employment benefit obligations. The retirement benefits
are generally a function of years of employment and amount of compensation. The
plans are primarily funded through payments to insurance companies. The Company
records its pension costs in the period during which the services are rendered
by the employees. Actuarial gains and losses are recognized in the statement of
operations when the net cumulative unrecognized actuarial gains or losses for
each individual plan at the end of the previous reporting year exceed 10 percent
of the higher of the present value of the defined benefit obligation and the
fair value of plan assets at that date. These gains and losses are recognized
over the expected remaining working lives of the employees participating in the
plans. Otherwise, recognition of actuarial gains and losses is included in other
comprehensive income.  Those amounts will be subsequently recognized
as a component of net periodic pension cost on the same basis as the amounts
recognized in accumulated other comprehensive income.


Impairment
of marketable securities and equity method investees





We
analyze our available-for-sale securities and equity method investees for
impairment during each reporting period to evaluate whether an event or change
in circumstances has occurred in that period which may have a significant
adverse effect on the fair value of the investment. We record an impairment
charge for other-than-temporary declines in fair value when the fair value is
not anticipated to recover above cost within a reasonable period after the
measurement date, unless there are mitigating factors that indicate impairment
may not be required. If an impairment charge is recorded, subsequent recoveries
in fair value are not reflected in earnings until sale of the securities held as
available for sale or of the equity method investee are sold. The evaluation of
whether a decline in fair value is other-than-temporary requires a high degree
of judgment and the use of different assumptions could materially affect our
results of operations.






30





Recent
accounting pronouncements





In
December 2007, the Financial Accounting Standards Board ('FASB') issued
Statements No. 141(R), Business Combinations, ("FAS 141(R)", (codified in ASC
805), and No. 160 Noncontrolling Interests in Consolidated Financial Statements,
("FAS 160"), (codified in ASC 810). Together these statements can affect the way
companies account for future business combinations and noncontrolling interests.
ASC 805 requires, amongst other changes, recognition of subsequent changes in
the fair value of contingent consideration in the Statement of Operations rather
than against Goodwill, and transaction costs to be recognized immediately in the
Statement of Operations. ASC 810-10-65-1 clarifies the classification of
noncontrolling interests in consolidated balance sheets and the accounting for
and reporting of transactions between the reporting entity and holders of such
noncontrolling interests. In particular the noncontrolling interest in
subsidiaries should be presented in the consolidated balance sheet within
equity, but separate from the parent's equity. Similarly the amount of net
income attributable to the parent and to the minority interest be clearly
identified and presented on the consolidated statement of
income.  Both these Statements are effective for transactions
completed in fiscal years beginning after December 15, 2008. Adoption of these
Statements by the Company in the financial statements beginning January 1, 2009
did not have a material effect on the Company's consolidated financial
statements except that noncontrolling interests is classified as a component of
equity.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1 (codified in ASC 825), Guidance
on Interim Fair Value Disclosures, which expands the fair value disclosures
required for all financial instruments within the scope of this topic to interim
periods for publicly traded entities. Entities must disclose the method(s) and
significant assumptions used to estimate the fair value of financial instruments
in financial statements on an interim basis and to highlight any changes in the
methods and significant assumptions from prior periods. The guidance is
effective for interim and annual periods ending after June 15, 2009 and adoption
of this FSP did not have a material effect  on our consolidated
financial statements.
 
 In April
2009, the FASB issued FSP FAS 115-2 (codified in ASC 320) which provides
additional guidance to highlight and expand on the factors that should be
considered in estimating fair value when there has been a significant decrease
in market activity for a financial asset.  The guidance is effective
for interim and annual periods ending after June 15, 2009. Adoption of this FSP
did not have a material effect t on our consolidated financial
statements.
 
 In May
2009, the FASB issued Statement No. 165 Subsequent Events, ('FAS 165'),
(codified in ASC 855). This Statement provides guidance on management's
assessment of subsequent events. The guidance clarifies that management must
evaluate, as of each reporting period, events or transactions that occur after
the balance sheet date "through the date that the financial statements are
issued or are available to be issued." Management must perform its assessment
for both interim and annual financial reporting periods. The new guidance is
effective prospectively for interim and annual periods ending after June 15,
2009. Adoption of the Statement did not have a material effect on the Company's
consolidated financial statements. In February 2010 the FASB amended the
subsequent events guidance issued in May 2009 to remove the requirement for SEC
filers to disclose a date through which subsequent events have been evaluated in
both issued and revised financial statements. The amendment is effective upon
issuance. The adoption of this guidance did not have a material effect on our
consolidated financial condition or results of operations.





In June
2009, the FASB issued Statement No. 168, Statement on Codification and Hierarchy
of Generally Accepted Accounting Principles, ('FAS 168'), (codified in ASC 105).
The standard is a replacement for FAS 162. The GAAP hierarchy will be modified
to include only two levels of GAAP; authoritative and non-authoritative. The
standard is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of this Standard did not
have a material effect on the Company's consolidated financial
statements.





In June
2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No.
46(R) (FAS 167) (codified in ASC 810). The amended guidance requires companies
to qualitatively assess the determination of the primary beneficiary of a
variable-interest entities ("VIEs") based on whether the entity (1) has the
power to direct the activities of the VIE that most significantly impact the
entity's economic performance and (2) has the obligation to absorb losses of the
entity that could potentially be significant to the VIE or the right to receive
benefits from the entity that could potentially be significant to the VIE. It
also requires additional disclosures for any enterprise that holds a variable
interest in a VIE. The new accounting and disclosure requirements become
effective for the Company from January 1, 2010. The Company is currently
assessing the impact of this amendment on its consolidated financial
statements.





In
January 2010, the FASB issued ASC 820 Improving Disclosures about Fair Value
Measurements. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. The Company is
currently assessing the impact of this amendment on its consolidated financial
statements.






31





Seasonality





In
general seasonal factors do not have a significant direct effect on our business
as most of our drilling units are contracted for periods of at least 12 months.
However, we have operations in certain parts of the world where weather
conditions during parts of the year could adversely impact the operational
utilization of the rigs and our ability to relocate rigs between drilling
locations, and limit contract opportunities in the short term. Such adverse
weather could include the hurricane season for our operations in the Gulf of
Mexico, the winter season in offshore Norway, and the monsoon season in
Southeast Asia.





Inflation


Most of
our contracts for drilling and well services include provision for rates to be
adjusted annually in line with inflation. Accordingly, we do not consider
inflation to be a significant risk to profitability in the current and
foreseeable economic environment, although it will have a moderate effect on
operating and administration costs.


A.
RESULTS OF OPERATIONS





Fiscal
Year Ended December 31, 2009, compared to Fiscal Year Ended December 31,
2008.





The
following table sets forth the Company's operating results for 2009 and
2008.





Year
      ended December 31, 2009
            
            
            Year
      ended December 31, 2008In
      US$ millions
            
            Mobile
      units
            
            
            Tender
      rigs
            
            
            Well
      services
            
            
            Total
            
            
            Mobile
      units
            
            
            Tender
      rigs
            
            
            Well
      services
            
            
            TotalTotal
      operating revenues
            
            
            2,251
            
            
            
            392
            
            
            
            610
            
            
            
            3,253
            
            
            
            1,144
            
            
            
            342
            
            
            
            620
            
            
            
            2,106Gain
      on sale of assets
            
            
            71
            
            
            
            
            
            
            
            
            
            
            
            71
            
            
            
            80
            
            
            
            -
            
            
            
            -
            
            
            
            80Total
      operating expenses
            
            
            1,181
            
            
            
            219
            
            
            
            552
            
            
            
            1,952
            
            
            
            756
            
            
            
            216
            
            
            
            565
            
            
            
            1,537Operating
      income
            
            
            1,141
            
            
            
            173
            
            
            
            58
            
            
            
            1,372
            
            
            
            468
            
            
            
            126
            
            
            
            55
            
            
            
            649Interest
      expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (228
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (130
            )Other
      financial items
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            329
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (619
            )Income
      before taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,473
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (100
            )Income
      taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (120
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (48
            )Gain
      on issuance of shares by subsidiary
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            25Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,353
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (123
            )





Total
operating revenues




In
      US $millions
            2009
            
            2008
            
            IncreaseMobile
      units
            2,251
            
            1,144
            
            +97
            %Tender
      rigs
            392
            
            342
            
            +15
            %Well
      services
            610
            
            620
            
            -2
            %Total
      operating revenues
            3,253
            
            2,106
            
            +54
            %





Total
operating revenues increased from $2.11 billion in 2008 to $3.25 billion in
2009. Total operating revenues are predominantly contract revenues with
additional, relatively small amounts of reimbursables and other
revenue.





Total
operating revenues in the mobile unit segment increased by $1.11 billion from
2008 to 2009. The number of drilling units in the mobile units segment increased
from 14 at December 31, 2008 to 17 at December 31, 2009. Four new
semi-submersible rigs were delivered and started operation during the period
(West Phoenix, West Aquarius,
West TaurusandWest
Eminence) along with one ultra-deepwater drillship (West Capella). The jack-up
rig West Ceres was sold
and the jack-up rig West
Atlas was destroyed in a fire. Although the new units were delivered over
the course of the year and some did not contribute fully to operating revenues
during the year, the additional revenue generated by the new units, net of the
rigs disposed of, amounted to $759 million. Average economic utilization of the
fleet decreased from 92% in 2008 to 82% in 2009. The decrease is related to
several of our jack-up units being stacked in the period as well as the
generally lower economic utilization associated with start- up for some of our
new units. Average dayrates increased from $230,000 in 2008 to $330,000 in 2009.
The increase in average dayrates is related to the increase in our
semi-submersible rig fleet, which achieve higher dayrates than our jack-up
units.





In the
tender rig operating segment, operating revenues increased by 15% from 2008 to
2009. The increase was mainly related to increased dayrates, which increased by
approximately $20,000 per day to an average of $115,000 per day in 2009. The
delivery of the







32





tender
rig T11,which began
operations in the second quarter of 2008, also contributed to the increase.
These dayrate increases were partly offset by a decline in economic utilization
from 98% in 2008 to 93% in 2009.


Total
operating revenues for well services decreased from $620 million in 2008 to $610
million in 2009. A significant portion of well services activity takes place in
Norway and operating revenues in Norwegian Kroner increased from NOK2.6 billion
in 2008 to NOK2.8 billion in 2009. The Norwegian content represented
approximately 73 percent of total revenues and revenues are generally fairly
stable.





Gain
on sale of assets





In 2009
there were gains on the disposals of the jack-up rigs West Ceres ($21 million) and
West Atlas ($58
million), the former being sold and the latter being a total insured loss
following a fire. Also in 2009 there was a $4 million gain on the sale of our
interest in the Chestnut field and a loss of $12 million due to the PPL shipyard
exercising its purchase option on the jack-up rig West Elara. In 2008, the
jack-up rig West Titaniawas sold and a gain of $80 million was recorded. All of these units were
in the mobile units operating segment.





Total
operating expenses




In
      US$ millions
            
            2009
            
            
            2008
            
            
            IncreaseMobile
      units
            
            
            1,181
            
            
            
            756
            
            
            
            +56
            %Tender
      rigs
            
            
            219
            
            
            
            216
            
            
            
            +1
            %Well
      services
            
            
            552
            
            
            
            565
            
            
            
            -2
            %Total
      operating expenses
            
            
            1,952
            
            
            
            1,537
            
            
            
            +27
            %





Total
operating expenses increased from $1.54 billion in 2008 to $1.95 billion in
2009, with the increase mainly in the mobile units segment.  Total
operating expenses consist of rig operating expenses, depreciation, reimbursable
expenses and general and administrative expenses. Total general and
administrative expenses increased to $149 million in 2009 compared to $126
million in of 2008. Reimbursable expenses in each segment were closely in line
with reimbursable revenues.





Total
operating expenses for the mobile units operating segment increased by $425
million from 2008 to 2009. Vessel and rig operating expenses increased by $257
million, mainly due to the new units which came into
operation.  Depreciation and amortization increased from $173 million
in 2008 to $333 million in 2009. Of the $160 million increase, $102 million was
related to newbuildings delivered in 2009, while the remaining $58 million was
largely related to newbuildings delivered during 2008 for which we expensed a
full year of depreciation in 2009 compared to reduced periods in 2008. General
and administrative expenses increased from $92 million in 2008 to $106 million
in 2009. The increase is related to our expansion which has made it necessary to
increase corporate staff numbers and establish new offices in different
regions.


Total
operating expenses in the tender rig segment increased slightly from 2008 to
2009. The increase is primarily related to the delivery of the tender rig T11 in the second quarter of
2008.





Total
operating expenses decreased marginally in the well services segment from $565
million in 2008 to $552 million in 2009. Within this amount, operating expenses
decreased from $425 million in 2008 to $394 million in 2009, reflecting a
similar reduction in operating revenues, leaving the operating margin at
approximately the same level. Reimbursable expenses increased from $104 million
in 2008 to $119 million in 2009. Reimbursable expenses are closely linked to
reimbursable revenues and amounts can fluctuate from period to period. However
we normally earn a margin of approximately 5% on reimbursables within the well
services segment.





Interest
expense





Interest
expense increased from $130 million in 2008 to $228 million in 2009, as a result
of less interest being capitalized in 2009. Interest costs incurred during the
construction of newbuildings are capitalized, and capitalized interest amounted
to $151 million in 2008 compared with $80 million in 2009. The increase in
interest bearing debt over the course of 2009 also contributed to the
increase.





Other
financial items




In
      US$ millions
            2009
            
            2008
            
            ChangeInterest
      income
            
            78
            
            
            31
            
            
            +152
            %Share
      in results of associated companies
            
            92
            
            
            15
            
            
            +513
            %Gain
      on sale of associated companies
            
            -
            
            
            150
            
            
            n/aImpairment
      loss on marketable securities and investments in associated
      companies
            
            -
            
            
            (615
            )
            
            n/aGain
      / (loss) on derivative financial instruments
            
            130
            
            
            (353
            )
            
            n/aForeign
      exchange gain (loss)
            
            (25
            )
            
            131
            
            
            n/aOther
      financial items
            
            54
            
            
            22
            
            
            +145
            %Total
      other financial items
            
            329
            
            
            (619
            )
            
            n/a
            %





n/a –
percentage change has not been calculated as it is not considered to be
meaningful due to one off or exceptional items.






33





Interest
income increased by $47 million in 2009, primarily as a result of interest
earned on the investment in the Petromena bond acquired at the end of the first
quarter of 2009, which contributed interest of $44 million.





Our share
in the results of associated companies increased by $77 million in 2009, due to
all of our associated companies generating higher earnings.





In 2008 a
gain of $150 million was recorded on the disposal of shares in Apexindo and
there was an impairment loss of $615 million on our investments in Pride,
Scorpion and SapuraCrest.


There was
a gain on derivative financial instruments of $130 million in 2009, compared
with a loss of $353 million in 2008. We have entered into interest rate swaps,
forward exchange contracts and total return swap agreements, none of which is
accounted for as hedge accounting. The gain in 2009 and the loss in 2008 reflect
movements in interest rates, exchange rates and our share price in these
periods.





In 2009,
there was a foreign exchange loss of $25 million compared to a gain of $131
million in the same period in 2008. The loss in 2009 is primarily related to the
weakening of the US Dollar against the Norwegian Kroner, which adversely affects
the value of our debt denominated in Norwegian Kroner.





Other
financial items amounted to a gain of $54 million in 2009, and include Seahawk
shares received as dividend in kind from Pride amounting to approximately $25
million and a realized gain of $16 million on the partial redemption of the
Petromena NOK2.0 billion bond.





Income
taxes





Income
taxes amounted to a net cost of $120 million in 2009 compared to a net cost of
$48 million in 2008. The Company's effective tax rate was approximately 8.2% in
2009. Due to the write down of $615 million in 2008, which was not tax
deductible, the effective tax rate for 2008 is not comparable. The increase in
tax expense in 2009 is principally due to a higher portion of our income being
generated in taxable (versus nontaxable) jurisdictions or in taxable
jurisdictions with higher tax rates.  Specifically, the Company's
recent start up of deepwater units operations in Indonesia, the Philippines and
Nigeria, the increased rig operations in Brazil and Norway and the commencement
of full operations in China for the reporting period have all contributed to
additional taxable income in 2009. Several of the new drilling operations are in
countries which tax drilling operations on the basis of deemed taxable income,
leading to an increase in tax costs compared with the previous year.
Additionally, in 2008 there was a non-taxable gain of $150 million recorded on
the disposal of shares in Apexindo.





Significant
parts of the Company's income and costs are reported in nontaxable jurisdictions
such as Bermuda. The drilling rig operations are normally carried out in taxable
jurisdictions. In the tax jurisdictions where the Company operates, the
corporate tax rate ranges from 16% to 35% (on earned income) and the deemed tax
rate varies from 5% to 8% of revenues. Further, losses in one tax jurisdiction
may not be offset against taxable income in other jurisdictions. Accordingly,
our effective tax rate may differ significantly from period to period depending
on the level of activity in and mix of each of the tax jurisdictions in which
our operations are conducted.





Fiscal
Year Ended December 31, 2008, compared to Fiscal Year Ended December 31,
2007.





The
following table sets forth the Company's operating results for 2008 and
2007:





Year
      ended December 31, 2008
            
            
            Year
      ended December 31, 2007In
      US $millions
            
            Mobile
      units
            
            
            Tender
      rigs
            
            
            Well
      services
            
            
            Total
            
            
            Mobile
      units
            
            
            Tender
      rigs
            
            
            Well
      services
            
            
            TotalTotal
      operating revenues
            
            
            1,144
            
            
            
            342
            
            
            
            620
            
            
            
            2,106
            
            
            
            837
            
            
            
            266
            
            
            
            449
            
            
            
            1,552Gain
      on sale of assets
            
            
            80
            
            
            
            -
            
            
            
            -
            
            
            
            80
            
            
            
            124
            
            
            
            -
            
            
            
            -
            
            
            
            124Total
      operating expenses
            
            
            756
            
            
            
            216
            
            
            
            565
            
            
            
            1,537
            
            
            
            612
            
            
            
            169
            
            
            
            406
            
            
            
            1,187Operating
      income
            
            
            468
            
            
            
            126
            
            
            
            55
            
            
            
            649
            
            
            
            349
            
            
            
            97
            
            
            
            43
            
            
            
            489Interest
      expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (130
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (113
            )Other
      financial items
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (619
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            11Income
      before taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (100
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            387Income
      taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (48
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            78Gain
      on issuance of shares by subsidiary
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            25
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            50Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (123
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            515








34


Total
operating revenues





In
      US $millions
            
            2008
            
            
            2007
            
            
            IncreaseMobile
      units
            
            
            1,144
            
            
            
            837
            
            
            
            +37
            %Tender
      rigs
            
            
            342
            
            
            
            266
            
            
            
            +29
            %Well
      services
            
            
            620
            
            
            
            449
            
            
            
            +38
            %Total
      operating revenues
            
            
            2,106
            
            
            
            1,552
            
            
            
            +36
            %





Total
operating revenues increased from $1.55 billion in 2007 to $2.11 billion in
2008, with increases in all three operating segments.





Total
operating revenues in the mobile unit segment increased by $307 million to $1.14
billion in 2008. The number of drilling units in the mobile units segment
increased from 10 at December 31, 2007 to 14 at December 31, 2008. Two new
semi-submersible rigs were delivered and started operation during the year
(West SiriusandWest Hercules) along with
one ultra-deepwater drillship (West Polaris) and two jack-up
rigs (West Triton and
West Ariel). The
jack-up rig West
Titania was sold. Although these units were delivered over the course of
the year and some did not contribute fully to operating revenues during the
year, the additional revenue generated by the new units, net of the rig sold,
amounted to $208 million. The economic utilization of the mobile units fleet
increased overall from 86% in 2007 to 88% in 2008. Average dayrates were also
higher in 2008, although in the latter part of the year the jack-up rig market
weakened to some extent, resulting in lower dayrates as well as periods with
idle units.





In the
tender rig operating segment, operating revenues increased from $266 million in
2007 to $342 million in 2008. The increase was partly due to the delivery of the
newbuilding tender rig T11,which began operations in the second quarter of 2008 and contributed $29
million in revenue. In addition, average dayrates for the tender rig fleet were
higher in 2008, although economic utilization declined from 100% in 2007 to 98%
in 2008.





Total
operating revenues for well services increased from $449 million (NOK 2,728
million) in 2007 to $620 million (NOK3,625 million) in 2008, mainly as a result
of higher activity levels in continuing operations and significant contributions
from businesses acquired in the year.





Gain
on sale of assets





A gain on
sale of assets of $80 million was recorded in 2008, arising from the sale of the
jack-up rig West
Titania. In 2007, a $124 million gain on sale of assets resulted from the
sale of the two FPSO's Crystal
Ocean and Crystal
Sea. These three units were all in the mobile units operating
segment.


Total
operating expenses





In
      US$ millions
            
            2008
            
            
            2007
            
            
            IncreaseMobile
      units
            
            
            756
            
            
            
            612
            
            
            
            +24
            %Tender
      rigs
            
            
            216
            
            
            
            169
            
            
            
            +28
            %Well
      services
            
            
            565
            
            
            
            406
            
            
            
            +39
            %Total
      operating expenses
            
            
            1,537
            
            
            
            1,187
            
            
            
            +29
            %





Total
operating expenses increased from $1.19 billion in 2007 to $1.54 billion in
2008, with increases in all three operating segments. Total operating expenses
consist of rig operating expenses, depreciation, reimbursable expenses and
general and administration expenses. Total general and administration expenses
increased to $127 million in 2008 compared with $110 million in 2007.
Reimbursable expenses in each segment were closely in line with reimbursable
revenues.





Total
operating expenses in the mobile units segment increased from $612 million in
2007 to $756 million in 2008. Vessel and rig operating expenses increased by $86
million in the same period mainly reflecting the expenses of the new units that
came into operation during the 2008 period. Reimbursable expenses are at the
same level on a year to year comparison and the margin is in the range of 5% to
10%. Depreciation and amortization increased from $135 million in 2007 to $173
million in 2008. Of the increase of $38 million, $25 million was related to our
newbuildings delivered in 2008, while the majority of the remaining $13 million
was related to newbuildings delivered during 2007 for which we have expensed a
full year of depreciation in 2008 compared to only part of the year in 2007.
General and administrative expenses for the mobile units segment increased from
$73 million in 2007 to $92 million in 2008. The increase is related to an
increase in geographical operations which require larger onshore
support.





Total
operating expenses for the tender rig segment increased from $169 million in
2007 to $216 million in 2008. Vessel and rig operating expenses increased in the
same period from $101 million to $134 million. The increase of $33 million is
primarily related to the new unit








35





T11,
which commenced drilling operations in the second quarter of 2008. Depreciation
and amortization amounted to 42 million in 2008, an increase of $3 million
compared to the preceding year. The increase is related to the delivery of
T11.





Total
operating expenses for the well services division increased from $286 million in
2007 to $425 million in 2008. The increase is related to a corresponding
increase in operating revenues. Depreciation and amortization increased from $9
million in 2007 to $19 million in 2008. Well Services has been involved in
several acquisitions during 2008. The acquired companies have owned a
significant amount of fixed assets that are depreciated based on a straight line
basis, which has contributed to the increase.





Interest
expense





Interest
expense increased from $113 million in 2007 to $130 million in 2008 as a result
of the increase in interest bearing debt used to finance new drilling units and
acquisitions, partly offset by the 1.8% reduction in the weighted average
interest rate payable in the year.  In addition to the interest
expense, interest costs incurred during the construction of newbuildings are
capitalized, and capitalized interest amounted to $153 million in 2008 compared
with $134 million in 2007.


Other
financial items





In
      US$millions
            
            2008
            
            
            2007
            
            
            ChangeInterest
      income
            
            
            31
            
            
            
            24
            
            
            
            +29
            %Share
      in results of associated companies
            
            
            15
            
            
            
            23
            
            
            
            -35
            %Gain
      on sale of associated companies
            
            
            150
            
            
            
            -
            
            
            
            n/aImpairment
      loss on marketable securities and investments in associated
      companies
            
            
            (615
            )
            
            
            -
            
            
            
            n/aGain
      / (loss) on derivative financial instruments
            
            
            (353
            )
            
            
            7
            
            
            
            n/aForeign
      exchange gain (loss)
            
            
            131
            
            
            
            (53
            )
            
            
            n/aOther
      financial items
            
            
            22
            
            
            
            10
            
            
            
            +120
            %Total
      other financial items
            
            
            (619
            )
            
            
            11
            
            
            
            n/a.





n/a –
percentage change has not been calculated as it is not considered to be
meaningful due to one off or exceptional items


Interest
income increased in 2008 as a result of increased levels of cash on deposit,
consisting mainly of restricted cash.





The share
in results of associated companies declined in 2008 due to the disposal during
the year of our interest in Apexindo and the liquidation of Lisme AS, a
Norwegian holding company in which we had a 44% interest, in 2007. The sale of
shares in Apexindo resulted in a gain on disposal of $150 million.





At
December 31, 2008, we beneficially owned shares, including share purchase
agreements, in Pride, Scorpion and SapuraCrest. At December 31, 2008, we
determined that the fair value of these investments was below their carrying
value and that there was little prospect for a recovery in values in 2009.
Accordingly, in 2008 we recognized an impairment charge of $615 million relating
to these investments.





We have
entered into interest rate swaps, forward exchange contracts and total return
swap agreements, or TRS, none of which is accounted for as hedge accounting.
Most of these arrangements were established in 2008 and the fair value of these
derivative financial instruments at December 31, 2008 is reflected in the
consolidated financial statements, resulting in fair value losses totaling $353
million. Of this total, $177 million arises from mark-to-market adjustments on
our interest rate swaps (notional principal $1.78 billion at December 31, 2008)
and $117 million from mark-to-market adjustments on our forward exchange
contracts (forward sales of $0.47 billion at December 31, 2008). The remaining
$59 million loss relates to a TRS agreement indexed to the market price of
4,500,000 of our common shares.





The
foreign exchange gain in 2008 mainly results from debt denominated in Norwegian
Kroner and the weakening of the Norwegian Kroner against the U.S.
Dollar.





Other
financial items consist of gains on the sale of marketable
securities.





Income
taxes





Income
taxes amounted to a net cost of $48 million in 2008. In 2007, income taxes
amounted to a net income of $78 million, mainly as a result of the restructuring
of several rig-owning companies, which resulted in a non-recurring tax benefit
of $75 million. For 2008, restructuring of rig ownership resulted in a
non-recurring tax benefit of $43 million compared to a benefit of $75 million
realized in 2007. The change in the Company's effective tax rate from a benefit
of approximately 20.2% in 2007 to a cost of approximately 48.5% in 2008 was
principally due to a higher portion of our income being generated in taxable
jurisdictions in 2008, a smaller benefit arising from the








36





restructuring
of the Company's rig-assets, and the nondeductible impairment loss on marketable
securities which offset the nontaxable gain on the disposal of Apexindo shares
earlier in the year. Impairment losses on marketable securities and gains and
losses on the sales of shares in associated companies are reported in nontaxable
jurisdictions. The Company's recent start up of jack up operations in Australia
contributed to increased current tax in 2008.





Significant
parts of the Company's income and costs are reported in nontaxable jurisdictions
such as Bermuda. The drilling rig operations are normally carried out in taxable
jurisdictions. In the tax jurisdictions where the Company operates the corporate
tax rate ranges from 16% to 35% (on earned income) and the deemed tax rate
varies from 5% to 8% of revenues. Further, losses in one tax jurisdiction may
not be offset against taxable income in other jurisdictions. Accordingly, our
effective tax rate may differ significantly from period to period depending on
the level of activity in and mix of each of the tax jurisdictions in which our
operations are conducted.





Gain
on issuance of shares by subsidiary





Our
subsidiary Seawell concluded share issuances in both 2008 and 2007, raising a
total of NOK190 million in 2008 and NOK275 million in 2007. We did not fully
participate in the 2008 share issuance and as a result our holding in Seawell
was reduced from 80% to 74%. We did not participate in the 2007 share issuance,
which resulted in a reduction in our holding from 100% to 80%. These share
issuances resulted in gains of $25 million and $50 million being recorded in
2008 and 2007, respectively. Due to a change in U.S. GAAP, any gains arising on
the future issue of shares by Seawell while it is our subsidiary will be
accounted for in shareholders equity and not in the statement of
operations.





B.
LIQUIDITY AND CAPITAL RESOURCES





We
operate in a capital intensive industry.  Our purchase of the units
acquired from Greenwich, discussed above in Item4.A – "History and Development
of the Company", was financed through a combination of equity raised and debt
issued. Our subsequent investment in newbuildings and our acquisition of other
companies have been financed through a combination of equity issuances, bond and
convertible bond offerings, and borrowings from commercial banks. Our liquidity
requirements relate to servicing our debt, funding investment in drilling units,
funding working capital requirements and maintaining adequate cash reserves to
mitigate the effects of fluctuations in operating cash flows. Most of our
contract and other revenues are received monthly in arrears, and most of our
operating costs are paid on a monthly basis.





Our
funding and treasury activities are conducted within corporate policies to
maximize returns while maintaining appropriate liquidity for our requirements.
Cash and cash equivalents are held mainly in U.S. Dollars, Norwegian Kroner,
Brazilian Real, Australian Dollars, Euros, Singapore Dollars and Pound
Sterling.





Our
short-term liquidity requirements relate to servicing our debt and funding
working capital requirements. Sources of liquidity include cash balances,
restricted cash balances, short-term investments, amounts available under
revolving credit facilities and contract and other revenues. We believe that
contract and other revenues will generate sufficient cash flow to fund our
anticipated debt service and working capital requirements for the short and
medium terms.





Our
long-term liquidity requirements include funding the equity portion of
investments in new drilling units, and repayment of long-term debt balances
including those relating to the following borrowings of the Company and its
consolidated subsidiaries:





Secured credit
facilities





- $185
million secured term loan facility due 2010


- $800
million secured term loan facility due 2013


- $100
million secured term loan facility due 2010


- $585
million secured term loan facility due 2012


- $1.50
billion secured credit facility due 2014


- NOK1.50
billion senior debt facility due 2012


- $100
million secured term loan facility due 2014


- $1.50
billion senior secured credit facility due 2014





Ship Finance secured credit
facilities





- $170
million secured term loan facility due 2013 (VIE)


- $700
million secured term loan facility due 2013 (VIE)


- $1.40
billion secured term loan facility due 2013 (VIE)






37





Unsecured
bonds


- $30
million unsecured bond due 2012


- NOK500
million unsecured bond due 2012


- NOK800
million unsecured bond due 2011


Convertible
bonds





- $1.00
billion 3.625% unsecured convertible bonds due 2012


- $500
million 4.875% unsecured convertible bonds due 2014





CIRR
loans





- NOK1.75
billion Commercial Interest Reference Rate ("CIRR") credit facilities due
2016


- NOK1.01
billion Commercial Interest Reference Rate ("CIRR") credit facilities due
2020





At
December 31, 2009, we had remaining contractual commitments relating to nine
newbuilding contracts totaling $1.68 billion (December 31, 2008: $2.89
billion).





As of
December 31, 2009, we had cash and cash equivalents totaling $602 million (2008:
$657 million), including $142 million of restricted cash (2008: $281 million).
In the year ended December 31, 2009, we generated cash from operations of $1.45
billion (2008: $0.40 billion), used $0.92 billion in investing activities (2008:
$3.85 billion) and used $0.45 billion in financing activities (2008: $2.06
billion).





During
the year ended December 312009 we paid cash dividends of $0.50 per common share,
or a total of $0.20 billion (2008: $0.69 billion).  A dividend of
$0.55 per common share totaling $0.22 billion was declared on February 25, 2010,
and paid on March 26, 2010.





To the
extent that we enter into significant further investments and/or newbuilding
commitments we expect that we will require additional issuances of equity and/or
new debt to meet our capital requirements. Without these new investments, we
believe that the cash that we generate from our operations will be sufficient to
cover our existing commitments to fund newbuildings, support our projected
growth including meeting our working capital needs, as well as permit us to pay
dividends to our stockholders and to pay our debt in accordance with the
existing maturity profile - see Item 8.A "Consolidated Statements and Other
Financial Information – Dividend Policy". A deterioration in our operating
performance, inability to obtain cost efficiencies, lack of success in adding
new contracts to our backlog, failure to complete our remaining newbuilding
program on time and within budget, as well as numerous other factors detailed
above in "Risk Factors" could limit our ability to further the growth of our
business, to meet working capital requirements, and to pay
dividends.





We plan
to pay our debt as it becomes due, although our leverage ratio will largely be
dependent upon our contract backlog and financial outlook. Any decision to
refinance debt maturing in future years will take the above factors into
consideration, and we believe it is likely that we will refinance a portion of
our debt.





Seadrill
Limited, as the parent company of its operating subsidiaries, is not a party to
any drilling contracts directly and is therefore dependent on receiving cash
distributions from its subsidiaries to meet its payment obligations. Cash
dividend payments are regularly transferred by the various subsidiaries. Surplus
cash held in subsidiaries is transferred to Seadrill Limited by intercompany
loans and/or dividend payments.


Borrowings





As of
December 31, 2009, we had total outstanding borrowings of $7.40 billion under
our credit facilities, at an average interest rate of 2.77%. Outstanding
borrowings at December 31, 2008, totaled $7.44 billion at an average interest
rate of 3.53%.





In
February 2005 Smedvig ASA ("Smedvig"), which we acquired in 2006, raised US$30.0
million through the issuance of a seven year bond which matures in February
2012. The bond bears quarterly interest of London Inter-Bank Offer Rate, or
LIBOR, plus a margin.





In July
2005 we entered into a $185 million secured term loan facility to partly fund
the acquisition of two jack-up rigs under construction. At December 31, 2009,
the outstanding balance was $45 million (2008: $72 million). The facility bears
interest at LIBOR plus a margin and is repayable over a term of five
years.





In August
2005 we entered into a $300 million secured loan facility with a syndicate of
banks. The facility was amended and increased in 2006 to $800
million.  At December 31, 2009, the outstanding balance was $725
million (2008: $668 million). The facility consists of two tranches with
differing interest rates and repayment schedules, and each tranche bears
interest at LIBOR plus a margin.  The final repayment of $368 million
is due in December 2013.








38





In
September 2005 we raised NOK500 million through the issuance of a seven year
bond, which matures in September 2012. The bond bears quarterly interest of
NIBOR (Norwegian Inter-Bank Offer Rate) plus a margin. At December 31, 2009, the
outstanding balance was $87 million (2008: $71 million).





In
October 2005 we entered into a $100 million secured term loan facility to partly
fund the acquisition of newbuilding jack-up rigs. At December 31, 2009, the
outstanding balance was $42 million (2008: $92 million). The facility bears
interest at LIBOR plus a margin and is repayable over a term of five
years.





In
December 2006 we entered into a $585 million secured term loan facility with a
syndicate of banks to partly fund the acquisition of eight tender rigs, which
have been pledged as security. At December 31, 2009, the outstanding balance was
$436 million (2008: $486 million). The facility bears interest at LIBOR plus a
margin and is repayable over a term of six years. At maturity a balloon payment
of $300 million is due.





In
February 2007, our fully consolidated VIE Rig Finance II Ltd (which is
wholly-owned by Ship Finance, a related party) entered into a $170 million
secured term loan facility with a syndicate of banks, in order to partly fund
the acquisition of the jack-up rig West Prospero. At December
31, 2009, the outstanding amount under the facility was $111 million (2008: $121
million). The facility bears interest at LIBOR plus a margin and is repayable
over a term of six years. The facility is secured by the assets of Rig Finance
II Ltd.





In June
2007 we entered into a $1.50 billion senior secured loan facility with a
syndicate of banks to partly fund the acquisition of four drilling rigs West Alpha, West Epsilon,
West Navigator and
West Venture,which
have beenpledged
as security. At December 31, 2009, the outstanding balance was $1.14 billion
(2008: $1.34 billion). The facility bears interest at LIBOR plus a margin and is
repayable over a term of seven years.  A final payment of $600 million
is due on maturity.


In
November 2007 we issued at par $1.00 billion of convertible bonds, the proceeds
of which were used to fund our construction program and for general corporate
purposes. Interest on the bonds is fixed at 3.625% per annum, payable
semi-annually in arrears. The bonds are convertible into Seadrill Limited common
shares by the holders at any time up to 10 banking days prior to November 8,
2012. The conversion price set at the time of issuance was $34.474 per share,
representing a 45% premium to the share price at the time. Since then, dividend
distributions have reduced the conversion price to $30.78. Unless previously
redeemed, converted or purchased and cancelled, the bonds mature in November
2012.





In
December 2007 our 73.8% subsidiary Seawell entered into a NOK1.50 billion
multi-tranche Senior Debt facility with a syndicate of banks to finance working
capital. At December 31, 2009, the amount outstanding under this facility was
NOK1.21 billion, equivalent to $211 million (2008: NOK1.42 billion equivalent to
$203 million). The facility bears interest at NIBOR plus a margin and is
repayable over a term of five years.





In April
2008 we entered into a $100 million secured term loan facility with two banks to
partly fund the acquisition of a tender rig. At December 31, 2009, the
outstanding amount on this facility was $86 million (2008: $97 million). The
facility bears interest at fixed rates and is repayable over a term of six
years. A final payment of $60 million is due on maturity.





In April
2008 we entered into a CIRR term loan for NOK850 million with Eksportfinans ASA,
the Norwegian export credit agency. The loan bears interest at a fixed rate of
4.56% and is repayable over a term of eight years. The outstanding balance at
December 31, 2009, was NOK750 million, equivalent to $121 million (2008: NOK800
million, equivalent to $114 million).





In June
2008 we entered into a CIRR term loan for NOK904 million with Eksportfinans ASA.
The loan bears fixed interest at a fixed rate of 4.15% and is repayable over a
term of eight years. The outstanding balance at December 31, 2009, was NOK744
million, equivalent to$129 million (December 31, 2008: NOK850 million,
equivalent to $121 million).





In July
2008 we entered into a CIRR term loan for NOK1.01 billion with Eksportfinans
ASA. The loan bears fixed interest at a fixed rate of 4.15% and is repayable
over a term of twelve years. The outstanding balance at December 31, 2009, was
NOK927 million, equivalent to $160 million (December 31, 2008: NOK1.01 billion,
equivalent to $144 million).





In July
2008 our fully consolidated VIE SFL West Polaris Limited (which is wholly-owned
by Ship Finance) entered into a $700 million secured term loan facility with a
syndicate of banks, in order to partly fund the acquisition of the newbuilding
drillship West Polaris.
At December 31, 2009, the outstanding balance under the facility was $619 (2008:
$688 million). The facility bears interest at LIBOR plus a margin and is
repayable over a term of five years. The facility is secured by the assets of
SFL West Polaris Limited.




In
September 2008 our fully consolidated VIE SFL Deepwater Ltd (which is
wholly-owned by Ship Finance) entered into a $1.40 billion secured term loan
facility with a syndicate of banks, in order to partly fund the acquisition of
the two semi-submersible rigs West Taurus and West Hercules.At December
31, 2009, the outstanding balance under the facility was $1.26 billion (2008:
$1.14 billion). The facility bears interest at LIBOR plus a margin and is
repayable over a term of five years. The facility is secured by the assets of
SFL Deepwater Ltd.






39





In June
2009 we entered into a $1.50 billion secured facility with a group of various
commercial lending institutions and export credit agencies. The loan is secured
by first priority mortgages on two ultra-deepwater semi-submersible drilling
rigs (West Aquarius and
West Sirius), one
deepwater drillship (West
Capella) and one jack-up drilling rig (West Ariel). The outstanding
balance at December 31, 2009, was $659 million, with $753 million still
available to draw down. The facility bears interest at LIBOR plus a margin and
is repayable over a term of five years.





In
September 2009 we issued at par $500 million of senior unsecured convertible
bonds, the proceeds of which are intended to be used for future growth. Interest
on the bonds is fixed at 4.875%, payable semi-annually in arrears. The bonds are
convertible into Seadrill Limited common shares at any time up to ten banking
days prior to September 29, 2014. The conversion price at the time of issuance
was $25.18 per share, representing a 35% premium to the share price at the time.
Since then, dividend distributions have reduced the conversion price to $23.97.
For accounting purposes $105 million has been allocated to the bond equity
component and $395 million to the bond liability component, due to the cash
settlement option stipulated in the bond agreement. Unless previously redeemed,
converted or purchased and cancelled, the bonds mature in September
2014.





In
October 2009 we issued a NOK800 million senior unsecured two year bond. The bond
bears interest at NIBOR plus a margin and the proceeds are for general corporate
purposes. At December 31, 2009, the outstanding balance was $134
million.





In the
year ended December 31, 2009 ,we repaid in full (i) a short-term bridging loan
($792 million outstanding at December 31 2008), (ii) the loan entered into by
our fully consolidated VIE Rig Finance Ltd to partly fund the acquisition of
West Ceres, which was
sold in July 2009 ($107 million outstanding at December 31, 2008) and (iii) two
floating rate bonds totaling NOK1.00 billion which matured ($144 million
outstanding at December 31, 2008).





In
connection with the above three CIRR fixed interest term loans totaling NOK2.37
billion, three collateral cash deposits equal to the total outstanding loan
balances have been established with commercial banks. The collateral cash
deposits are reduced in parallel with repayments of the CIRR loans and receive
fixed interest at the same rates as those paid on the CIRR loans. The collateral
cash deposits are classified as "restricted cash" on the balance sheet, and the
effect of these arrangements is that the CIRR loans have no effect on net
interest bearing debt.





In
addition to security provided to lenders in the form of pledged assets, which is
the case for all of our credit facilities and bank loans, agreements relating to
long-term debt generally contain financial covenants. The main financial
covenants contained in our loan agreements are as follows:





·
            Minimum
      liquidity requirements: to maintain cash and cash equivalents of at least
      $100 million within the group.·
            Interest
      coverage ratio: to maintain an EBITDA to interest expense ratio of
      2.5:1.·
            Current
      ratio: to maintain a current assets to current liabilities ratio of at
      least 1:1. Current assets are defined as book value less minimum
      liquidity, but including up to 20% of shares in listed companies of which
      we own 20% or more. Current liabilities are defined as book value less the
      current portion of long term debt.


·
            Equity
      ratio: to maintain a total equity to total assets ratio of at least 30%.
      Both equity and total assets are adjusted for the difference between book
      and market values of drilling units.·
            Leverage
      ratio: to maintain a ratio of net debt to EBITDA no greater than 4.5:1.
      Net debt is calculated as all interest bearing debt less cash and cash
      equivalents excluding minimum liquidity requirements.


For the
purposes of the above tests, EBITDA is defined as 12 months trailing earnings
before interest, taxation, depreciation and amortization.





The main
covenants for the Company's outstanding bonds are to maintain adjusted
shareholders' equity of at least $1.50 billion and a ratio of adjusted
shareholders' equity to total liabilities of at least 30% to 40%. Adjusted
shareholder's equity is book value of equity adjusted for the difference between
book and market values of drilling units.


.


We are in
compliance with all financial loan covenants as at December 31,
2009.  At December 31, 2009, three month U.S. Dollar LIBOR was 0.25%
(2008: 1.43%) and three month NIBOR was 2.19% (2008: 3.97%).





Derivatives





We use
financial instruments to reduce the risk associated with fluctuations in
interest and foreign exchange rates. Most of these agreements do not qualify for
hedge accounting, and for these any changes in the fair values of the swap
agreements are included in the Consolidated Statement of Operations under
"gain/(loss) on derivative financial instruments". Two of our fully-consolidated
VIEs have executed interest rate cash flow hedges in the form of interest rate
swaps. Movements in the fair value of these hedging swaps are reflected in
"Accumulated other comprehensive income (loss)."






40





At
December 31, 2009, the Company and its consolidated subsidiaries, including
VIEs, had entered into interest rate swap contracts with a combined outstanding
principal amount of $4.12 billion at rates between 2.055% per annum and 4.629%
per annum.  The overall effect of these swaps is to fix the interest
rate on $4.12 billion of floating rate debt at a weighted average interest rate
of 3.26% per annum. At December 31, 2009, our net exposure to short term
fluctuations in interest rates on our outstanding debt was $0.88 billion, based
on our total net interest bearing debt of $6.59 billion less the $4.12 billion
notional principal of our floating to fixed interest rate swaps, less the $1.59
billion in fixed interest loans.





Also at
December 31, 2009, we had entered into forward exchange contracts to sell
approximately $504 million in exchange for Norwegian Kroner and Singapore
Dollars between January 2010 and September 2012, at exchange rates ranging from
NOK5.71 to NOK6.40 per U.S. Dollar and from SGD1.39 to SGD1.42 per U.S.
Dollar.


In June
and July 2008 we entered into Total Return Swap ("TRS") agreements with a total
of 4,500,000 of our own common shares as the underlying security.  The
agreements were scheduled to expire in December 2008 and the reference prices
were in a range of NOK141.2 to NOK157.8 per share. In November 2008 these
contracts were terminated and we simultaneously entered into a new TRS agreement
with 4,500,000 of our common shares as underlying security, with an agreed
reference price of NOK56.70 per share and an expiration date in February 2009.
In February 2009, we entered into a new TRS agreement for the same number of
shares with expiration date in August 2009 and the new reference price was
NOK61.3 per share. In August 2009, we entered into a new TRS agreement for the
same number of shares with an expiration date in February 2010 and an agreed
reference price of NOK98.44 per share. In February 2010 these contracts were
settled and we simultaneously entered a new TRS agreement for 3,500,000 of our
common shares as underlying security with an agreed reference price of NOK125.70
per share and an expiration date in February 2011. The settlement amount for the
TRS transaction will be (A) the market value of the shares at the date of
settlement plus all dividends paid by the Company between entering into and
settling the contract, less (B) the reference price of the shares agreed at the
inception of the contract plus the counterparty's financing costs. Settlement
will be either a payment from or to the counterparty, depending on whether (A)
is more or less than (B). There is no obligation for us to purchase any shares
under the agreement and this arrangement has been recorded as a derivative
transaction, with the fair value of the TRS recognized as an asset or liability
as appropriate, and changes in fair values recognized in the consolidated
statement of operations.





In
addition to the above TRS transactions, we may from time to time enter into
short-term TRS arrangements relating to securities in other companies. The above
TRS indexed to our own common shares was our only TRS agreement as at December
31, 2009.





Equity





At
December 31, 2009, 2008 and 2007, our issued and fully paid share capital
amounted to 399,133,216 common shares of par value $2.00 each, totaling $798
million. In 2007, we had two issuances of equity totaling 16 million new common
shares for total proceeds of approximately $303 million. We had no issuances of
equity in 2008 and 2009.





At
December 31, 2009, we were holding 110,200 of our common shares as treasury
shares (2008: 717,800; 2007: 608,700) and our net outstanding share capital
amounted to $798 million (2008: $797 million; 2007: $797 million). A share
repurchase program was approved by the Board in 2007, authorizing us to buy back
shares which may be either cancelled, or held as treasury shares to meet our
obligations relating to our share option scheme. Under the program we purchased
600,000 shares in the year ended December 31, 2008, and 950,000 shares in the
year ended December 31, 2007. No shares were purchased in the year ended
December 31, 2009. As of December 31, 2009, we have not cancelled any shares and
have used 1,439,800 of them to meet our share option scheme
obligations.





In May
2005 a general meeting of the Company approved authorizing the Board of
Directors to establish and maintain an employee share option scheme, or the
Option Scheme, in order to encourage the holding of shares in Seadrill by
individuals including directors, officers and employees of Seadrill and its
subsidiaries.  The Board of Directors has made a number of grants
pursuant to rules established to implement the Option Scheme. As of December 31,
2009, we have granted 8,340,667 options, of which 6,199,833 remain outstanding.
The fair value cost of options granted is recognized in the statement of
operations as an expense, with a corresponding amount credited to additional
paid in capital (see Note 28 to the Consolidated Financial Statements). The
additional paid-in capital arising from share options was $16 million in the
year ended December 31, 2009 (2008: $15 million; 2007: $15
million).


As at
December 31, 2009,our total additional paid-in capital amounted to $2.12 billion
(2008: $1.99 billion; 2007: $1.98 billion), of which $1.96 billion arises from
shares issued at a premium, with the remaining balance attributable to the
Option Scheme, purchases and sales of treasury shares and the equity component
of the 4.875% convertible bond.





As at
December 31, 2009, we were party to a TRS agreement indexed to 4,500,000 of our
shares, whereby we are exposed to movements in the price of our shares (see
"Derivatives" above). In February 2010 the TRS agreement was settled and we
entered into a new TRS agreement indexed to 3,500,000 of our
shares.






41





Since
January 1, 2010, we have issued 13,155,000 new common shares for total proceeds
of approximately $323 million, which will be used to partly finance the
potential acquisitions of the CJ70 design jack-up rig and further investment in
Scorpion (see Item 5.F "Contractual Obligations" below) and general
purposes.





C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.





We do not
undertake any significant expenditure on research and development, and have no
significant interests in patents or licenses.





D.
TREND INFORMATION





The
slowdown in the world economy following the credit crisis in the latter part of
2008 adversely affected activity levels in most areas of the offshore drilling
industry. Although oil and gas prices increased significantly through 2009, oil
companies retain a cautious attitude  regarding the sustainability of
the short-term price recovery. As such, and in spite of the fact that most oil
companies express confidence in the long-term outlook for their business,
uncertainty persists surrounding investment in exploration and production
activities, resulting in postponement of drilling activities.





The area
of the market and type of rig most impacted by the drop in activity has been
benign environment jack-up rigs, where a significant number of units were
stacked in the Gulf of Mexico, Africa and Southeast Asia regions. The nature of
the jack-up market is that drilling assignments generally have a duration
lasting from three to twelve months. The wells that are drilled are often
tiebacks to existing infrastructure, which in many cases implies a higher
break-even oil price for marginal projects. Furthermore, the demand side also
consists of smaller operators, who are more dependent on funding through the
financial markets. As a result, the market for benign environment jack-ups was
adversely impacted by the uncertainty regarding future oil and gas prices and
challenging financial markets. There have been, however, positive signs over the
last few months in the form of increased activity from oil companies, with core
demand being focused on high specification and modern assets. This has resulted
in improved market conditions for new high specification jack-up rigs, which has
positively impacted dayrates for such equipment, although demand for older
jack-ups has remained weak with an uncertain near term outlook.





The
market for dynamically positioned deepwater units has been less affected, due to
the limited availability of such rigs in the short term and the continued
long-term focus on this area of activity by super majors and national oil
companies. Although there were fewer fixtures in 2009 compared to 2008, those
that were announced, including sublets between oil companies, were at dayrates
of approximately $500,000, which is relatively high by historical standards. In
the first quarter 2010, we have seen market rates decreasing to around $450,000
per day. We believe that the long-term outlook for dynamically positioned
deepwater rigs remains promising, due to expected strong demand, particularly in
Brazil, West Africa, and the U.S. and Mexican Gulf of Mexico. However, in the
near term we would not be surprised if the market was presented with some weak
fixtures from smaller offshore drilling companies with short-term availability,
due to financial strain and/or lack of operational track record in deep
water.





The
drop in shallow water activity, that severely affected the market for jack-up
rigs, also adversely affected the market for tender rigs.  Like
jack-ups, tender rigs that have come off contract have been warm stacked due to
oil companies postponing drilling activity in response to the uncertainty
surrounding the direction of oil and gas prices. However, market enquiries from
oil companies in 2010 suggest that demand is picking up, reinforcing what we
believe is an attractive medium-term outlook for tender rigs. We have so far
this year secured employment for the newbuild tender rig T12 for a one year assignment
in Thailand. We believe that the market will continue to improve and offer
opportunities to build additional order backlog and earnings visibility for this
asset class.





E.
OFF BALANCE SHEET ARRANGEMENTS





At
December 31, 2009, as described above, we were party to a TRS agreement indexed
to our own common shares. The fair value of this position as at December 31,
2009, is reflected in the Consolidated Financial Statements included in Item 18
of this Annual Report.





At
December 31, 2008, in addition to the TRS agreement indexed to our own shares,
we had forward purchase contracts for 16,300,000 shares in Pride. The fair
values of this position and the TRS agreement as at December 31, 2008, are
reflected in the Consolidated Financial Statements included in Item 18 of this
Annual Report. The forward purchase contracts for shares in Pride became
effective in July 2009, and the shares are included in our Consolidated Balance
Sheet as at December 31, 2009. We were not party to any other material off
balance sheet arrangements at December 31, 2009, and December 31,
2008.






42


F.
CONTRACTUAL OBLIGATIONS





At
December 31, 2009, we had the following contractual obligations and
commitments:





Payment
      due by period(In
      US$millions)
            
            Less
      than
              1
      year
            
            
            1 –
      3
              years
            
            
            3 –
      5
              years
            
            
            After
              5
      years
            
            
            Total3.625%
      convertible bonds due 2012
            
            
            -
            
            
            
            1,000
            
            
            
            -
            
            
            
            -
            
            
            
            1,0004.875%
      convertible bonds due 2014 (1)
            
            
            -
            
            
            
            -
            
            
            
            500
            
            
            
            -
            
            
            
            500Interest
      bearing debt
            
            
            774
            
            
            
            1,961
            
            
            
            3,103
            
            
            
            159
            
            
            
            5,997Total
      debt repayments (1)
            
            
            774
            
            
            
            2,961
            
            
            
            3,603
            
            
            
            159
            
            
            
            7,497Total
      interest payments (2)
            
            
            321
            
            
            
            579
            
            
            
            218
            
            
            
            11
            
            
            
            1,129Accrued
      pension liabilities
            
            
            6
            
            
            
            11
            
            
            
            14
            
            
            
            7
            
            
            
            38Other
      non-current liabilities
            
            
            7
            
            
            
            15
            
            
            
            16
            
            
            
            -
            
            
            
            38Total
      operating lease obligations
            
            
            20
            
            
            
            34
            
            
            
            29
            
            
            
            30
            
            
            
            113Total
      drilling unit purchases (3)
            
            
            1,175
            
            
            
            503
            
            
            
            -
            
            
            
            -
            
            
            
            1,678Total
      contractual cash obligations
            
            
            2,303
            
            
            
            4,103
            
            
            
            3,880
            
            
            
            207
            
            
            
            10,493




(1) In
September 2009 we issued $500 million of 4.875% convertible bonds due 2014. Due
to the hybrid nature of this financial instrument, for accounting purposes the
liability is divided into $395 million of debt and $105 million of equity. The
above contractual obligations assume that none of the bonds are converted into
common shares and that the full $500 million is repayable in 2014. Accordingly,
total debt repayments shown above exceed by $101million the interest bearing
debt shown in the consolidated balance sheet as at December 31,
2009.





(2)
Interest payments are based on the existing borrowings of the Company and its
consolidated subsidiaries. It is assumed that no refinancing of existing loans
takes place and that there is no repayment on revolving credit facilities.
Interest has been calculated using the US$Yield Curve published by Reuters, plus
agreed margins for each loan facility. The effects of interest rate swaps have
been included in the calculations.





(3)
Drilling unit purchase commitments relate to three jack-up rigs ($454 million),
three tender rigs ($143 million), two semi-submersible rigs ($781 million) and
one drillship ($300 million). We have an option not to take delivery of one of
the jack-up rigs, which if exercised would reduce the above commitments by $184
million. In April 2010 we announced that we have entered into an option
agreement to buy a CJ70 design harsh environment jack-up rig from the Jurong
shipyard. We intend to exercise the option, which will increase the above
commitments by $354 million.





(4) In
April 2010 we announced that we plan to make an offer for the outstanding shares
in Scorpion which we do not already own. The planned offer is triggered by the
Oslo Stock Exchange Mandatory Offer Rules, following our acquisition in April
2010 of shares in Scorpion at a price of NOK36.00 per share, which increased our
shareholding in Scorpion to 40.0% of its issued share capital. If the offer is
made at the price of NOK36.00 per share and is accepted by all of holders of the
outstanding shares, the cost of acquiring the remaining shares in Scorpion will
amount to approximately $330 million.





(5) The
potential acquisitions of the CJ70 design jack-up rig and further investment in
Scorpion will be partly financed by the private placement announced on April 12,
2010, of 12,500,000 common shares for gross proceeds of approximately $322
million. We are in the process of securing the necessary debt finance for the
remainder of the investments.





G.
SAFE HARBOR





See
section entitled "Forward Looking Statements" in this Annual
Report.





ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES





A.
DIRECTORS AND SENIOR MANAGEMENT





The
following table sets forth information regarding our directors and officers, and
also certain key employees within our operating subsidiaries, who are
responsible for overseeing the management of our business.





Name
            Age
            PositionJohn
      Fredriksen
            65
            President,
      Director and Chairman of the BoardTor
      Olav Trøim
            47
            Vice
      President and DirectorKate
      Blankenship
            45
            Director
      and Audit Committee memberKjell
      E. Jacobsen
            53
            DirectorKathrine
      Fredriksen
            26
            DirectorGeorgina
      Sousa
            59
            Company
      SecretaryAlf
      C. Thorkildsen
            53
            Chief
      Executive Officer, Interim Chief Financial Officer and President, Seadrill
      Management ASPer
      Wullf
            50
            Chief
      Operating Officer and Executive Vice President, Seadrill Management
      ASTim
      Juran
            49
            Executive
      Vice President Deepwater Western HemisphereSvend
      Anton Maier
            45
            Vice
      President Deepwater Eastern HemisphereSveinung
      Lofthus
            49
            Senior
      Vice President EuropeIan
      Shearer
            48
            Senior
      Vice President Asia Pacific Jack-upsAlf
      Ragnar Løvdal
            52
            Senior
      Vice President Tender RigsThorleif
      Egeli
            46
            Chief
      Executive Officer, Seawell Management
AS




43





Certain
biographical information about each of our directors, executive officers and key
officers is set forth below.





John Fredriksen has served as
Chairman of the Board, President and a director of the Company since its
inception in May 2005. Mr. Fredriksen has established trusts for the benefit of
his immediate family which control Hemen, our largest shareholder. Mr.
Fredriksen is Chairman, President, Chief Executive Officer and a director of a
related party Frontline, a Bermuda company listed on the NYSE, the Oslo Stock
Exchange and the London Stock Exchange. He is also a director of a related
party, Golar LNG Limited, or Golar, a Bermuda company listed on the Nasdaq
Global Market and the Oslo Stock Exchange whose principal shareholder is World
Shipholding Limited, a company indirectly influenced by trusts established by
Mr. John Fredriksen for the benefit of his immediate family. He is also a
director of a related party Golden Ocean Group Limited, or Golden Ocean, a
Bermuda company publicly on the Oslo Stock Exchange whose principal shareholder
is Hemen.


Tor Olav Trøim has served as
Vice-President and a director of the Company since its inception in May 2005.
Mr. Trøim graduated as M.Sc Naval Architect from the University of Trondheim,
Norway in 1985. His careers include Equity Portfolio Manager with Storebrand ASA
(1987-1990), and Chief Executive Officer for the Norwegian Oil Company DNO AS
(1992-1995). Mr. Trøim serves as a director and Vice President of Golar, and as
a director of three Oslo Stock Exchange listed companies, Golden Ocean, Aktiv
Kapital ASA and Marine Harvest ASA. He served as a director of Frontline from
November 1997 until February 2008.  Mr. Trøim served as a director of
Seatankers Management from 1995 until June 2009.  He also has acted as
Chief Executive Officer for Knightsbridge Tankers Limited, a Bermuda company
listed on the Nasdaq Global Select Market, until September 2007 and for Golar
until April 2006.





Kate Blankenship has served as
a director of the Company since its inception in May 2005. Mrs. Blankenship has
also served as a director of Frontline since 2003. Mrs. Blankenship joined
Frontline in 1994 and served as its Chief Accounting Officer and Secretary until
October 2005. Mrs. Blankenship has been a director of Ship Finance since October
2003. Mrs. Blankenship has been a director of Independent Tankers Corporation
Limited since February 2008, Golar since July 2003 and Golden Ocean since
November 2004. Mrs. Blankenship served as Chief Financial Officer of
Knightsbridge Tankers Limited from April 2000 to September 2007 and its
Secretary from December 2000 to March 2007. She is a member of the Institute of
Chartered Accountants in England and Wales.





Kjell E. Jacobsen has served
as a director of the Company since May 2008, when he was appointed to fill a
casual vacancy on our board of directors. Mr. Jacobsen was Chief Executive
Officer of Seadrill Management AS from 2006 until 2008. From 2002 to 2006, Mr.
Jacobsen was the Chief Executive Officer of the Norwegian offshore drilling
contractor, Smedvig. Between 1991 and 2002, Mr. Jacobsen held several senior
positions, including his appointment as managing director of the mobile units of
Smedvig. From 1981 to 1991, Mr. Jacobsen worked for Statoil and Citibank in both
Oslo and London. Mr. Jacobsen graduated from the Norwegian Naval Academy in 1976
and from the Norwegian School of Economics and Business Administration in
1981.





Kathrine Fredriksen has served
as a director of the Company since September 2008. Ms. Fredriksen has also
served as a director of Frontline and Golar since February 2008. She graduated
from Wang Handels Gymnas in Norway and studied at the European Business School
in London. Ms. Fredriksen is the daughter of Mr. John Fredriksen, our President
and Chairman.





Georgina Sousa has served as
Company Secretary of the Company since February 2006. She is currently Head of
Corporate Administration for Frontline.  Until January 2007, she was
Vice-President-Corporate Services of Consolidated Services Limited, a Bermuda
Management Company, having joined the firm in 1993 as Manager of Corporate
Administration.  From 1976 to 1982 she was employed by the Bermuda law
firm of Appleby, Spurling & Kempe as a Company Secretary and from 1982 to
1993 she was employed by the Bermuda law firm of Cox & Wilkinson as Senior
Company Secretary.






44





Alf C. Thorkildsen was
appointed Chief Executive Officer and President of Seadrill Management AS in
June 2008. He is also acting as Interim Chief Financial Officer of Seadrill
Management AS from April 2010 until October 2010, when a newly appointed Chief
Financial Officer is scheduled to take up the position.  From 2002 to
2006, Mr. Thorkildsen was the Chief Financial Officer in the offshore drilling
contractor Smedvig, and following the acquisition of Smedvig by Seadrill Mr
Thorkildsen served as the Chief Operating Officer of Seadrill Management AS
until June 2008. Prior to joining Smedvig Mr. Thorkildsen worked for more than
20 years at Royal Dutch Shell plc, or Shell, in various senior positions. Mr.
Thorkildsen graduated from the Norwegian School of Business Administration with
a degree in economics and from Arizona State University with a Masters of
Business Administration.





Per Wullf has served as the
Chief Operating Officer and Executive Vice President of Seadrill Management AS
since February 2009. Mr. Wullf has more than 28 years of experience in the
international offshore and onshore drilling industry with A.P. Moller - Maersk
A/S, serving as Managing Director for Maersk Drilling Norge AS from 2006 to
2009.





Tim Juran has served as the
Executive Vice President, Deepwater Western Hemisphere since January 2007. Mr.
Juran has more than 28 years of experience in the international offshore and
onshore drilling industry, including several senior positions in Transocean Ltd.
and Reading & Bates Drilling Company. Mr. Juran graduated from the
University of Wisconsin - Platteville with a bachelor's degree in mining
engineering.





Svend Anton Maier has served
as the Vice President, Deepwater Eastern Hemisphere since February 2007. Mr.
Maier has more than twenty years of experience in the offshore drilling
industry. Prior to joining us, Mr. Maier held several senior positions in
Transocean Ltd., including country manager in Nigeria, Equatorial Guinea and
Gabon. Mr. Maier graduated from the Maritime Institute of Tønsberg with a degree
in marine engineering.





Sveinung Lofthus has served as
the Senior Vice President, Europe since 2005. Mr. Lofthus has more than 20 years
experience in the international offshore and onshore drilling industry,
including project and rig management positions in Smedvig. Mr. Lofthus graduated
from the University of Stavanger with a degree in petroleum
engineering.





Ian Shearer was appointed the
Senior Vice President, Australasia Jack-ups in 2007. From 2004 to 2007 Mr.
Shearer was responsible for our platform drilling services in the U.K. Mr.
Shearer has 20 years of experience in the drilling industry, including several
senior positions with Smedvig. He graduated from the University of Aberdeen with
a bachelor's degree in mechanical engineering and from Robert Gordon's Institute
of Technology, Aberdeen with an M.Sc in offshore engineering.





Alf Ragnar Løvdal was
appointed Senior Vice President, Tender Rigs in April 2009. He was previously
CEO in Seawell Management AS. Mr. Løvdal has 30 years of experience in the oil
and gas industry, including 20 years responsibility for the well services
business in the drilling contractor Smedvig.  Before joining Smedvig,
Mr. Løvdal held various positions in different oil service companies, including
five years of offshore field experience with Schlumberger. He has a degree in
mechanical engineering from Horten Engineering Academy in Norway.


Thorleif Egeli was appointed
Chief Executive Officer of Seawell Management AS in October 2009. Mr. Egeli has
more than 16 years of experience in the oil services industry, including his
most recent position as Vice President, Schlumberger North America. He graduated
from the Norwegian Technical University with a degree in mechanical engineering
and has an MBA from the Erasmus School of Management, Rotterdam.





B.
COMPENSATION





During
the year ended December 31, 2009, we paid our directors and executive officers
aggregate compensation of $8.3 million, including compensation in the form of
options exercised. In addition we have incurred compensation expense in the
aggregate amount of $0.1 million for their pension and retirement benefits.
These amounts include compensation of $1.5 million paid to the CEO, and $0.02
million expensed for the CEO's pension and retirement benefits.





In the
event the Chief Executive Officer resigns at the request of the board of
directors, he will receive compensation equal to his salary for two
years.





In
addition to cash compensation, during 2009 we also recognized an expense of $5.7
million relating to stock options granted in 2006, 2007, 2008 and 2009 to
certain of our directors and employees. The options vest over a three year
period, with the first tranche vesting in May 2007, and they expire between
September 2011 and May 2014. The exercise price of the options at December 31,
2009, was in the range $2.23 to NOK122.73 (equivalent to $21.29) per share, and
for most options shall be reduced by the amount of any future dividends declared
with respect to the common shares.





45





C.
BOARD PRACTICES





Our board
of directors is elected annually by a vote of a majority of the common shares
represented at the meeting at which one or more holders of one-third of our
outstanding common shares constitutes a quorum. In addition, the maximum and
minimum number of directors is determined by our shareholders at the annual
general meeting, but no less than two directors shall serve at any given time.
We currently have a maximum number of directors of eight. Each director shall
hold office until the next annual general meeting following his or her election
or until his or her successor is elected.





Our board
of directors currently consists of five directors. Three of our directors, John
Fredriksen, Kathrine Fredriksen and Tor Olav Trøim may be deemed affiliated with
our largest shareholder, Hemen. One of our directors, Kate Blankenship, is
independent pursuant to Rule 10A-3 of the Securities and Exchange Commission,
but is not considered independent pursuant to the rules of the Oslo Stock
Exchange. Our current board of directors does not follow the recommendation of
the Norwegian Code of Practice for Corporate Governance of two independent
directors.





We
currently have an audit committee, which is responsible for overseeing the
quality and integrity of our financial statements and its accounting, auditing
and financial reporting practices, our compliance with legal and regulatory
requirements, the independent auditor's qualifications, independence and
performance and our internal audit function. Our audit committee consists of
Mrs. Blankenship.


In
lieu of a compensation committee comprised of independent directors, our Board
of Directors is responsible for establishing the executive officers'
compensation and benefits.  In lieu of a nomination committee
comprised of independent directors, our Board of Directors is responsible for
identifying and recommending potential candidates to become board members and
recommending directors for appointment to board committees.





There are
no service contracts between us and any of our Directors providing for benefits
upon termination of their employment or service.





D.
EMPLOYEES





As at
April 26, 2010, we have approximately 7,600 employees, including approximately
1,100 contracted-in staff.





Some of
our employees and our contracted labor, most of whom work in Brazil, Nigeria,
Norway and the U.K., are represented by collective bargaining agreements. As
part of the legal obligations in some of these agreements, we are required to
contribute certain amounts to retirement funds and pension plans and have
restricted ability to dismiss employees. In addition, many of these represented
individuals are working under agreements that are subject to salary negotiation.
These negotiations could result in higher personnel costs, other increased costs
or increased operating restrictions that could adversely affect our financial
performance.





We
consider our relationships with the various unions as stable, productive and
professional. At present, there are no ongoing negotiations or outstanding
issues.





Total employees (including contracted-in staff
      )
            
            December 31, 2007
            
            
            December 31, 2008
            
            
            December 31, 2009
            
            
            April 26,
              2010Operating
      segments:Mobile
      units
            
            
            1,700
            
            
            
            2,700
            
            
            
            3,100
            
            
            
            3,100Tender
      rigs
            
            
            1,500
            
            
            
            1,700
            
            
            
            1,800
            
            
            
            1,800Well
      services
            
            
            1,500
            
            
            
            2,400
            
            
            
            2,600
            
            
            
            2,600Corporate
            
            
            100
            
            
            
            100
            
            
            
            100
            
            
            
            100Total
      employees
            
            
            4,800
            
            
            
            6,900
            
            
            
            7,600
            
            
            
            7,600Geographical
      location:Norway
            
            
            2,300
            
            
            
            2,600
            
            
            
            2,800
            
            
            
            2,800Rest
      of Europe
            
            
            300
            
            
            
            900
            
            
            
            800
            
            
            
            800USA
            
            
            -
            
            
            
            300
            
            
            
            300
            
            
            
            250South
      America
            
            
            -
            
            
            
            300
            
            
            
            700
            
            
            
            800Asia
      and Australia
            
            
            2,100
            
            
            
            2,600
            
            
            
            2,500
            
            
            
            2450Africa
            
            
            100
            
            
            
            200
            
            
            
            500
            
            
            
            500Total
      employees
            
            
            4,800
            
            
            
            6,900
            
            
            
            7,600
            
            
            
            7,600





The
number of employees has increased over the past three years as a result of the
increase in our operating fleet of drilling units and business
acquisitions.






46





E.
SHARE OWNERSHIP





The table
below shows the number of common shares beneficially owned and the percentage
owned of our outstanding common shares for our directors, officers and key
employees as of April 26, 2010, and the percentage held of the total common
shares in issue. Also shown are their interests in share options awarded to them
under the Option Scheme which was approved by the Company in May 2005. The
subscription price for options granted under the scheme will normally be reduced
by the amount of all dividends declared by the Company in the period from the
date of grant until the date the option is exercised.





Director
      or Key Employee
            Beneficial
      Interest in Common Shares of
              $2.00
      each
            
            Interest
      in OptionsNumber
      of shares
            %
            
            Total
              number
      of options
            Number
      of options
              vested
            Exercise
      price
            Expiry
      dateJohn
      Fredriksen (2)
            (2)
            (2)
            
            -
            -
            -
            -Tor
      Olav Trøim (3)
            635,000
            (1)
            
            -
            -
            -
            -Kate
      Blankenship
            41,000
            (1)
            
            20,000
            -
            NOK
      84.83
            May
      2014Kjell
      E. Jacobsen
            -
            (1)
            
            175,000
              100,000
            175,000
              33,333
            NOK
      86.60
              NOK
      116.72
            December
      2011
              January
      2014Kathrine
      Fredriksen
            -
            (1)
            
            -
            -
            -
            -Georgina
      Sousa
            -
            (1)
            
            -
            -
            -
            -Alf
      C. Thorkildsen
            20,000
            (1)
            
            275,000
              325,000
            275,000
              -
            NOK
      86.60
              NOK
      84.83
            December
      2011
              May
      2014Per
      Wullf
            -
            (1)
            
            150,000
            -
            NOK
      84.83
            May
      2014Tim
      Juran
            855
            (1)
            
            150,000
              140,000
            150,000
              -
            NOK
      98.63
              NOK
      104.64
            September
      2011
              May
      2014Svend
      Anton. Maier
            -
            (1)
            
            12,500
              25,000
              60,000
            12,500
              16,667
              -
            NOK
      83.81
              NOK
      114.23
              NOK
      84.83
            September
      2011
              September
      2011
              May
      2014Sveinung
      Lofthus
            2,000
            (1)
            
            100,000
              60,000
            100,000
              -
            NOK
      72.73
              NOK
      84.83
            September
      2011
              May
      2014Ian
      Shearer
            -
            (1)
            
            40,000
              60,000
            3,333
              -
            NOK
      114.23
              NOK84.83
            September
      2011
              May
      2014Alf
      Ragnar Løvdal
            -
            (1)
            
            40,000
            
            NOK
      90.83
            May
      2014Thorleif
      Egeli
            800
            (1)
            
            -
            -
            -
            -





(1)
less than one percent





(2) Hemen
Holding Ltd, or Hemen, is a Cyprus holding company, the shares of which are held
in trusts established by Mr. John Fredriksen for the benefit of his immediate
family. Mr. Fredriksen disclaims beneficial ownership of the 133,097,583 shares
of our common stock held by Hemen, except to the extent of his voting and
dispositive interest in such shares of common stock. Mr. Fredriksen has no
pecuniary interest in the shares held by Hemen. In addition, to the holdings of
shares and options contained in the table above, as of April 26, 2010, Hemen is
party to separate TRS agreements relating to 3,900,000 of our common
shares.





(3) In
addition to the holdings of shares and options contained in the table above, as
of April 26, 2010, Drew Investment Ltd., a company controlled by Tor Olav Trøim,
is party to separate TRS agreements relating to 400,000 of our common
shares.







47




ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS


A.
MAJOR SHAREHOLDERS





The
following table presents certain information as at April 6, 2010, regarding the
ownership of our common shares with respect to each shareholder whom we know to
beneficially own more than five percent of our outstanding common
shares:





Common
      Shares HeldShareholder
            
            Number
            
            
            %Hemen
      (1)
            
            
            133,097,583
            
            
            
            32.35
            %Folketrygdfondet
      (2)
            
            
            27,001,030
            
            
            
            6.56
            %Fidelity
      Management and Research Company (3)
            
            
            20,501,728
            
            
            
            5.10
            %Wellington
      Management Company LLP (3)
            
            
            21,846,224
            
            
            
            5.47
            %





(1)
Hemen, a Cyprus holding company, the shares of which are held in trusts
established by Mr. John Fredriksen for the benefit of his immediate
family.





(2)
Folketrygdfondet manages the Government Pension Fund of Norway on behalf of the
Norwegian Ministry of Finance.





(3) Share
ownership information is based on Norwegian Securities Regulation notification
statements, available on www.newsweb.no.





As of
April 26, 2010, the Company had a single shareholder of record in the United
States, in whose name all shareholdings in the United States are recorded. We
had a total of 411,443,816 common shares outstanding as of April 26,
2010.





Our major
shareholders have the same voting rights as our other shareholders. No
corporation or foreign government owns more than 50% of our outstanding common
shares. We are not aware of any arrangements, the operation of which may at a
subsequent date result in a change in control of Seadrill.





B.
RELATED PARTY TRANSACTIONS





The
Company was formed on March 10, 2005, and its shares commenced trading on the
Oslo Stock Exchange in November 2005. Its shares commenced trading on the New
York Stock Exchange in April 2010. Since its formation, the Company's largest
shareholder has been Hemen, which currently holds approximately 32% of our
shares.  Under the mandatory offer rules of the Oslo Stock Exchange
described in Item 4.A "History and Development of the Company – Summary of Oslo
Stock Exchange Mandatory Offer Rules",  if Hemen were to acquire more
than 1/3 of our shares, it could trigger the mandatory offer
rules.  Hemen has not advised us of any intention to do
so.





The
Company transacts business with the following related parties, being companies
in which Hemen and companies associated with Hemen have a significant
interest:





·
            Ship
      Finance International Limited ("Ship
Finance")


·
            Metrogas
      Holdings Inc ("Metrogas")


·
            Scorpion
      Offshore Ltd ("Scorpion")


·
            Frontline
      Management (Bermuda) Limited
("Frontline")





In July
2006 we entered into a sale and leaseback agreement with Ship Finance, a company
listed on the New York Stock Exchange in which Hemen indirectly controls
approximately 43% of the outstanding shares. Under the agreement we sold the
jack-up rig West Ceres
to Rig Finance Ltd, or Rig Finance, a wholly-owned subsidiary of Ship Finance,
for a total consideration of $210 million. Upon sale the rig was immediately
leased back to us for a period of 15 years, with the Company having fixed price
purchase options after three, five, seven, 10, 12 and 15 years. In July 2009, we
exercised our option to repurchase West Ceres from Rig Finance
at the option price of US$136 million. Lease payments to Rig Finance amounted to
$20 million in 2009 (2008: $41 million).





In
January 2007 we entered into a sale and leaseback agreement with Ship Finance,
under which we sold the jack-up rig West Prospero to Rig Finance
II Ltd, or Rig Finance II, a wholly-owned subsidiary of Ship Finance, for a
total consideration of $210 million. Upon sale the rig was immediately leased
back to us for a period of 15 years, with the Company having fixed price
purchase options after three, five, seven, 10, 12 and 15 years. Lease payments
to Rig Finance II amounted to $30 million in 2009 (2008: $46
million).





In May
2008 we entered into a sale and leaseback agreement with Ship Finance, under
which the Company would sell the drillship West Polaris to SFL West
Polaris, a wholly-owned subsidiary of Ship Finance, for a total consideration of
$845 million upon completion of construction. Upon delivery the drillship was
leased back to us for a period of 15 years, with the Company having fixed price
purchase options after four, six, eight, 10, 12 and 15 years. In addition, Ship
Finance has a right to sell the drillship to us after 15 years at a fixed price.
Lease payments to SFL West Polaris amounted to $127 million in 2009 (2008: $37
million).






48





In
September 2008 we entered into a sale and leaseback agreement with Ship Finance,
under which we sold two newbuilding semi-submersible rigs West HerculesandWest Taurus to SFL Deepwater
Ltd, or SFL Deepwater, a wholly-owned subsidiary of Ship Finance, for a total
consideration of $1.70 billion. Upon delivery the rigs were immediately leased
back to us for a period of 15 years, with the Company having fixed price
purchase options for West
Hercules after three, six, eight, 10, and 12 years and for West Taurus after six, eight,
10 and 12 years. In addition, we have fixed price obligations to purchase the
rigs after 15 years. Lease payments to SFL Deepwater amounted to $224 million in
2009 (2008: $29 million).


We
consolidate the above four Ship Finance VIEs, Rig Finance, Rig Finance II, SFL
West Polaris and SFL Deepwater,  as it is has been determined that we
are the primary beneficiary of the risks and rewards connected with the
ownership of the units and the lease contracts. This has the effect that the
Ship Finance equity in the VIEs, including their earnings, is attributable to
non-controlling interests. Following our repurchase of West Ceresin July 2009, Rig Finance will no longer
be a consolidated VIE.


In
November 2008, the Company granted Ship Finance an unsecured short-term credit
facility of $115 million. Ship Finance repaid $25 million in the first quarter
of 2009 and the balance of $90 million was sold to Metrogas, a company
indirectly controlled by trusts established by Mr. John Fredriksen for the
benefit of his immediate family. In November 2009, the loan of $90 million was
assigned back to the Company. At the same time the repayment schedule was
amended to provide a maturity date of January 31, 2011. The agreed interest
payable monthly by Ship Finance is based on terms believed by us to be no less
favorable than are available from unaffiliated third parties. Interest
receivable on the loan amounted to $8.8 million in 2009 (2008: $2.1
million).





In April
2009 the Company obtained an unsecured credit facility of $60 million from
Metrogas, which was repaid in June 2009. Interest payable on the facility
amounted to $0.7 million in 2009.





In
November 2009, the Company granted Scorpion an unsecured short-term credit
facility of $27.7 million, increasing to $79.7 million in December 2009. The
applicable interest rate is based on terms believed by us to be no less
favorable than are available from unaffiliated third parties and is due
semi-annually. Interest received on the loan amounted to $1.0 million in 2009.
In February 2010, the Company granted Scorpion a secured short-term credit
facility of $49.5 million. The applicable interest rate is based on terms
believed by us to be no less favorable than are available from unaffiliated
third parties.





Frontline,
a company indirectly controlled by Hemen, provides us with management support
and administrative services. Fee payments to Frontline amounted to $0.2 million
in 2009 (2008: $0.2 million) and are included in "General and administrative
expenses", as they do not merit separate disclosure.





C.
INTERESTS OF EXPERTS AND COUNSEL.





Not
applicable.





ITEM
8. FINANCIAL INFORMATION





A.  CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION





Please
see the section of this Annual Report on Form 20-F entitled Item 18 "Financial
Statements."


Legal
Proceedings





The
Company is routinely party, as plaintiff or defendant, to claims and lawsuits in
various jurisdictions for demurrage, damages, off-hire and other claims and
commercial disputes arising from the operation of our drilling units, in the
ordinary course of our business or in connection with our acquisition
activities. The Company believes that the resolution of such claims will not
have a material adverse effect on our operations or financial condition. The
following dispute is the only legal proceeding which we consider to be
material.





Gazprom
dispute





At the
end of 2005 and the beginning of 2006, the Company had a dispute with Gazprom in
connection with the operations of the jack-up rig West Larissa, which was named
Ekha at that
time.





In May
2009, legal hearings took place in the High Court of Justice, London, and the
Court has issued a decision with the following main conclusions:





·
            The
      Company was awarded charter hire for the period from November 23, 2005, to
      January 9, 2006, being the date up to when the incident occurred.
      Including interest this amounted to approximately $6.8
      million.





·
            The
      Company was not awarded hire for the time after the incident, nor was the
      Company awarded any reimbursement for uninsured costs related to its
      claim.





·
            The
      Court has ruled that Gazprom is entitled to recover costs and expenses
      related to West
      Larissa, where Gazprom can demonstrate that these were wasted as a
      consequence of Seadrill's actions during the incident. The Judge also
      ruled that Gazprom wrongfully terminated the Contract, and has thus
      rejected Gazprom's claim for losses associated with the contracting of
      another rig.





49





It is not
possible at this stage to quantify the net outcome of this ruling. The amount of
Gazprom's counter-claim, as well as responsibility for incurred legal costs,
will be decided in a separate hearing at a later stage. The Court's decision has
been appealed by the Company, and appeal hearings are scheduled to take place
during the first half of 2010. The Company does not expect the final outcome to
have a significant effect on its financial results.


Dividend
Policy





Under our
bye-laws, our board of directors may declare cash dividends or distributions,
and may also pay a fixed cash dividend biannually or on other dates. Our Board
of Directors' stated objective is to generate competitive returns for its
shareholders. Any dividends declared will be in the sole discretion of the Board
of Directors and will depend upon earnings, market prospects, current capital
expenditure programs and investment opportunities. Under Bermuda law, the Board
of Directors has no discretion to declare or pay a dividend if there are
reasonable grounds for believing that (a) the Company is, or would after the
payment be, unable to pay its liabilities as they become due; or (b) the
realizable value of the Company's assets would thereby be less than the
aggregate of its liabilities and issued share capital and share premium
accounts.





In
addition, since we are a holding  company with no material assets
other than the shares of our subsidiaries through which we conduct our
operations, our ability to pay dividends will depend on our subsidiaries'
distributing to us their earnings and cash flow.





Since our
listing on the Oslo Stock Exchange in November 2005, we have paid dividends as
follows:





Payment date
            
            Amount per share2010March
      26, 2010
            
            $
            0.552009December
      7, 2009
            
            $
            0.502008March
      14, 2008
            
            $
            0.25June
      18, 2008
            
            $
            0.60September
      16, 2008
            
            $
            0.60September
      30, 2008
            
            $
            0.30




B.
SIGNIFICANT CHANGES





None





ITEM
9. THE OFFER AND LISTING





A. OFFER AND LISTING
DETAILS





Shares of
our common stock, par value $2.00 per share, have traded on the Oslo Stock
Exchange, or OSE, since November 22, 2005, under the symbol "SDRL". The closing
price of our shares on the Oslo Stock Exchange was NOK162.50 on April 26,
2010.





Shares of
our common stock commenced trading on the New York Stock Exchange, or NYSE, on
April 15, 2010, also under the symbol "SDRL". The closing price of our shares on
the NYSE was $27.83 on April 26, 2010.





The NYSE
listing is intended to be the Company's "primary listing" and the OSE listing is
intended to be the Company's secondary listing.





The
following table sets forth the fiscal years high and low closing prices of our
common shares since they began trading on the Oslo Stock Exchange in November
2005:




High
              NOK
            
            
            Low
              (NOK)Fiscal
      year ended December 312009
            
            
            149.80
            
            
            
            47.002008
            
            
            179.75
            
            
            
            41.602007
            
            
            134.25
            
            
            
            98.102006
            
            
            114.50
            
            
            
            55.752005
            
            
            55.00
            
            
            
            43.00






50


The
following table sets forth, for each full financial quarter for the two most
recent fiscal years, the high and low closing prices of our common shares
trading on the Oslo Stock Exchange:




High
              NOK
            
            
            Low
              (NOK)Fiscal
      year ended December 31, 2009First
      quarter
            
            
            68.80
            
            
            
            47.00Second
      quarter
            
            
            101.25
            
            
            
            65.40Third
      quarter
            
            
            120.60
            
            
            
            83.00Fourth
      quarter
            
            
            149.80
            
            
            
            115.60





High
              NOK
            
            
            Low
              (NOK)Fiscal
      year ended December 31,2008First
      quarter
            
            
            141.00
            
            
            
            102.75Second
      quarter
            
            
            179.75
            
            
            
            135.50Third
      quarter
            
            
            160.25
            
            
            
            114.75Fourth
      quarter
            
            
            114.00
            
            
            
            41.60





The
following table sets forth, for the six most recent months, the high and low
closing prices of our common shares trading on the Oslo Stock
Exchange:


High
              NOK
            
            
            Low
              (NOK)March
      2010
            
            
            143.00
            
            
            
            136.20February
      2010
            
            
            140.20
            
            
            
            124.10January
      2010
            
            
            150.00
            
            
            
            132.50December
      2009
            
            
            148.50
            
            
            
            132.20November
      2009
            
            
            139.00
            
            
            
            117.00October
      2009
            
            
            119.30
            
            
            
            104.50





On April
26, 2010, the exchange rate between the Norwegian Kroner and the U.S. Dollar was
NOK 5.86 to one U.S. Dollar (December 31, 2009: NOK 5.77 to one U.S.
Dollar).





C.
MARKETS





Our
common shares currently trade on the New York Stock Exchange and the Oslo Stock
Exchange under the symbol "SDRL".




ITEM
10. ADDITIONAL INFORMATION





A.
SHARE CAPITAL





Not
applicable.





B.
MEMORANDUM AND ARTICLES OF ASSOCIATION





The
Memorandum of Association of the Company was filed as Exhibit 1.1 to the
Company's Registration Statement on Form 20-F (Registration No. 001-34667 ),
which was filed with the Securities and Exchange Commission on March 25, 2010,
and is hereby incorporated by reference into this Annual Report.





The
object of our business, as stated in Section six of our Memorandum of
Association, is to engage in any lawful act or activity for which companies may
be organized under The Companies Act, 1981 of Bermuda, or the Companies Act,
other than to issue insurance or re-insurance, to act as a technical advisor to
any other enterprise or business or to carry on the business of a mutual fund.
Our Memorandum of Association and Bye-laws do not impose any limitations on the
ownership rights of our shareholders.







51







Under our
Bye-laws, annual shareholder meetings will be held in accordance with the
Companies Act at a time and place selected by our board of directors.
The  quorum  at  any  annual  or  general  meeting  is  equal  to  one  or  more
shareholders,  either present in person or represented by
proxy,  holding in the aggregate shares carrying 33 1/3 percent of the
exercisable  voting rights.  The meetings may be held at any
place, in or outside of Bermuda, other than Norway. Special meetings may be
called at the discretion of the board of directors and at the request of
shareholders holding at least one-tenth of all outstanding shares entitled to
vote at a meeting.  Annual shareholder meetings and special meetings
must be called by not less than seven days' prior written notice specifying the
place, day and time of the meeting. The board of directors may fix any date as
the record date for determining those shareholders eligible to receive notice of
and to vote at the meeting. No shareholder shall be entitled to attend unless
written notice of the intention to attend and vote in person or by proxy,
together with the power of attorney or other authority (if any) under which it
is signed, or a notarized copy of that power of attorney, is sent to the Company
Secretary, to reach the Registered Office by not later than 48 hours before the
time for holding the meeting.





There are
no pre-emptive, redemption, conversion or sinking fund rights attached to our
shares of common stock. All or any of the rights attached to our shares may be
altered by either the written consent or majority vote at a special general
meeting of a majority of shareholders who hold at least 75% of the nominal value
of our issued and outstanding shares. The holders of common shares are entitled
to one vote per share on all matters submitted to a vote of holders of common
shares. There are no limitations on the right of non-Bermudians or non-residents
of Bermuda to hold or vote our common shares. Unless a different majority is
required by law or by our bye-laws under bye-law 57, resolutions to be approved
by holders of common shares require approval by a simple majority of votes cast
at a general meeting. Under our bye-laws, we have the power to purchase our
shares of common stock for cancellation or to be held as treasury
shares.





Our
directors are elected by a majority of the votes cast at our annual general
meeting. Our board of directors must consist of at least two members. The number
of directors may be modified by simple majority of the votes cast at a general
meeting.Each
director serves from his or her election until his or her successor is duly
elected and qualified except in the case of earlier resignation or removal.
Under our bye-laws, our board of directors has the authority to appoint any
individual to fill a casual vacancy on the board. In a director's absence, the
director may appoint any person (including another director) to act as his or
her alternate. Basic director fees are determined by majority vote at a general
meeting, and the board of directors has the authority to grant additional fees
for extraordinary services rendered as a director. Directors may participate
fully in any transaction or arrangement where they have an interest, so long as
they declare the nature of their interest at the first opportunity either in
meeting or by writing to our board of directors. Under our bye-laws our board of
directors has the authority to exercise all the powers of the Company to borrow
money and to mortgage or charge our undertaking property, assets and uncalled
capital in the course of managing our business, subject to the provisions of
Bermuda law.


Our
bye-laws provide that no director, alternate director, officer, member of a
committee under bye-law 103, resident representative of the Company, or their
heirs, executors or administrators, shall be liable for the acts, receipts,
neglects, or defaults of any other such person or any person involved in our
formation, or for any loss or expense incurred by us through the insufficiency
or deficiency of title to any property acquired by us, or for the insufficiency
or deficiency of any security in or upon which any of our monies shall be
invested, or for any loss or damage arising from the bankruptcy, insolvency, or
tortuous act of any person with whom any monies, securities, or effects shall be
deposited, or for any loss occasioned by any error of judgment, omission,
default, or oversight on his part, or for any other loss, damage or misfortune
whatever which shall happen in relation to the execution of his duties, or
supposed duties, to us or otherwise in relation thereto.





Bermuda
law permits our bye-laws to contain provisions excluding personal liability of a
director, alternate director, officer, member of a committee authorized under
bye-Law 103, resident representative or their respective heirs, executors or
administrators to the company for any loss, damage or expense (including but not
limited to liabilities under contract, tort and statute or any applicable
foreign law or regulation and all reasonable legal and other costs and expenses
properly payable) incurred by him as such director, alternate director, officer,
member of a committee authorized under bye-Law 103 or resident representative in
the reasonable belief that he has been so appointed or elected notwithstanding
any defect in such appointment or election.





Bermuda
law also grants us the power generally to indemnify a director, alternate
director, officer, member of a committee authorized under bye-law 103, resident
representative or their respective heirs, executors or administrators to the
company in defending any proceedings, whether civil or criminal, in which
judgment is given in his favor, or in which he is acquitted, or in connection
with any application under the Companies Act in which relief from liability is
granted to him by the court.





Under our
bye-laws, our shareholders agree to waive any claim or right of action they
might have, whether individually or by right of the Company, against any
director, alternate director, officer, person or member of a committee
authorized under bye-law 103, resident representative of the company or any of
their respective heirs, executors or administrators due to any action taken by
any such person, or the failure of any such person to take any action in the
performance of his duties, or supposed duties, to us or otherwise in relation
thereto.






52





Notwithstanding
any of the foregoing, no indemnity, waiver or exclusion of liability contained
in our bye-laws in favor of any person is effective in respect of liabilities
arising from such person's own fraud or dishonesty.


Under our
bye-laws, our board of directors may in its sole discretion, declare dividends
or distributions and pay a fixed cash dividend bi-annually or on other dates.
Under Bermuda law, the board of directors has no discretion to declare or pay a
dividend if there are reasonable grounds for believing that (a) the Company is,
or would after the payment be, unable to pay its liabilities as they become due;
or (b) the realizable value of the Company's assets would thereby be less than
the aggregate of its liabilities and its issued share capital and share premium
accounts.





In the
event of our liquidation, dissolution or winding up, our shareholders have the
right to receive a pro rata share, in a proportion equal to their proportionate
shareholding, of the surplus assets of the Company after all of the Company's
liabilities are discharged. A liquidator may, with the sanction of a 2/3
majority vote at a general meeting and after the discharge of all of the
Company's liabilities, divide among our shareholders in specie or in kind the
whole or any part of the remaining assets and may, for such purposes, assign
such values as he deems fair.





Anti-Takeover
Effects of Provisions of Our Constitutional Documents





Several
provisions of our bye-laws may have anti-takeover effects. These provisions are
intended to avoid costly takeover battles, lessen our vulnerability to a hostile
change of control and enhance the ability of our board of directors to maximize
shareholder value in connection with any unsolicited offer to acquire us.
However, these anti-takeover provisions, which are summarized below, could also
discourage, delay or prevent (1) the merger, amalgamation or acquisition of our
company by means of a tender offer, a proxy contest or otherwise, that a
shareholder may consider in its best interest and (2) the removal of our
incumbent directors and executive officers.





Should a
person or persons resident for tax purposes in Norway, other than Nordea Bank
Norge ASA, become the holder of 50% or more of the aggregate of our issued and
outstanding common stock, being held or owned directly or indirectly, we will be
entitled to dispose of such number of shares that would reduce the person or
persons ownership of our common stock to under 50%.


Where a
person or entity becomes the owner of more than 30% of our issued and
outstanding common stock, our board of directors can decline to register the
acquired common shares in excess of 30% unless the acquirer makes an offer to
purchase our remaining shares of common stock or agrees to sell part of the
shares of common stock acquired to reduce the number of our common shares held
by them to below 30% of our issued and outstanding common stock. Sale of the
acquirer's shares over 30% of the issued and outstanding common stock must take
place no later than two weeks from when his total share ownership rose above
30%, the acquisition date. Offers to purchase our remaining shares must occur
within four weeks of the acquisition date and the offer price must be at least
as high as the highest price paid by the acquirer in the six months prior to the
acquisition date. Should the acquirer fail to reduce his common shares or make
an offer for the outstanding common shares with the time period, the acquirer
will not be able to exercise any rights associated with the shares in excess of
30% of our outstanding and issued common stock.





There is
a statutory remedy under Section 111 of the Bermuda Companies Act 1981 which
provides that a shareholder may seek redress in the Bermuda courts as long as
such shareholder can establish that a company's affairs are being conducted, or
have been conducted, in a manner oppressive or prejudicial to the interests of
some part of the shareholders, including such shareholder.





C.
MATERIAL CONTRACTS


The
Company has no material contracts other than those entered in the ordinary
course of business.





D.
EXCHANGE CONTROLS





The
Bermuda Monetary Authority (the "BMA") must give permission for all issuances
and transfers of securities of a Bermuda exempted company like ours. We have
received general permission from the BMA to issue any unissued common shares and
for the free transferability of our common shares as long as our common shares
are listed on an "appointed stock exchange".  Our common shares are
listed on the Oslo Stock Exchange and the New York Stock Exchange – each of
which is an "appointed stock exchange".  Our common shares may
therefore be freely transferred among persons who are residents and
non-residents of Bermuda.


Although
we are incorporated in Bermuda, we are classified as a non-resident of Bermuda
for exchange control purposes by the BMA.  Other than transferring
Bermuda Dollars out of Bermuda, there are no restrictions on our ability to
transfer funds into and out of Bermuda or to pay dividends to US residents who
are holders of Common Shares or other nonresidents of Bermuda who are holders of
our common shares in currency other than Bermuda Dollars.
  In
accordance with Bermuda law, share certificates may be issued only in the names
of corporations, individuals or legal persons. In the case of an applicant
acting in a special capacity (for example, as an executor or trustee),
certificates may, at the request of the applicant,








53





record
the capacity in which the applicant is acting. Notwithstanding the recording of
any such special capacity, we are not bound to investigate or incur any
responsibility in respect of the proper administration of any such estate or
trust.





We will
take no notice of any trust applicable to any of our shares or other securities
whether or not we had notice of such trust.





As an
"exempted company", we are exempt from Bermuda laws which restrict the
percentage of share capital that may be held by non-Bermudians, but as an
exempted company, we may not participate in certain business transactions
including: (i) the acquisition or holding of land in Bermuda (except that
required for its business and held by way of lease or tenancy for terms of not
more than 21 years) without the express authorization of the Bermuda
legislature; (ii) the taking of mortgages on land in Bermuda to secure an amount
in excess of $50,000 without the consent of the Minister of Finance of Bermuda;
(iii) the acquisition of securities created or issued by, or any interest in,
any local company or business, other than certain types of Bermuda government
securities or securities of another "exempted company", "exempted partnership"
or other corporation or partnership resident in Bermuda but incorporated abroad;
or (iv) the carrying on of business of any kind in Bermuda, except in so far as
may be necessary for the carrying on of its business outside Bermuda or under a
license granted by the Minister of Finance of Bermuda.





The
Bermuda government actively encourages foreign investment in "exempted" entities
like us that are based in Bermuda but do not operate in competition with local
business. In addition to having no restrictions on the degree of foreign
ownership, we are subject neither to taxes on our income or dividends nor to any
exchange controls in Bermuda. In addition, there is no capital gains tax in
Bermuda, and profits can be accumulated by us, as required, without limitation.
There is no income tax treaty between the United States and Bermuda pertaining
to the taxation of income other than applicable to insurance
enterprises.


E.
TAXATION





The
following is a discussion of the material Bermuda, United States federal income
and other tax considerations with respect to the Company and holders of common
shares. This discussion does not purport to deal with the tax consequences of
owning common shares to all categories of investors, some of which, such as
dealers in securities, investors whose functional currency is not the United
States Dollar and investors that own, actually or under applicable constructive
ownership rules, 10% or more of our common shares, may be subject to special
rules. This discussion deals only with holders who hold the common shares as a
capital asset. Holders of common shares are encouraged to consult their own tax
advisors concerning the overall tax consequences arising in their own particular
situation under United States federal, state, local or foreign law of the
ownership of common shares.


Bermuda
and Other Non-U.S. Tax Considerations





As of the
date of this document, we are not subject to taxation under the laws of Bermuda,
and distributions to us by our subsidiaries also are not subject to any Bermuda
tax. As of the date of this document, there is no Bermuda income, corporation or
profits tax, withholding tax, capital gains tax, capital transfer tax, estate
duty or inheritance tax payable by non-residents of Bermuda in respect of
capital gains realized on a disposition of our common shares or in respect of
distributions by us with respect to our common shares. This discussion does not,
however, apply to the taxation of persons ordinarily resident in Bermuda.
Bermuda holders should consult their own tax advisors regarding possible Bermuda
taxes with respect to dispositions of, and distributions on, our common
shares.





Under
current Bermuda law, we are not subject to tax on income or capital gains. We
have received from the Minister of Finance under The Exempted Undertaking Tax
Protection Act 1966, as amended, an assurance that, in the event that Bermuda
enacts legislation imposing tax computed on profits, income, any capital asset,
gain or appreciation, or any tax in the nature of estate duty or inheritance,
the imposition of any such tax shall not be applicable to us or to any of our
operations or shares, debentures or other obligations, until March 28, 2016.
This assurance is subject to the proviso that it is not to be construed to
prevent the application of any tax or duty to such persons as are ordinarily
resident in Bermuda or to prevent the application of any tax payable in
accordance with the provisions of the Land Tax Act 1967.  The
assurance does not exempt us from paying import duty on goods imported into
Bermuda.  In addition, all entities employing individuals in Bermuda
are required to pay a payroll tax and there are other sundry taxes payable,
directly or indirectly, to the Bermuda government.  We and our
subsidiaries incorporated in Bermuda pay annual government fees to the Bermuda
government.
 
 The
March 28, 2016 date is common to all exempted companies incorporated in
Bermuda.  It is expected, based on past practices, that the Minister
of Finance will extend that date and the application of the
assurance.  If the Minister of Finance does not grant a new exemption
or extend our current assurance, and if the Bermudian Parliament passes
legislation imposing taxes on exempted companies, we may become subject to
taxation in Bermuda at some point after March 28,
2016.
  Bermuda
currently has no tax treaties in place with other countries in relation to
double-taxation or for the withholding of tax for foreign tax
authorities.





Dividends
distributed by Seadrill Limited out of Bermuda





Currently,
there are no withholding taxes payable in Bermuda on dividends distributed from
Seadrill Limited to its shareholders.





Taxation
of rig owning entities





The
majority of our drilling rigs are owned in tax-free jurisdictions such as
Bermuda, Cayman Islands and Liberia. There is no taxation of the rig owners'
income in these jurisdictions. The remaining drilling rigs are owned in
jurisdictions with income or tonnage taxation of the rig owners' income. These
jurisdictions are Cyprus, Hong Kong, Hungary, Singapore and
Svalbard.





Please
also see the section below entitled "Taxation in country of drilling
operations".






54




Taxation
in country of drilling operations





Income
derived from drilling operations is generally taxed in the country where these
operations take place (currently including Angola, Australia, Brazil, China,
Congo, Denmark, Indonesia, Malaysia, Nigeria, Norway, Thailand, UK, USA and
Vietnam). The taxation of income derived from drilling operations could be based
on net income, deemed income and/or withholding taxes etc, depending upon the
applicable tax legislation in each country of operation.  Some
countries levy withholding taxes on bareboat charter payments (internal rig
rent), branch profits, crew, dividends, interest and management
fees.





Drilling
operations can be carried out by locally incorporated companies, foreign
branches of operating companies or foreign branches of the rig owning entities.
We elect the appropriate structure having regard to the applicable legislation
of each country where the drilling operations occur.





In some
countries where the drilling operations are performed, a tax liability may also
arise for the rig owning entity.





Net
income





Net
income corresponds to gross income for the drilling operations less
tax-deductible costs (i.e. operating costs, crew, insurance, management fees and
capital costs (internal bareboat fee or tax depreciation and interest costs)
incurred in relation to those operations.  In addition to net income
tax, withholding tax on branch profits, dividends, internal bareboat fees etc
may also be levied.





Net
income taxation for an international drilling contractor is complex, and pricing
of internal transactions (rig sales, bareboat fees and services etc.) will
allocate overall taxable income between the relevant countries. We apply OECD
Transfer Pricing Guidelines as a basis to arrive at pricing for internal
transactions. OECD Transfer Pricing Guidelines describe various methods to
arrive at pricing of internal services based on terms believed by us to be no
less favorable than are available from unaffiliated third parties, and disputes
can arise with tax authorities regarding whether the pricing of such internal
transactions is correct.





Deemed
income





Deemed
income tax is normally calculated based on gross turnover, which can include or
exclude reimbursables and often reflects an assumed profit ratio, multiplied by
the applicable corporate tax rate. Some countries will also levy withholding
taxes on the distribution of dividend/branch profits at the deemed tax
rate.





Withholding
taxes etc. in country of drilling operations





Some
countries base their taxation solely on withholding tax on gross
turnover.  In addition, some countries levy stamp duties, training
taxes or similar taxes on the gross turnover.





Customs
duties





Customs
duties are generally payable on the importation of drilling rigs, equipment and
spares into the country of operation, although several countries provide
exemption from such duties for the temporary importation of drilling rigs. This
exemption may also apply to the temporary importation of equipment.


Taxation
of other income


Other
income related to crewing, management fees and technical services will be
generally taxed in the country of residency of the service provider, although
withholding tax and/or income tax may also be imposed in the country where the
drilling operations take place.





Financial
income, dividend income, and investment income will be taxable in accordance
with the legislation applicable in the country in which the company holding the
investment is resident. For companies resident in Bermuda, there is currently no
tax on these types of income.





Some
countries levy withholding taxes on outbound dividends and interest
payments.





Capital
gains taxation


For rigs
located in Bermuda, Cayman Islands, Cyprus, Liberia and Singapore, no capital
gains tax is payable in these countries. However, some countries may apply a
capital gains tax or a claw-back of tax depreciation (whole or part) when
drilling rigs are sold while working in the country of operation, or within a
certain time after completion of such drilling operations, or when the rig is
exported after completion of such drilling operations.





Other
taxes


Our
operations may be applicable to sales taxes, VAT or similar taxes in various
countries.






55





Taxation
of shareholders


Taxation
of shareholders will depend upon the jurisdiction where the shareholder is a tax
resident. Shareholders should seek advice from their tax advisor to establish
the relevant taxation applicable to their circumstances.





United
States Federal Income Tax Considerations





In the
opinion of Seward & Kissel LLP, our United States counsel, the following are
the material United States federal income tax consequences to us of our
activities and to U.S. Holders and Non-U.S. Holders, each as defined below, of
our common stock.  This discussion does not purport to deal with the
tax consequences of owning common stock to all categories of investors, some of
which, such as dealers in securities, investors whose functional currency is not
the United States Dollar and investors that own, actually or under applicable
constructive ownership rules, 10 percent or more of our common stock, may be
subject to special rules.  The following discussion of United States
federal income tax matters is based on the United States Internal Revenue Code
of 1986, or the Code, judicial decisions, administrative pronouncements, and
existing and proposed regulations issued by the United States Department of the
Treasury, all of which are subject to change, possibly with retroactive
effect.  The discussion below is based, in part, on the description of
our business as described herein and assumes that we conduct our business as
described herein.  Unless otherwise noted, references in the following
discussion to the "Company," "we" and "us" are to Seadrill Limited and its
subsidiaries on a consolidated basis.





United
States Federal Income Taxation of U.S. Holders





As used
herein, the term "U.S. Holder" means a beneficial owner of common stock that is
a United States citizen or resident, United States corporation or other United
States entity taxable as a corporation, an estate the income of which is subject
to United States federal income taxation regardless of its source, or a trust if
a court within the United States is able to exercise primary jurisdiction over
the administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust.


If a
partnership holds our common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner in a partnership holding our common stock, you
are encouraged to consult your tax advisor.





Distributions





Subject
to the discussion of passive foreign investment companies below, any
distributions made by us with respect to our common stock to a U.S. Holder will
generally constitute dividends, which may be taxable as ordinary income or
"qualified dividend income" as described in more detail below, to the extent of
our current or accumulated earnings and profits, as determined under United
States federal income tax principles. Distributions in excess of our earnings
and profits will be treated first as a nontaxable return of capital to the
extent of the U.S. Holder's tax basis in his common stock on a dollar-for-dollar
basis and thereafter as capital gain. Because we are not a United States
corporation, U.S. Holders that are corporations will not be entitled to claim a
dividends received deduction with respect to any distributions they receive from
us. Dividends paid with respect to our common stock will generally be treated as
"passive category income" or, in the case of certain types of U.S. Holders,
"general category income" for purposes of computing allowable foreign tax
credits for United States foreign tax credit purposes.





Dividends
paid on our common stock to a U.S. Holder who is an individual, trust or estate
(a "U.S. Individual Holder") will generally be treated as "qualified dividend
income" that is taxable to such U.S. Individual Holders at preferential tax
rates (through 2010) provided that (1) the common stock is readily tradable on
an established securities market in the United States (such as the New York
Stock Exchange, on which we plan to list our common stock); (2) we are not a
passive foreign investment company for the taxable year during which the
dividend is paid or the immediately preceding taxable year (as discussed below);
and (3) the U.S. Individual Holder has owned the common stock for more than 60
days in the 121-day period beginning 60 days before the date on which the common
stock becomes ex-dividend. There is no assurance that any dividends paid on our
common stock will be eligible for these preferential rates in the hands of a
U.S. Individual Holder.  Legislation has been previously introduced in
the U.S. Congress which, if enacted in its present form, may preclude our
dividends from qualifying for such preferential rates prospectively from the
date of the enactment.  Any dividends paid by the Company which are
not eligible for these preferential rates will be taxed as ordinary income to a
U.S. Holder.





Special
rules may apply to any "extraordinary dividend" generally, a dividend in an
amount which is equal to or in excess of ten percent of a stockholder's adjusted
basis (or fair market value in certain circumstances) in a share of common stock
paid by us. If we pay an "extraordinary dividend" on our common stock that is
treated as "qualified dividend income," then any loss derived by a U.S.
Individual Holder from the sale or exchange of such common stock will be treated
as long-term capital loss to the extent of such dividend.





Sale,
Exchange or other Disposition of Common Stock





Assuming
we do not constitute a passive foreign investment company for any taxable year,
a U.S. Holder generally will recognize taxable gain or loss upon a sale,
exchange or other disposition of our common stock in an amount equal to the
difference between the







56








amount
realized by the U.S. Holder from such sale, exchange or other disposition and
the U.S. Holder's tax basis in such stock. Such gain or loss will be treated as
long-term capital gain or loss if the U.S. Holder's holding period is greater
than one year at the time of the sale, exchange or other disposition. Such
capital gain or loss will generally be treated as United States source income or
loss, as applicable, for U.S. foreign tax credit purposes. A U.S. Holder's
ability to deduct capital losses is subject to certain limitations.


Passive
Foreign Investment Company Status and Significant Tax Consequences





Special
United States federal income tax rules apply to a U.S. Holder that holds stock
in a foreign corporation classified as a passive foreign investment company (a
"PFIC") for United States federal income tax purposes. In general, a foreign
corporation will be treated as a PFIC with respect to a United States
shareholder in such foreign corporation, if, for any taxable year in which such
shareholder holds stock in such foreign corporation, either:





·
            at
      least 75 percent of the corporation's gross income for such taxable year
      consists of passive income (e.g., dividends, interest, capital gains and
      rents derived other than in the active conduct of a rental business);
      or





·
            at
      least 50 percent of the average value of the assets held by the
      corporation during such taxable year produce, or are held for the
      production of, passive income.





For
purposes of determining whether a foreign corporation is a PFIC, it will be
treated as earning and owning its proportionate share of the income and assets,
respectively, of any of its subsidiary corporations in which it owns at least 25
percent of the value of the subsidiary's stock.





Income
earned by a foreign corporation in connection with the performance of services
would not constitute passive income. By contrast, rental income would generally
constitute "passive income" unless the foreign corporation is treated under
specific rules as deriving its rental income in the active conduct of a trade or
business or is received from a related party.


We
presently believe that we are not a PFIC and do not anticipate becoming a
PFIC.  This is, however, a factual determination made on an annual
basis and is subject to change.  Therefore, we can give you no
assurance as to our PFIC status.





As
discussed more fully below, if we were to be treated as a PFIC for any taxable
year, a U.S. Holder would be subject to different taxation rules depending on
whether the U.S. Holder makes an election to treat us as a "Qualified Electing
Fund," which election we refer to as a "QEF election." As an alternative to
making a QEF election, a U.S. Holder should be able to make a "mark-to-market"
election with respect to our common stock, as discussed below.





Taxation
of U.S. Holders Making a Timely QEF Election





If a U.S.
Holder makes a timely QEF election, which U.S. Holder we refer to as an
"Electing Holder," the Electing Holder must report each year for United States
federal income tax purposes his pro rata share of our ordinary earnings and our
net capital gain, if any, for our taxable year that ends with or within the
taxable year of the Electing Holder, regardless of whether or not distributions
were received from us by the Electing Holder. The Electing Holder's adjusted tax
basis in the common stock will be increased to reflect taxed but undistributed
earnings and profits. Distributions of earnings and profits that had been
previously taxed will result in a corresponding reduction in the adjusted tax
basis in the common stock and will not be taxed again once distributed. An
Electing Holder would generally recognize capital gain or loss on the sale,
exchange or other disposition of our common stock. A U.S. Holder would make a
QEF election with respect to any year that our company is a PFIC by filing IRS
Form 8621 with his United States federal income tax return. If we were aware
that we or any of our subsidiaries were to be treated as a PFIC for any taxable
year, we would, if possible, provide each U.S. Holder with all necessary
information in order to make the QEF election described above.  If we
were to be treated as a PFIC, a U.S. Holder would be treated as owning his
proportionate share of stock in each of our subsidiaries which is treated as a
PFIC and such U.S. Holder would need to make a separate QEF election for any
such subsidiaries.  It should be noted that we may not be able to
provide such information if we did not become aware of our status as a PFIC in a
timely manner.


Taxation
of U.S. Holders Making a "Mark-to-Market" Election





Alternatively,
if we were to be treated as a PFIC for any taxable year and, as we anticipate,
our stock is treated as "marketable stock," a U.S. Holder would be allowed to
make a "mark-to-market" election with respect to our common stock, provided the
U.S. Holder completes and files IRS Form 8621 in accordance with the relevant
instructions and related Treasury Regulations.  The "mark-to-market"
election will not be available for any of our subsidiaries. If that election is
made, the U.S. Holder generally would include as ordinary income in each taxable
year the excess, if any, of the fair market value of the common stock at the end
of the taxable year over such holder's adjusted tax basis in the common stock.
The U.S. Holder would also be permitted an ordinary loss in respect of the
excess, if any, of the U.S. Holder's adjusted tax basis in the common stock over
its fair market value at the end of the taxable year, but only to the extent of
the net amount previously included in income as a result of the mark-to-market
election. A U.S. Holder's tax basis in his common stock would be adjusted to
reflect any such income or loss amount. Gain realized on the sale, exchange or
other disposition of our common stock would be treated as ordinary income, and
any loss realized on the sale, exchange or other disposition of the common stock
would be treated as ordinary loss to the extent that such loss does not exceed
the net mark-to-market gains previously included by the U.S.
Holder.  It should be noted that the mark-to-market election would
likely not be available for any of our subsidiaries which are treated as
PFICs.






57




Taxation
of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election





Finally,
if we were to be treated as a PFIC for any taxable year, a U.S. Holder who does
not make either a QEF election or a "mark-to-market" election for that year,
whom we refer to as a "Non-Electing Holder," would be subject to special rules
with respect to (1) any excess distribution (i.e., the portion of any
distributions received by the Non-Electing Holder on our common stock in a
taxable year in excess of 125 percent of the average annual distributions
received by the Non-Electing Holder in the three preceding taxable years, or, if
shorter, the Non-Electing Holder's holding period for the common stock), and (2)
any gain realized on the sale, exchange or other disposition of our common
stock. Under these special rules:





·
            the
      excess distribution or gain would be allocated ratably over the
      Non-Electing Holders' aggregate holding period for the common
      stock;





·
            the
      amount allocated to the current taxable year and any taxable year before
      we became a PFIC would be taxed as ordinary income;
  and





·
            the
      amount allocated to each of the other taxable years would be subject to
      tax at the highest rate of tax in effect for the applicable class of
      taxpayer for that year, and an interest charge for the deemed deferral
      benefit would be imposed with respect to the resulting tax attributable to
      each such other taxable year.


These
penalties would not apply to a pension or profit sharing trust or other
tax-exempt organization that did not borrow funds or otherwise utilize leverage
in connection with its acquisition of our common stock. If a Non-Electing Holder
who is an individual dies while owning our common stock, such holder's successor
generally would not receive a step-up in tax basis with respect to such
stock.





United
States Federal Income Taxation of "Non-U.S. Holders"





A
beneficial owner of common stock that is not a U.S. Holder is referred to herein
as a "Non-U.S. Holder."





Dividends
on Common Stock





Non-U.S.
Holders generally will not be subject to United States federal income tax or
withholding tax on dividends received from us with respect to our common stock,
unless that income is effectively connected with the Non-U.S. Holder's conduct
of a trade or business in the United States. If the Non-U.S. Holder is entitled
to the benefits of a United States income tax treaty with respect to those
dividends, that income is taxable only if it is attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United
States.





Sale,
Exchange or Other Disposition of Common Stock





Non-U.S.
Holders generally will not be subject to United States federal income tax or
withholding tax on any gain realized upon the sale, exchange or other
disposition of our common stock, unless:





·
            the
      gain is effectively connected with the Non-U.S. Holder's conduct of a
      trade or business in the United States. If the Non-U.S. Holder is entitled
      to the benefits of an income tax treaty with respect to that gain, that
      gain is taxable only if it is attributable to a permanent establishment
      maintained by the Non-U.S. Holder in the United States;
  or





·
            the
      Non-U.S. Holder is an individual who is present in the United States for
      183 days or more during the taxable year of disposition and other
      conditions are met.





If the
Non-U.S. Holder is engaged in a United States trade or business for United
States federal income tax purposes, the income from the common stock, including
dividends and the gain from the sale, exchange or other disposition of the stock
that is effectively connected with the conduct of that trade or business will
generally be subject to regular United States federal income tax in the same
manner as discussed in the previous section relating to the taxation of U.S.
Holders. In addition, if you are a corporate Non-U.S. Holder, your earnings and
profits that are attributable to the effectively connected income, which are
subject to certain adjustments, may be subject to an additional branch profits
tax at a rate of 30 percent, or at a lower rate as may be specified by an
applicable income tax treaty.





Backup
Withholding and Information Reporting





In
general, dividend payments, or other taxable distributions, made within the
United States to you will be subject to information reporting requirements. Such
payments will also be subject to backup withholding tax if paid to a
non-corporate U.S. Holder who:





·
            fails
      to provide an accurate taxpayer identification
  number;





·
            is
      notified by the Internal Revenue Service that he has failed to report all
      interest or dividends required to be shown on his federal income tax
      returns; or





·
            in
      certain circumstances, fails to comply with applicable certification
      requirements.





Non-U.S.
Holders may be required to establish their exemption from information reporting
and backup withholding by certifying their status on Internal Revenue Service
Form W-8BEN, W-8ECI or W-8IMY, as applicable.






58







If a
Non-U.S. Holder sells his common stock to or through a United States office or
broker, the payment of the proceeds is subject to both United States backup
withholding and information reporting unless the Non-U.S. Holder certifies that
he is a non-U.S. person, under penalties of perjury, or otherwise establishes an
exemption. If a Non-U.S. Holder sells his common stock through a non-United
States office of a non-United States broker and the sales proceeds are paid to
the Non-U.S. Holder outside the United States then information reporting and
backup withholding generally will not apply to that payment.  However,
United States information reporting requirements, but not backup withholding,
will apply to a payment of sales proceeds, even if that payment is made to a
Non-U.S. Holder outside the United States, if the Non-U.S. Holder sells common
stock through a non-United States office of a broker that is a United States
person or has some other contacts with the United States.





Backup
withholding tax is not an additional tax.  Rather, a taxpayer
generally may obtain a refund of any amounts withheld under backup withholding
rules that exceed the taxpayer's income tax liability by filing a refund claim
with the Internal Revenue Service.





Other
Tax Considerations





In
addition to the tax consequences discussed above, we may be subject to tax in
one or more other jurisdictions where we conduct activities.  The
amount of any such tax imposed upon our operations may be material.





F.
DIVIDENDS AND PAYING AGENTS





Not
applicable.





G.
STATEMENT BY EXPERTS


Not
applicable.





H.
DOCUMENTS ON DISPLAY





We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended. In accordance with these requirements we file reports and
other information with the Commission. These materials, including this annual
report on Form 20-F and the accompanying exhibits, may be inspected and copied
at the public reference facilities maintained by the Commission at 100 F Street,
NE, Room 1580, Washington, D.C. 20549.  You may obtain information on
the operation of the public reference room by calling 1 (800) SEC-0330, and you
may obtain copies at prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C.  The Commission
maintains a website (http://www.sec.gov.) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, documents referred to in this
annual report on Form 20-F may be inspected at our principle executive offices
at Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, Bermuda HM 08 and at the
offices of Seadrill Management AS at Løkkeveien 111, 4007 Stavanger,
Norway.





I.
SUBSIDIARY INFORMATION





Not
applicable




ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are
exposed to various market risks, including foreign currency fluctuations,
changes in interest rates, equity and credit risk.  Our policy is to
hedge our exposure to these risks where possible, within boundaries deemed
appropriate by management.  We accomplish this by entering into a
variety of derivative instruments and contracts to maintain the desired level of
risk exposure. We may enter into derivative instruments from time to time for
speculative purposes.








59





Foreign
Exchange Risk





The
Company and the majority of its subsidiaries use the U.S. Dollar as their
functional currency because the majority of their revenues and expenses are
denominated in U.S. Dollars. Accordingly, the Company's reporting currency is
also U.S. Dollars. We do, however, earn revenue and incur expenses in other
currencies and there is thus a risk that currency fluctuations could have an
adverse effect on the value of our cash flows.





Our
foreign currency risk arises from:





·
            the
      measurement of debt and other monetary assets and liabilities denominated
      in foreign currencies converted to U.S. Dollars, with the resulting gain
      or loss recorded as "Other financial
items";





·
            changes
      in the fair value of foreign currency forward contracts, which are
      recorded as "Other financial
items";





·
            the
      impact of fluctuations in exchange rates on the reported amounts of our
      revenues and expenses which are contracted in foreign currencies;
      and





·
            foreign
      subsidiaries whose accounts are not maintained in U.S. Dollars, which when
      converted into U.S. Dollars can result in exchange adjustments which are
      recorded as a component in shareholders'
equity.





We use
foreign currency forward contracts to manage our exposure to foreign currency
risk on certain assets, liabilities and future anticipated transactions. Such
derivative contracts do not qualify for hedge accounting treatment and are
recorded in the balance sheet under "Other current assets" if the forward
contracts have a net positive fair value, and under "Other current liabilities"
if the forward contracts have a net negative fair value, with changes in the
fair value recorded in the statement of operations under "Other financial
items".  At December 31, 2009, we had various forward contracts to
sell approximately $504 million between January 2010 and September 2012 for
Norwegian Kroner and Singapore Dollars at exchange rates ranging from
NOK/US$5.71 to NOK/US$6.40 and from SGD/US$1.39 to SGD/US$1.42. The fair value
of our currency forward contracts as at December 3, 2009, and December 31, 2008,
was as follows:





December 31, 2009
            
            
            December 31, 2008(In
      millions of U.S. Dollars)
            
            Notional
      Amount
            
            
            Fair
      value
            
            
            Notional
      Amount
            
            
            Fair
      ValueOther
      current assets (liabilities)
            
            
            504
            
            
            
            16
            
            
            
            474
            
            
            
            (21
            )





A 1%
change in the exchange rate between the U.S. Dollar and the bought forward
currencies would result in a fair value gain or loss of $5.0 million that would
be reflected in our Consolidated Statements of Operations, based on our currency
forward contracts as at December 31,2009.





Interest
Rate Risk





A
significant portion of our debt obligations and surplus funds placed with
financial institutions are subject to movements in interest rates. It is our
policy to obtain the most favorable interest rates available without increasing
our foreign currency exposure. In keeping with this, our surplus funds are
placed in fixed deposits with reputable financial institutions which yield
better returns than bank deposits. The deposits generally have short-term
maturities so as to provide us with the flexibility to meet working capital and
capital investments.





We use
interest rate swaps to manage our exposure to interest rate risks. Interest rate
swaps are used to convert floating rate debt obligations to a fixed rate in
order to achieve an overall desired position of fixed and floating rate debt.
The extent to which interest rate swaps are used is determined by reference to
our net debt exposure and our views regarding future interest rates. Most of our
interest rate swaps do not qualify for hedge accounting and movements in their
fair values are reflected in the statement of operations under "gain/(loss) on
derivative financial instruments". Interest rate swap agreements that have a
positive fair value are recorded as "Other current assets", while swaps with a
negative fair value are recorded as "Other current liabilities".





At
December 31, 2009, we had entered into interest rate swap agreements with a
combined outstanding principal amount of approximately $2.85 billion at rates
between 2.06% per annum and 4.63% per annum. The swap agreements mature between
December 2011 and December 2018. The fair values of our interest rate swaps as
at December 31, 2009, and December 31, 2008, were as follows:





December 31, 2009
            
            
            December 31, 2008(In
      millions of U.S. Dollars)
            
            Outstanding
      principal
            
            
            Fair
      value
            
            
            Outstanding
      principal
            
            
            FairValueOther
      current assets (liabilities)
            
            
            2,854
            
            
            
            (70
            )
            
            
            1,740
            
            
            
            (146
            )







60







In
addition to the above interest rate swaps, two of our fully-consolidated VIEs
have executed interest rate cash flow hedges in the form of interest rate swaps.
Movements in their fair value are reflected in "Accumulated other comprehensive
income (loss)", with their fair value recorded as "Other current assets" or
"Other current liabilities". At December 31, 2009, the fully-consolidated VIEs
had entered into interest rate swap agreements with a combined outstanding
principal amount of $1.27 billion at rates between 2.19% per annum and 3.89% per
annum. These swap agreements mature between October 2012 and August 2013, and
their fair values as at December 31, 2009, and December 31, 2008, were as
follows:




December 31, 2009
              
              
              December 31, 2008D
              
              Outstanding
      principal
              
              
              Fair
      value
              
              
              Outstanding
      principal
              
              
              FairValueOther
      current assets (liabilities)
              
              
              1,268
              
              
              
              (33
              )
              
              
              1,139
              
              
              
              (55
              )
 At
December 31, 2009, our net exposure to floating interest rate fluctuations on
our outstanding debt was $0.88billion, compared with $3.04 billion at December
31, 2008. This net exposure is based on our $5.00billion of floating rate debt
less the $2.85billion outstanding principal covered by our interest rate swaps
and less the $1.27 billion outstanding principal of our VIEs' interest rate
hedges at December 31, 2009. A 1% change in short-term interest rates would thus
increase or decrease our interest expense by approximately $9 million on an
annual basis as of December 31, 2009 (December 31, 2008: $30
million).





Equity
risk





At
December 31, 2009, we had entered into a TRS contract indexed to 4,500,000 of
our own shares, whereby we carry the risk of fluctuations in the market price of
our shares. The settlement amount for the contract will be (A) the market value
of the shares at the date of settlement plus the amount of dividends paid on the
shares by us between entering into and settling the contract, less (B) the
reference price of the shares agreed at the inception of the contract plus the
counterparty's financing costs. Settlement will be either a payment from or to
the counterparty, depending on whether (A) is more or less than (B). The
contract was scheduled to expire in February 2010 and the agreed reference price
was NOK98.44 per common share. The open position at December 31, 2009, exposes
us to market risk associated with our share price, and it is estimated that a
10% reduction in the price below the value at December 31, 2009, would generate
an adverse fair value adjustment of up to $7.7 million, which would be recorded
in the Statement of Operations. In February 2010 the number of shares underlying
the TRS agreement was reduced by 1,000,000 shares to 3,500,000 shares and the
agreement was extended to February 2011.  Early termination of this
TRS agreement is possible. The new reference price is NOK125.70 per common
share.





In
addition to the above TRS transaction indexed to our own shares, we may from
time to time enter into short-term TRS arrangements relating to securities in
other companies.




The fair
market value of our $1.00 billion 3.625% convertible bonds at December 31, 2009,
was $1.00 billion (2008: $0.51 billion). The fair market value of our $0.50
billion 4.875% convertible bonds at December 31, 2009, was
$0.61billion.





Concentration
of credit risk





The
market for our services is the offshore oil and gas industry, and the customers
consist primarily of major integrated oil companies, independent oil and gas
producers and government-owned oil companies. We perform ongoing credit
evaluations of our customers and generally do not require collateral in our
business agreements. Reserves for potential credit losses are maintained when
necessary.





The
following table shows those of our customers who have generated more than nine
percent of our contract revenues in one of the periods shown:





Year
      ended December 31,Customer
            
            2009
            
            
            2008
            
            
            2007Statoil
            
            
            17
            %
            
            
            32
            %
            
            
            33
            %Shell
            
            
            10
            %
            
            
            7
            %
            
            
            13
            %Total
            
            
            13
            %
            
            
            5
            %
            
            
            8
            %Exxon
            
            
            12
            %
            
            
            5
            %
            
            
            6
            %Petrobras
            
            
            10
            %
            
            
            -
            
            
            
            -Other
      customers
            
            
            38
            %
            
            
            51
            %
            
            
            40
            %Total
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





We may
also face credit related losses in the event that counterparties to our
derivative financial instrument contracts do not perform according to the terms
of the contract. The credit risk arising from these counterparties relates to
unrealized profits from foreign exchange forward contracts and interest rate
swaps. We generally do not require collateral for our financial instrument
contracts. We do, however, enter into master netting agreements with our
counterparties to derivative financial instrument contracts to mitigate our
exposure to counterparty credit risks. These agreements provide us with the
legal right to discharge all or a portion of amounts owed to a counterparty by
offsetting against them any amounts that the counterparty may owe
us.






61





In the
opinion of management, our counterparties are creditworthy financial
institutions, and we do not expect any significant loss to result from their
non-performance. The credit exposure of interest rate swap agreements, currency
option contracts and foreign currency contracts is represented by the fair value
of contracts with a positive fair value at the end of each period, reduced by
the effects of master netting agreements.




ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES


A.
DEBT SECURITIES





Not
applicable.





B.
WARRANTS AND RIGHTS





Not
applicable.





C.
OTHER SECURITIES





Not
applicable.


D.
AMERICAN DEPOSITORY SHARES





Not
applicable.





PART
II








ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





Neither
we nor any of our subsidiaries have been subject to a material default in the
payment of principal, interest, a sinking fund or purchase fund installment or
any other material default that was not cured within 30 days. In addition, the
payments of our dividends are not and have not been in arrears, or have not been
subject to material delinquency that was not cured within 30 days.








ITEM
14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS





None.





ITEM
15T. CONTROLS AND PROCEDURES





a)
            Disclosure
      Controls and Procedures





Management
assessed the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule13a-15(e) of the Securities
Exchange Act of 1934, as of December 31, 2009. Based upon that evaluation the
Principal Executive Officer and Principal Financial Officer concluded that the
Company's disclosure controls and procedures are effective as of the evaluation
date.





b)
            Management's
      annual report on internal controls over financial
  reporting





This
annual report does not include a report of management's assessment regarding
internal control over financial reporting or an attestation report of the
Company's registered public accounting firm, due to a transition period
established by the rules of the Securities and Exchange Commission for newly
public companies.





c)
            Changes
      in internal control over financial
reporting





There
were no changes in our internal controls over financial reporting that occurred
during the period covered by this annual report that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.







62





ITEM
16. RESERVED





ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT.





Our Board
of Directors has determined that the sole member of the audit committee, Kate
Blankenship, is an independent Director and is the Audit Committee Financial
Expert.





ITEM
16B. CODE OF ETHICS





We have
adopted a Code of Ethics that applies to all entities controlled by the Company
and its employees, directors, officers and agents of the Company. We have posted
a copy of our Code of Ethics on our website at www.seadrill.com. We will provide any person, free of charge,
a copy of our Code of Ethics upon written request to our registered
office.








ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Our
principal account for the fiscal years ended December 31, 2009 and 2008 was
PricewaterhouseCoopers AS. The following table sets forth the fees related to
audit and other services provided by PricewaterhouseCoopers AS:





2009
            
            
            2008Audit
      fees (a)
            
            
            1,583,833
            
            
            
            1,116,997Audit-related
      fees (b)
            
            
            160,691
            
            
            
            160,427Taxation
      fees (c)
            
            
            272,308
            
            
            
            161,992All
      other fees (d)
            
            
            -
            
            
            
            -Total
            
            
            2,016,832
            
            
            
            1,439,416





a)
            Audit
      fees





Audit
fees represent professional services rendered for the audit of our annual
financial statements and services provided by the principal accountant in
connection with statutory and regulatory filings or engagements





b)
            Audit-related
      fees





Audit-related
fees consist of assurance and related services rendered by the principal
accountant related to the performance of the audit or review of our financial
statements which have not been reported  under Audit Fees
above.





c)
            Taxation
      fees





Taxation
fees represent fees for professional services rendered by the principal
accountant for tax compliance, tax advice and tax planning.





d)
            All
      other fees





All other
fees include services other than audit fees, audit-related fees and taxation
fees set forth above.





e)
            Audit
      Committee's Pre-Approval Policies and
Procedures





Our Board
of Directors has adopted pre-approval policies and procedures in compliance with
paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X that require the Board to
approve the appointment of our independent auditor before such auditor is
engaged, and approve each of the audit and non-audit related services to be
provided by such auditor under such engagement by the Company. All services
provided by the principal auditor in 2009 and 2008 were approved by the Board
pursuant to the pre-approval policy.





ITEM
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES





Not
applicable.




63


ITEM
16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS





Purchases
of our common shares of par value $2.00 each have been made as
follows:





Period
            Total
      number of shares purchase
            Average
      price
              paid
      per share
            Total
      number of shares purchased as part of
              publicly
      announced
              plans
      or programs
            Maximum
      number
              (or
      approximate Dollar value) of shares that may yet be purchased under the
      plans or programsOctober
      2007
            450,000
(1)
            NOK
      125.79
            -
            -November
      2007
            400,000(1)
            NOK
      116.24
            -
            -December
      2007
            100,000(1)
            NOK
      115.00
            -
            -January
      2008
            500,000(1)
            NOK115.84
            -
            -June
      2008
            100,000(1)
            NOK
      161.32
            -
            -February
      2010
            1,000,000(1)
            NOK
      125.70
            -
            -Total
            2,550,000
            NOK
      123.27
            -
            -





1)
            The
      shares repurchased in the period were not part of a publicly announced
      plan or program. The repurchases were made in open-market
      transactions.





2)
            A
      share repurchase program was approved by the Board in 2007, authorizing us
      to buy back shares which may either be cancelled or held as treasury
      shares to meet our obligations relating to our share option scheme. Of the
      2,550,000 shares purchased and shown above, as at April 26, 2010,
      1,705,600 have been utilized to meet our obligations relating to the share
      option scheme and 844,400 are being held as treasury
    shares.





3)
            At
      December 31, 2009, we were party to a Total Return Equity Swap ("TRS")
      agreement relating to 4,500,000 of our common shares - see Item 5.B "Liquidity and Capital
      Resources - Derivatives".  In February 2010 the agreement was
      settled and we entered into a new TRS agreement relating to 3,500,000 of
      our common shares, with a reference price of NOK131.18 per share and an
      expiry date of February 2, 2011. At the same time we acquired 1,000,000 of
      our common shares at an average price of NOK125.70 to meet our share
      option scheme obligations.





4)
            On
      April 15, 2010, Tor Olav Trøim purchased 10,000 of our common shares
      through market transactions at a price of $26.90 per
  share.





5)
            As
      of April 26, 2010, Hemen is party to TRS agreements relating to 3,900,000
      of our common shares with a reference price of NOK153.26 per share and
      Drew Investment Ltd., a company controlled by Tor Olav Trøim, is party to
      TRS agreements relating to 400,000 of our common shares with a reference
      price of NOK148.55 per share.




ITEM
16F.  CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT





Not
applicable.





ITEM
16G.  CORPORATE GOVERNANCE





Pursuant
to an exception under the NYSE listing standards available to foreign private
issuers, we are not required to comply with all of the corporate governance
practices followed by U.S. companies under the NYSE listing
standards.  The significant differences between our corporate
governance practices and the NYSE standards applicable to listed U.S. companies
are set forth below.





Executive
Sessions.The NYSE requires that non-management directors meet
regularly in executive sessions without management. The NYSE also requires that
all independent directors meet in an executive session at least once a
year.  As permitted under Bermuda law and our Bye-laws, our
non-management directors have not regularly held executive sessions without
management. However, we expect them to do so in the future.





Nominating/Corporate
Governance Committee.The NYSE requires
that a listed U.S. company have a nominating/corporate governance committee of
independent directors and a committee charter specifying the purpose, duties and
evaluation procedures of the committee. As permitted under Bermuda law and our
Bye-laws, we do not currently have a nominating or corporate governance
committee.





Audit
Committee.The NYSE requires, among
other things, that a listed U.S. company have an audit committee with a minimum
of three members. As permitted by Rule 10A-3 under the Exchange Act, our audit
committee consists of one independent member of our board of
directors.  Under the Audit Committee charter, the Audit Committee
confers with the Company's independent registered public accounting firm and
reviews, evaluates and advises the board of directors concerning the adequacy of
the Company's accounting systems, its financial reporting practices, the
maintenance of its books and records and its internal controls. In addition, the
Audit Committee reviews the scope of the audit of the Company's financial
statements and results thereof.




Corporate
Governance Guidelines.The NYSE requires
U.S. companies to adopt and disclose corporate governance guidelines. The
guidelines must address, among other things: director qualification standards,
director responsibilities, director access to management and independent
advisers, director compensation, director orientation and continuing education,
management succession and an annual performanceevaluation. We are not
required to adopt such guidelines under Bermuda law and we have not adopted such
guidelines.


64


PART
III
 
 ITEM
17. FINANCIAL STATEMENTS
 
 See Item
18.




ITEM
18. FINANCIAL STATEMENTS





The
following financial statements listed below and set forth on pages F-1 through
F-77 are filed as part of this annual report on


Form
20-F:





Consolidated
      Financial Statements of Seadrill LimitedIndex
      to Consolidated Financial Statements of Seadrill Limited
            F-1Report
      of Independent Registered Public Accounting Firm – PricewaterhouseCoopers
      AS
            F-2Consolidated
      Statements of Operations for the years ended December 31 2009, 2008 and
      2007
            F-3Consolidated
      Statements of Comprehensive Income for the years ended December 31 2009,
      2008 and 2007
            F-4Consolidated
      Balance Sheets as of December 31 2009 and 2008
            F-5Consolidated
      Statements of Cash Flows for the years ended December 31 2009, 2008 and
      2007
            F-6Consolidated
      Statements of Changes in Shareholders' Equity for the years ended December
      31 2009, 2008 and 2007
            F-8Notes
      to Consolidated Financial Statements
            F-9




ITEM
      19.
            EXHIBITSExhibit
              Number
            Description1.1*
            Memorandum
      of Association of Seadrill Limited, or the Company, incorporated by
      reference to Exhibit 1.1 of the Company's Registration Statement, SEC File
      No.001-34667, filed on March 15 2010, which we refer to as the Original
      Registration Statement.1.2
      *
            Bye-Laws
      of Seadrill Limited as adopted by the sole shareholder on May 13, 2005 and
      as amended by resolution of the shareholders at the Annual General Meeting
      held on December 1, 2006 and as further amended by resolution of the
      shareholders at the Annual General Meeting held on September 28,
      20071.3
      *
            Certificate
      of Incorporation of Seadrill Limited delivered May 10,
  20051.4
      *
            Certificate
      of Deposit of Memorandum of Increase of Share Capital delivered May 13,
      20051.5
      *
            Certificate
      of Deposit of Memorandum of Increase of Share Capital delivered August 8,
      20051.6
      *
            Certificate
      of Deposit of Memorandum of Increase of Share Capital delivered December
      20, 20061.7
      *
            Certificate
      of Incorporation on Name Change delivered December 20,
  20062.1
      *
            Form
      of Common Stock Certificate4.1
      *
            Share
      Option Scheme dated December 1, 20064.2
      *
            Bermuda
      Tax Assurance8.1
            Subsidiaries
      of the Company11.1
            Code
      of Ethics12.1
            Certification
      of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities
              Exchange
      Act, as amended.12.2
            Certification
      of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities Exchange Act, as amended.13.1
            Certification
      of the Principal Executive Officer pursuant to 18 USC Section 1350, as
      adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.13.2
            Certification
      of the Principal Financial Officer pursuant to 18 USC Section 1350, as
      adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


________


*
Incorporated by reference.





65




Index to
Consolidated Financial Statements of Seadrill Limited
 
 
 Report
      of Independent Registered Public Accounting Firm
              Page
      3Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008, and
      2007
              Page
      4Consolidated
      Statements of Comprehensive Income for the years ended December 31, 2009,
      2008, and 2007
              Page
      5Consolidated
      Balance Sheets as of December 31, 2009 and 2008
              Page
      6Consolidated
      Statements of Cashflows for the years ended December 31, 2009, 2008, and
      2007
              Page
      7Consolidated
      Statements of Changes in Shareholders' Equity for the years ended December
      31, 2009, 2008, and 2007
              Page
      9Notes
      to Consolidated Financial Statements
              Page
      10
  F-1
 
 Report
of Independent Registered Public Accounting Firm
 
 To the
Board of Directors and Shareholders of Seadrill Limited:
 
 In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, consolidated statements of cash flows,
consolidated statements of comprehensive income and consolidated statements of
changes in shareholders' equity present fairly, in all material respects, the
financial position of Seadrill Limited and its subsidiaries at December 31, 2009
and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.  We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board(United
States).  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 
 
 
 /s/
PricewaterhouseCoopers AS
 
 PricewaterhouseCoopers
AS
 Stavanger,
Norway
 May 5,
2010
 
 F-2
 
 
 
 Seadrill
Limited
 CONSOLIDATED
STATEMENT OF OPERATIONS
 for
the years ended December 31, 2009, 2008 and 2007
 (In
millions of US dollar, except per share data)
 2009
                
                
                2008
                
                
                2007Operating
      revenuesContract
      revenues
                
                
                3,044.9
                
                
                
                1,867.8
                
                
                
                1,318.5Reimbursables
                
                
                166.0
                
                
                
                163.5
                
                
                
                146.6Other
      revenues
                
                
                43.0
                
                
                
                74.5
                
                
                
                87.0Total
      operating revenues
                
                
                3,253.9
                
                
                
                2,105.8
                
                
                
                1,552.1Gain
      on sale of assets
                
                
                71.1
                
                
                
                80.1
                
                
                
                124.2Operating
      expensesVessel
      and rig operating expenses
                
                
                1,252.8
                
                
                
                1,021.6
                
                
                
                755.4Reimbursable
      expenses
                
                
                154.9
                
                
                
                156.6
                
                
                
                139.4Depreciation
      and amortization
                
                
                395.9
                
                
                
                233.2
                
                
                
                182.9General
      and administrative expenses
                
                
                149.1
                
                
                
                125.8
                
                
                
                109.8Total
      operating expenses
                
                
                1,952.7
                
                
                
                1,537.2
                
                
                
                1,187.5Net
      operating income
                
                
                1,372.3
                
                
                
                648.7
                
                
                
                488.8Financial
      itemsInterest
      income
                
                
                78.1
                
                
                
                30.9
                
                
                
                23.6Interest
      expenses
                
                
                (228.4
                )
                
                
                (130.0
                )
                
                
                (112.7
                )Share
      in results from associated companies
                
                
                92.4
                
                
                
                15.6
                
                
                
                23.2Gain
      on sale of associated companies
                
                
                -
                
                
                
                150.5
                
                
                
                -Impairment
      loss on marketable securities and investments in associated
      companies
                
                
                -
                
                
                
                (615.0
                )
                
                
                -Gain
      / (loss) on derivative financial instruments
                
                
                129.6
                
                
                
                (353.3
                )
                
                
                6.9Foreign
      exchange (loss) / gain
                
                
                (25.4
                )
                
                
                130.8
                
                
                
                (52.9
                )Other
      financial items
                
                
                54.5
                
                
                
                22.2
                
                
                
                9.8Total
      financial items
                
                
                100.8
                
                
                
                (748.3
                )
                
                
                (102.1
                )Income/(loss)
      before income taxes
                
                
                1,473.1
                
                
                
                (99.6
                )
                
                
                386.7Income
      taxes
                
                
                (120.0
                )
                
                
                (48.3
                )
                
                
                78.3Gain
      on issuance of shares by subsidiary
                
                
                -
                
                
                
                25.2
                
                
                
                50.0Net
      income/ (loss)
                
                
                1,353.1
                
                
                
                (122.7
                )
                
                
                515.0Net
      income/ (loss) attributable to the parent
                
                
                1,261.2
                
                
                
                (164.4
                )
                
                
                502.0Net
      income attributable to the non-controlling interest
                
                
                91.9
                
                
                
                41.7
                
                
                
                13.0Basic
      earnings/ (loss) per share (US dollar)
                
                
                3.16
                
                
                
                (0.41
                )
                
                
                1.28Diluted
      earnings/ (loss) per share (US dollar)
                
                
                3.00
                
                
                
                (0.41
                )
                
                
                1.20
  See
accompanying notes that are an integral part of these Consolidated Financial
Statements.
 
  F-3
 
 Seadrill
Limited
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
 for
the years ended December 31, 2009, 2008 and 2007
 (In
millions of US dollar, except per share data)
  2009
                
                
                2008
                
                
                2007Net
      income/ (loss)
                
                
                1,353.1
                
                
                
                (122.7
                )
                
                
                515.0Other
      comprehensive income/ (loss), net of tax:Change
      in unrealized gain/ (loss) on marketable securities
                
                
                317.1
                
                
                
                (61.9
                )
                
                
                61.9Change
      in unrealized foreign exchange differences
                
                
                29.6
                
                
                
                (28.2
                )
                
                
                33.9Change
      in actuarial gain/ (loss) relating to pension
                
                
                13.7
                
                
                
                (5.8
                )
                
                
                7.1Change
      in unrealized gain/ (loss) on interest rate swaps in VIEs
                
                
                15.1
                
                
                
                (55.2
                )
                
                
                -Other
      comprehensive income/ (loss):
                
                
                375.5
                
                
                
                (151.1
                )
                
                
                102.9Total
      comprehensive income/ (loss) for the period
                
                
                1,728.6
                
                
                
                (273.8
                )
                
                
                617.9Comprehensive
      income/ (loss) attributable to the parent
                
                
                1,619.8
                
                
                
                (315.5
                )
                
                
                604.9Comprehensive
      income attributable to the non-controlling interest
                
                
                108.8
                
                
                
                41.7
                
                
                
                13.0The
      total balance of accumulated other comprehensive income as at December 31
      is made up as follows:Unrealized
      gain on marketable securities
                
                
                317.1
                
                
                
                -
                
                
                
                61.9Unrealized
      gain on foreign exchange
                
                
                80.1
                
                
                
                57.5
                
                
                
                85.7Actuarial
      gain relating to pension
                
                
                10.9
                
                
                
                (1.4
                )
                
                
                4.4Fair
      value (loss) in VIEs
                
                
                (48.6
                )
                
                
                (55.2
                )
                
                
                -Accumulated
      other comprehensive income at December 31
                
                
                359.5
                
                
                
                0.9
                
                
                
                152.0
 Note: All
items of other comprehensive income / (loss) are stated net of tax.
 
 The
applicable amount of income taxes associated with each component of other
comprehensive income is $0 due to the fact that the items relate to companies
domiciled in non-taxable jurisdictions.
  
 See
accompanying notes that are an integral part of these Consolidated Financial
Statements.
 
  F-4
 
 Seadrill
Limited
 CONSOLIDATED
BALANCE SHEETS
 for
the years ended December 31, 2009, 2008 and 2007
 (In
millions of US dollar, except per share data)
 December
      31, 2009
                  
                  
                  December
      31, 2008ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  
                  460.0
                  
                  
                  
                  376.4Restricted
      cash
                  
                  
                  142.1
                  
                  
                  
                  280.7Marketable
      securities
                  
                  
                  742.3
                  
                  
                  
                  134.7Accounts
      receivables, net
                  
                  
                  451.6
                  
                  
                  
                  341.1Amount
      due from related party
                  
                  
                  137.9
                  
                  
                  
                  115.0Other
      current assets
                  
                  
                  327.1
                  
                  
                  
                  415.9Total
      current assets
                  
                  
                  2,261.0
                  
                  
                  
                  1,663.8Non-current
      assetsInvestment
      in associated companies
                  
                  
                  321.0
                  
                  
                  
                  240.1Newbuildings
                  
                  
                  1,430.9
                  
                  
                  
                  3,660.5Drilling
      units
                  
                  
                  7,514.3
                  
                  
                  
                  4,645.5Goodwill
                  
                  
                  1,596.0
                  
                  
                  
                  1,547.3Other
      intangible assets
                  
                  
                  23.5
                  
                  
                  
                  20.1Restricted
      cash
                  
                  
                  371.0
                  
                  
                  
                  345.9Deferred
      tax assets
                  
                  
                  13.4
                  
                  
                  
                  9.7Equipment
                  
                  
                  115.1
                  
                  
                  
                  83.1Amount
      due from related party
                  
                  
                  90.0
                  
                  
                  
                  -Other
      non-current assets
                  
                  
                  95.2
                  
                  
                  
                  88.5Total
      non-current assets
                  
                  
                  11,570.4
                  
                  
                  
                  10,640.7Total
      assets
                  
                  
                  13,831.4
                  
                  
                  
                  12,304.5LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesCurrent
      portion of long-term debt
                  
                  
                  774.1
                  
                  
                  
                  746.1Trade
      accounts payable
                  
                  
                  84.7
                  
                  
                  
                  119.8Other
      current liabilities
                  
                  
                  1,175.3
                  
                  
                  
                  1,191.9Total
      current liabilities
                  
                  
                  2,034.1
                  
                  
                  
                  2,057.8Non-current
      liabilitiesLong-term
      interest bearing debt
                  
                  
                  6,621.8
                  
                  
                  
                  6,690.7Deferred
      taxes
                  
                  
                  124.5
                  
                  
                  
                  125.0Other
      non-current liabilities
                  
                  
                  238.1
                  
                  
                  
                  209.0Total
      non-current liabilities
                  
                  
                  6,984.4
                  
                  
                  
                  7,024.7Commitments
      and contingenciesShareholders'
      equityCommon
      shares of par value US$2.00 per share: 800,000,000 shares authorized
      399,023,016 outstanding at December 31, 2009 (December, 31 2008:
      398,415,416)
                  
                  
                  798.0
                  
                  
                  
                  796.9Additional
      paid in capital
                  
                  
                  164.2
                  
                  
                  
                  35.9Contributed
      surplus
                  
                  
                  1,955.4
                  
                  
                  
                  1,955.4Accumulated
      other comprehensive income
                  
                  
                  359.5
                  
                  
                  
                  0.9Accumulated
      earnings/(deficit)
                  
                  
                  901.9
                  
                  
                  
                  (159.9
                  )Non-controlling
      interest
                  
                  
                  633.9
                  
                  
                  
                  592.8Total
      shareholders' equity
                  
                  
                  4,812.9
                  
                  
                  
                  3,222.0Total
      liabilities and shareholders' equity
                  
                  
                  13,831.4
                  
                  
                  
                  12,304.5
 See
accompanying notes that are an integral part of these Consolidated Financial
Statements.
  
 F-5
 
 Seadrill
Limited
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 for
the years ended December 31, 2009, 2008 and 2007
 (In millions of US
dollar)
 
 2009
                
                
                2008
                
                
                2007Cash
      Flaws from Operating ActivitiesNet
      income/ (loss)
                
                
                1,353.1
                
                
                
                (122.7
                )
                
                
                515.0Adjustments to reconcile net income to net cash provided by operating
      activities:Depreciation and amortization
                
                
                395.9
                
                
                
                233.2
                
                
                
                182.9Amortization of deferred loan chars
                
                
                23.3
                
                
                
                12.7
                
                
                
                14.0Amortization of unfavorable contracts
                
                
                (43.0
                )
                
                
                (65.3
                )
                
                
                (87.0
                )Amortization of mobilization revenue
                
                
                (49.8
                )
                
                
                (5.2
                )
                
                
                -Impairment loss on marketable securities and investments in associated
      companies
                
                
                -
                
                
                
                615.0
                
                
                
                -Share of results from associated companies
                
                
                (92.4
                )
                
                
                (15.6
                )
                
                
                (23.2
                )Share-based compensation expense
                
                
                16.0
                
                
                
                14.9
                
                
                
                15.1Gain on disposal of fixed assets
                
                
                (71.1
                )
                
                
                (80.1
                )
                
                
                (124.2
                )Gain on issuance of shares in subsidiary
                
                
                -
                
                
                
                (25.2
                )
                
                
                (50.0
                )Gain on disposal of associated companies
                
                
                -
                
                
                
                (150.5
                )
                
                
                -Unrealized (gain)/ loss related to derivative financial
      instruments
                
                
                (152.9
                )
                
                
                168.8
                
                
                
                (19.8
                )Realized gain on disposal of other investments
                
                
                (15.9
                )
                
                
                (22.2
                )
                
                
                (9.8
                )Dividend received from associated company
                
                
                41.2
                
                
                
                -
                
                
                
                5.4Deferred income tax expense
                
                
                2.2
                
                
                
                22.6
                
                
                
                (134.6
                )Unrealized foreign exchange loss/(gain) on long term interest bearing
      debt
                
                
                28.0
                
                
                
                (79.2
                )
                
                
                65.6Changes
      in operating assets and liabilities, net of effect of
      acquisitionsUnrecognized
      mobilization fees received from customers
                
                
                165.9
                
                
                
                83.0
                
                
                
                -Trade
      accounts receivable
                
                
                (110.5
                )
                
                
                (83.0
                )
                
                
                (26.4
                )Trade
      accounts payable
                
                
                (35.1
                )
                
                
                (62.8
                )
                
                
                31.6Prepaid
      expenses/accrued revenue
                
                
                (71.5
                )
                
                
                (95.6
                )
                
                
                8.3Other,
      net
                
                
                68.6
                
                
                
                58.2
                
                
                
                123.1Net
      cash provided by operating activities
                
                
                1,452.0
                
                
                
                401.0
                
                
                
                486.0
 
 
 F-6
  
 Seadrill
Limited
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 for
the years ended December 31, 2009, 2008 and 2007
 (In
millions of US dollar)
 2009
                
                
                2008
                
                
                2007Cash
      Flows from Investing ActivitiesAdditions
      to newbuilding
                
                
                (1,153.2
                )
                
                
                (2,591.2
                )
                
                
                (1,568.0
                )Additions
      to rigs and equipment
                
                
                (216.2
                )
                
                
                (176.3
                )
                
                
                (169.6
                )Sale
      of rigs and equipment
                
                
                392.9
                
                
                
                103.8
                
                
                
                199.9Investment
      in subsidiaries, net of cash acquired
                
                
                -
                
                
                
                (173.2
                )
                
                
                (355.8
                )Change
      in margin calls and other restricted cash
                
                
                344.6
                
                
                
                (610.7
                )
                
                
                (15.9
                )Investment
      in associated companies
                
                
                (32.9
                )
                
                
                (369.2
                )
                
                
                -Proceed
      from repayment of short term loan to related parties
                
                
                115.0
                
                
                
                -
                
                
                
                -Short
      term loan granted to related parties
                
                
                (169.7
                )
                
                
                (115.0
                )
                
                
                -Proceeds
      on issuance of shares in subsidiary
                
                
                -
                
                
                
                25.2
                
                
                
                50.0Purchase
      of marketable securities
                
                
                (263.0
                )
                
                
                (309.9
                )
                
                
                (141.4
                )Disposal
      of associated company
                
                
                -
                
                
                
                221.0
                
                
                
                83.3Sale
      of marketable securities
                
                
                58.8
                
                
                
                148.1
                
                
                
                49.3Net
      cash used in investing activities
                
                
                (923.7
                )
                
                
                (3,847.4
                )
                
                
                (1,868.2
                )Cash
      Flows from Financing ActivitiesProceeds
      from debt
                
                
                2,407.3
                
                
                
                5,150.0
                
                
                
                3,947.4Repayment
      of short term capital lease obligations
                
                
                -
                
                
                
                -
                
                
                
                (0.1
                )Repayments
      of debt
                
                
                (2,490.9
                )
                
                
                (2,107.7
                )
                
                
                (2,211.7
                )Debt
      fees paid
                
                
                (42.7
                )
                
                
                (30.1
                )
                
                
                (21.1
                )Change
      in current liability related to share forward contracts
                
                
                (68.6
                )
                
                
                67.6
                
                
                
                109.0Contribution
      (to) 1 from non-controlling interests
                
                
                (68.0
                )
                
                
                440.1
                
                
                
                40.0Purchase
      of treasury shares
                
                
                -
                
                
                
                (13.7
                )
                
                
                (21.2
                )Proceeds
      from sale of treasury shares
                
                
                8.8
                
                
                
                8.3
                
                
                
                21.4Dividends
      paid
                
                
                (199.4
                )
                
                
                (688.1
                )
                
                
                -Proceedes
      from issuance of equity
                
                
                -
                
                
                
                -
                
                
                
                303.9Net
      cash provided by financing activities
                
                
                (453.5
                )
                
                
                2,826.4
                
                
                
                2,167.6Effect
      of exchange rate changes on cash and cash equivalents
                
                
                8.8
                
                
                
                (0.6
                )
                
                
                1.2Net
      increase / (decrease) in cash and cash equivalents
                
                
                83.6
                
                
                
                (620.6
                )
                
                
                786.6Cash
      and cash equivalents at beginning of the year
                
                
                376.4
                
                
                
                997.0
                
                
                
                210.4Cash
      and cash equivalents at the end of period
                
                
                460.0
                
                
                
                376.4
                
                
                
                997.0Supplementary
      disclosure of cash flow informationInterest
      paid
                
                
                230.5
                
                
                
                245.4
                
                
                
                247.0Taxes
      paid
                
                
                137.5
                
                
                
                52.0
                
                
                
                13.5
 See
accompanying notes that are an integral part of these Consolidated Financial
Statements.
 
  F-7
 
 Seadrill
Limited
 
 CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
 for
the years ended December 31, 2009, 2008 and 2007
 (In
millions of US dollar)
 
 Share
                  Capital
                
                
                Additional
                  paid-in
                  capital
                
                
                Contributed
      surplus
                
                
                Accumulated
      other comprehensive income
                
                
                Retained
      Earnings
                
                
                Non-controlling
      interest
                
                
                Total
      shareholders' equityBalance
      at December 31, 2006
                
                
                766.3
                
                
                
                1693.1
                
                
                
                -
                
                
                
                49.1
                
                
                
                206.5
                
                
                
                212.0
                
                
                
                2927.0Shares
      issued, net of issuance costs
                
                
                32.0
                
                
                
                271.9
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                303.9Employee
      stock options issued
                
                
                
                
                
                
                15.2
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                15.2Unrealized
      gain / (loss) on marketable securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                61.9
                
                
                
                
                
                
                
                
                
                
                
                61.9Unrealized
      foreign exchange differences
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                33.9
                
                
                
                
                
                
                
                
                
                
                
                33.9Changes
      in actuarial gain i (loss) relating to pension
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7.1
                
                
                
                
                
                
                
                
                
                
                
                7.1Effect
      of shares issued to non-controlling interest
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (16.0
                )
                
                
                
                
                
                
                (16.0
                )Net
      purchase of treasury shares
                
                
                (1.2
                )
                
                
                1.4
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                0.2Change
      in non-controlling interest
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (120.4
                )
                
                
                (120.4
                )Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                502.0
                
                
                
                13.0
                
                
                
                515.0Balance
      at December 31, 2007
                
                
                797.1
                
                
                
                1981.6
                
                
                
                -
                
                
                
                152.0
                
                
                
                692.5
                
                
                
                104.6
                
                
                
                3727.8Employee
      stock options issued
                
                
                
                
                
                
                14.8
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                14.8Unrealized
      gain / (loss) on marketable securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (61.9
                )
                
                
                
                
                
                
                
                
                
                
                (61.9
                )Unrealized
      foreign exchange differences
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (28.2
                )
                
                
                
                
                
                
                
                
                
                
                (28.2
                )Changes
      in actuarial gain / (loss) relating to pension
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5.8
                )
                
                
                
                
                
                
                
                
                
                
                (5.8
                )Net
      purchase of treasury shares
                
                
                (0.2
                )
                
                
                (5.1
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5.3
                )Change
      in fair value of interest rate swaps in VIEs
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (55.2
                )
                
                
                
                
                
                
                
                
                
                
                (55.2
                )Changes
      in non-controlling interest
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                446.5
                
                
                
                446.5Transfer
      between categories
                
                
                
                
                
                
                (1955.4
                )
                
                
                1955.4
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                0.0Dividend
      payment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (688.0
                )
                
                
                
                
                
                
                (688.0
                )Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                
                (164.4
                )
                
                
                41.7
                
                
                
                (122.7
                )Balance
      at December 31, 2008
                
                
                796.9
                
                
                
                35.9
                
                
                
                1955.4
                
                
                
                0.9
                
                
                
                (159.9
                )
                
                
                592.8
                
                
                
                3222.0Sale
      of treasury shares
                
                
                1.1
                
                
                
                7.7
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8.8Employee
      stock options issued
                
                
                
                
                
                
                15.7
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                0.3
                
                
                
                16.0Convertible
      loan-equity portion
                
                
                
                
                
                
                104.9
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                104.9Unrealized
      gain on marketable securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                317.1
                
                
                
                
                
                
                
                
                
                
                
                317.1Foreign
      exchange differences
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                29.2
                
                
                
                
                
                
                
                0.4
                
                
                
                29.6Changes
      in actuarial gain relating to pension
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                12.3
                
                
                
                
                
                
                
                1.4
                
                
                
                13.7Change
      in unrealized gain on interest rate swaps inVIEs
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                15.1
                
                
                
                15.1Net
      paid to non-controlling interest
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (68.0
                )
                
                
                (68.0
                )Dividend
      payment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (199.4
                )
                
                
                
                
                
                
                (199.4
                )Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1261.2
                
                
                
                91.9
                
                
                
                1353.1Balance
      at December 31, 2009
                
                
                798.0
                
                
                
                164.2
                
                
                
                1955.4
                
                
                
                359.5
                
                
                
                901.9
                
                
                
                633.9
                
                
                
                4812.9
 See
accompanying notes that are an integral part of these Consolidated Financial
Statements.
 
 
 F-8
 
 Note
1- General information
 
 Seadrill
Limited ("Seadrill" or the "Company") is a publicly listed company on the Oslo
Stock Exchange and the New York Stock Exchange (refer note 34 subsequent
events). The Company was incorporated in Bermuda in May 2005. Assisted by the
acquisition of other companies and investment in newbuildings, Seadrill has
developed into an international offshore drilling contractor providing services
within drilling and well services, and at December 31, 2009 owned
35 offshore drilling units, including 9 units under construction. The
Company's versatile fleet consists of drillships, jack-up rigs, semi-submersible
rigs and tender rigs for operations in shallow and deepwater areas, as well as
benign and harsh environments. In addition to owning and operating offshore
mobile drilling units and tender rigs, the Company provides platform drilling,
well intervention and engineering services through the separately
over-the-counter ("OTC") listed subsidiary company Seawell Limited ("Seawell"),
a Bermuda company in which the Company owned 74% at December 31, 2009.
 
 As used
herein, and unless otherwise required by the context, the term "Seadrill" refers
to Seadrill Limited and the terms "Company", "we", "Group", "our" and words of
similar import refer to Seadrill and its consolidated companies. The use herein
of such terms as group, organization, we, us, our and its, or references to
specific entities, is not intended to be a precise description of corporate
relationships.
 
 Basis
of presentation
 
 The
financial statements are presented in accordance with generally accepted
accounting principles in the United States of America (US GAAP). The amounts are
presented in United States dollar rounded to the nearest hundred thousand,
unless otherwise stated. Due to the implementation of new accounting rules,
effective January 1, 2009 the Company changed the reporting of non-controlling
interest (former called minority interest). The change requires non-controlling
interests to be reported as equity in the consolidated balance sheet and
requires net income attributable to controlling interest and to non-controlling
interests to be shown sperately on the face of the statement of operations. As a
result of our adoption, the Company modified the consolidated statements of
operations to separately present net income (loss) attributable to
non-controlling interest and net income attributable to controlling interest.
Prior periods have been adjusted accordingly.
 
 The
accompanying consolidated financial statements present the financial position of
Seadrill Limited, the consolidated subsidiaries and the group's interest in
associated entities. Investments in companies in which the Company directly or
indirectly holds more than 50 per cent of the voting control are consolidated in
the financial statements, as well as certain variable interest entities in which
the Company is deemed to be subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns, or both.
 
 In
accordance with US GAAP, Seawell's acquisition of the Noble Corporation North
Sea Platform division ("Noble"), Peak Well Solutions AS ("Peak") and Tecwel AS
("Tecwel") in 2008, and the step-up acquisition of Eastern Drilling ASA
("Eastern Drilling") in 2007 have been accounted for as purchases in accordance
with Statement of Financial Accounting Standards No. 141 "Business Combinations"
(currently Accounting Standards Codification (ASC) Topic 805 Business Combinations). The
fair value of the assets acquired and liabilities assumed were included in the
Company's consolidated financial statements beginning on the date when control
was achieved. Derivative financial instruments, financial instruments that are
held for trading or classified as available-for-sale and other investments in
entities owned less than 20 percent where the Company does not exercise
significant influence, are recognized at fair value if fair value is readily
determinable.
 
 Non-current
assets and disposal groups held for sale are stated at the lower of their
carrying amount or fair value less costs of sale.
 
 The
accounting policies set out below have been applied consistently to all periods
in these consolidated financial statements.
   F-9
 
 Basis
of consolidation
 
 The
consolidated financial statements include controlled entities, which are those
where the Company's voting interests exceed 50 percent or the Company has an
interest in a Variable Interest Entity ("VIE") and the Company has been
determined to be the primary beneficiary.
 
 A
variable interest entity ("VIE") is a legal entity where either (a) equity
interest holders as a group lack the characteristics of a controlling financial
interest, including: decision making ability and an interest in the entity's
residual risks and rewards or (b) the equity holders have not provided
sufficient equity investment to permit the entity to finance its activities
without additional subordinated financial support, or where (c) the voting
rights of some investors are not proportional to their obligations to absorb the
expected losses of the entity, their rights to receive the expected residual
returns of the entity, or both and substantially all of the entity's activities
either involve or are conducted on behalf of an investor that has
disproportionately few voting rights. ASC Topic 810 Consolidation (formerly FIN
46(R)) requires a variable interest entity to be consolidated if any of its
interest holders are entitled to a majority of the entity's residual return or
are exposed to a majority of its expected losses.
 
 Investment
in companies in which the Company holds between 20 percent and 50 percent of an
ownership interest, and over which the Company exercises significant influence,
but does not consolidate, are accounted for using the equity method. The Company
records its investments in associated companies and its share of earnings or
losses in the consolidated statements of operations as "Share in results from
associated companies". The excess, if any, of purchase price over book value of
the Company's investments in equity method investees is included in the
accompanying consolidated balance sheets in "Investment in associated
companies".
 
 Investments
in companies in which the Company's ownership is less than 20 percent are valued
at fair value unless it is not possible to estimate fair value, then the cost
method is used.
 
 Intercompany
transactions and internal sales have been eliminated on consolidation.
Unrealized gains and losses arising from transactions with associates are
eliminated to the extent of the Company's interest in the entity.
 
 Note
2- Accounting policies
 
 Use
of estimates
 The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Contract
revenue
 A
substantial majority of the Company's revenues are derived from dayrate based
drilling contracts (which may include lump sum fees for mobilization and
demobilization), and other service contracts. Both day rate based and lump sum
fee revenues are recognized rateably over the contract period when services are
rendered. Under some contracts, the Company is entitled to additional payments
for exceeding performance targets. Such additional payments are recognized when
any uncertainties are resolved or upon completion of the drilling
program.
 
 In
connection with drilling contracts, the Company may receive lump sum fees for
the mobilization of equipment and personnel or for capital additions and
upgrades prior to commencement of drilling services. These up-front fees are
recognized as revenue over the contract term, excluding option periods.
 
 In some
cases, the Company may receive lump sum non-contingent fees or dayrate fees from
customers for demobilization upon completion of a drilling program.
Non-contingent demobilization fees are recognized as revenue over contract term,
excluding option periods not exercised. Contingent demobilization fees are
recognized as earned upon completion.
 
 Fees
received from customers under drilling contracts for capital upgrades are
deferred and recognized over the contract term, excluding option periods not
exercised.
 
 Reimbursables
 Reimbursements
received for the purchase of supplies, personnel services and other services
provided at the request of the Company's customers in accordance with a contract
or agreement are recorded as revenue. The related costs are recorded as
reimbursable expenses in the same period.
   F-10
  Other
revenues
 In a
business combination there may exists favorable and unfavorable drilling
contracts which are recorded at fair value at the date of acquisition when the
purchase price allocation is prepared. A favorable or unfavorable drilling
contract is a contract that has a dayrate which differs from prevailing rates at
the time of acquisition. The net present value of such contracts is recorded as
an asset or liability at the purchase date and subsequently recognized as
revenue or reduction to revenue over the contract term.
 
 Mobilization
and demobilization expenses
 Demobilization
costs are costs to return a vessel or drilling rig to a safe harbor or
geographic area and are expensed as incurred.
 
 Mobilization
costs incurred as part of a contract are capitalized and recognized as expense
over the contract term, excluding option periods not exercised. The costs of
relocating drilling units that are not under contract are expensed as
incurred.
 
 Repairs,
maintenance and periodic surveys
 Costs related to periodic
overhauls of drilling units are capitalized under drilling units and
amortized over the anticipated period between overhauls, which is generally five
years. Related costs are primarily shipyard costs and the cost of employees
directly involved in the work. Amortization costs for periodic overhauls are
included in depreciation and amortization expense.
 
 Costs for
other repair and maintenance activities are included in vessel and rig operating
expenses and expensed when the repairs and maintenance take place.
 
 Foreign
currencies
 The
Company and the majority of its subsidiaries use the U.S. Dollar as their
functional currency because the majority of their revenues and expenses are
denominated in U.S. Dollars. Accordingly, the Company's reporting currency is
also U.S. Dollars. For subsidiaries that maintain their accounts in currencies
other than U.S. Dollars, the Company uses the current method of translation
whereby the statements of operations are translated using the average exchange
rate for the year and the assets and liabilities are translated using the year
end exchange rate. Foreign currency translation gains or losses on consolidation
are recorded as a separate component of other comprehensive income in
shareholders' equity.
 
 Transactions
in foreign currencies are translated into U.S. Dollars at the rates of exchange
in effect at the date of the transaction. Foreign currency assets and
liabilities are translated using rates of exchange at the balance sheet date.
Gains and losses on foreign currency transactions are included in the
consolidated statements of operations.
 
 Current
and non-current classification
 Receivables
and liabilities are classified as current assets and liabilities respectively,
if their maturity is within one year of the balance sheet date. Otherwise, they
are classified as non-current assets and liabilities.
 
 Cash
and cash equivalents
 Cash and
cash equivalents consist of cash, bank deposits and highly liquid financial
instruments with original maturities of three months or less.
 
 Restricted
cash
 Restricted
cash consists of bank deposits which have been pledged as collateral for certain
guarantees issued by a bank or minimum deposits which must be maintained in
accordance with contractual arrangements. Restricted cash with maturity longer
than one year are classified on a separate line as non-current
assets.
 
 Marketable
securities
 Marketable
equity securities held by the Company are considered to be available-for-sale
and, as such, are recorded at fair value with resulting unrealized gains and
losses recorded as a separate component of accumulated other comprehensive
income in shareholders' equity. Gains and losses on forward contracts to
purchase marketable equity securities are accounted for as available-for-sale
securities when they do not meet the definition of a derivative.
   F-11
 
 Receivables
 Receivables,
including accounts receivable, are recorded in the balance sheet at their
nominal amount less an allowance for doubtful accounts. The Company establishes
reserves for doubtful accounts on a case-by-case basis when it is unlikely that
required payments of specific amounts will occur. In establishing these
reserves, the Company considers the financial condition of the customer as well
as specific circumstances such as customer disputes. Uncollectible trade
accounts receivables are written off when a settlement is reached for an amount
that is less than the outstanding historical balance.
 
 Impairment
of marketable securities and equity method investees
 The
Company analyzes its available-for-sale securities and equity method investees
for impairment during each reporting period to evaluate whether an event or
change in circumstances has occurred in that period that may have a significant
adverse effect on the fair value of the investment. The Company records an
impairment charge for other-than-temporary declines in fair value when the fair
value is not anticipated to recover above cost within reasonably period after
the measurement date, unless there are mitigating factors that indicate
impairment may not be required. If an impairment charge is recorded, subsequent
recoveries in fair value are not reflected in earnings until sale of the
securities held as available for sale or of the equity method investee are
sold.
 
 Newbuildings
 The
carrying value of rigs under construction ("Newbuildings") represents the
accumulated costs at the balance sheet date. Cost components include payments
for yard installments and variation orders, construction supervision, equipment,
spare parts, capitalized interest, costs related to first time mobilization and
commissioning costs. No charge for depreciation is made until commissioning of
the newbuilding has been completed and it is ready for its intended
use.
 
 In some
cases, the Company may have options with shipyards to construct rigs at fixed or
variable prices which require some or no additional payment upon
exercise.  Payments for rig purchase options are capitalized at the
time when option contracts are acquired or entered into. The Company reviews the
expected future cash flows, which would result from the exercise of each option
contract on a contract by contract basis to determine whether the carrying value
of the option is recoverable.
 
 Capitalized
interest
 Interest
expenses are capitalized during construction of newbuildings based on
accumulated expenditures for the applicable project at the Company's current
rate of borrowing. The amount of interest expense capitalized in an accounting
period shall be determined by applying an interest rate ("the capitalization
rate") to the average amount of accumulated expenditures for the asset during
the period. The capitalization rates used in an accounting period shall be based
on the rates applicable to borrowings outstanding during the period. The Company
does not capitalize amounts beyond the actual interest expense incurred in the
period.
 
 If the
Company's financing plans associate a specific new borrowing with a qualifying
asset, the Company uses the rate on that borrowing as the capitalization rate to
be applied to that portion of the average accumulated expenditures for the asset
that does not exceed the amount of that borrowing. If average accumulated
expenditures for the asset exceed the amounts of specific new borrowings
associated with the asset, the capitalization rate to be applied to such excess
shall be a weighted average of the rates applicable to other borrowings of the
Company.
 
 Drilling
units
 Rigs,
vessels and equipment are recorded at historical cost less accumulated
depreciation. The cost of these assets less estimated residual value is
depreciated on a straight-line basis over their estimated remaining economic
useful lives. The estimated economic useful life of the Company's mobile units
and tender rigs, when new, is 30 years.
 
 Significant
investments are capitalized and depreciated in accordance with the nature of the
investment. Significant investments that are deemed to increase an asset's value
for its remaining useful life are capitalized and depreciated over the remaining
life of the asset.
 
 Assets
are classified as held for sale when management is actively committed to a
probable asset sale within one year of an asset ready for immediate
sale.  Cost of property and equipment sold or retired, with the
related accumulated depreciation and write-downs are removed from the balance
sheet, and resulting gains or losses are included in the consolidated statement
of operations.
   F-12
  
 Other
equipment
 
 Other
equipment is recorded at historical cost less accumulated depreciation and is
depreciated over its estimated remaining useful life, which approximates is
between three and five years depending on the type of asset.
 
 Goodwill
 The
Company allocates the cost of acquired businesses to the identifiable tangible
and intangible assets and liabilities acquired, with any remaining amount being
capitalized as goodwill. Goodwill is tested for impairment at least annually at
the reporting unit level, which is defined as an operating segment or a
component of an operating segment that constitutes a business for which
financial information is available and is regularly reviewed by management. The
Company has determined that its reporting units are the same as the operating
segments for the purpose of allocating goodwill and the subsequent testing of
goodwill for impairment.  The goodwill impairment test requires the
Company to compare the fair value of its reporting units to their carrying
value.  In the event that the fair value is less than carrying value,
the Company must perform an exercise similar to a purchase price allocation in a
business combination in order to determine the amount of the impairment
charge.
 
 The
Company performs our annual test of goodwill impairment as of December 31 for
each reporting segment, based on a discounted cash flow model. When testing for
impairment we have used expected future cash flows using contract day rates
during the contract periods. For periods after expiry of the contract periods,
day rates have been forecasted based on estimates regarding future market
conditions, including zero escalation of day rates. The estimated future cash
flows have been calculated based on remaining asset lives. The estimated cash
flows have been discounted using a weighted average cost of capital (WACC). We
had no impairment of goodwill for the years ended December 31, 2009 and 2008 as
the net present value of the estimated future cash flows justify the book value
of goodwill. We have also performed sensitivity analysis using different
scenarios regarding future cash flows, remaining asset lives and discount rates
showing acceptable tolerance to changes in underlying assumptions in the
impairment model before changes in assumptions would result in
impairment.
 
 Other
intangible assets
 Other
intangible assets are recorded at historical cost less accumulated amortization.
The cost of these assets less estimated residual value is amortized on a
straight-line basis over the estimated remaining economic useful lives. Other
intangible assets include technology and customer relationships.
 
 Impairment
of long-lived assets
 The
carrying value of long-lived assets that are held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may no longer be appropriate. The Company
assesses recoverability of the carrying value of the asset by estimating the
undiscounted future net cash flows expected to result from the asset, including
eventual disposition. If the undiscounted future net cash flows are less than
the carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value.
 
 Defined
benefit pension plans
 The
Company has several defined benefit plans which provide retirement, death and
termination benefits. The Company's net obligation is calculated separately for
each plan by estimating the amount of the future benefit that employees have
earned in return for their cumulative service.
  The
projected future benefit obligation is discounted to its present value, and the
fair value of any plan assets is deducted. The discount rate is the market yield
at the balance sheet date on government bonds in the currency and based on terms
consistent with the post-employment benefit obligations. The retirement benefits
are generally a function of years of employment and amount of compensation. The
plans are primarily funded through payments to insurance companies. The Company
records its pension costs in the period during which the services are rendered
by the employees. Actuarial gains and losses are recognized in the statement of
operations when the net cumulative unrecognized actuarial gains or losses for
each individual plan at the end of the previous reporting year exceed 10 percent
of the higher of the present value of the defined benefit obligation and the
fair value of plan assets at that date. These gains and losses are recognized
over the expected remaining working lives of the employees participating in the
plans. Otherwise, recognition of actuarial gains and losses is included in other
comprehensive income.  Those amounts will be subsequently recognized
as a component of net periodic pension cost on the same basis as the amounts
recognized in accumulated other comprehensive income.
   F-13
 
 Treasury
shares
 Treasury
shares are recognized as a separate component of shareholders' equity at cost.
The purchase of treasury shares reduces the Company's share capital by the
nominal value of the acquired treasury shares. The amount paid in excess of the
nominal value is treated as a reduction of additional paid-in
capital.
 
 Derivative
Financial Instruments and Hedging Activities
 The
Company's interest-rate swap agreements, foreign currency options and forward
exchange contracts are recorded at fair value when they do not qualify as hedges
for accounting purposes, as they are not designated as hedges of specific
assets, liabilities or firm commitments. Consequently, changes in the fair value
of interest-rate swap agreements, forward exchange and currency options
contracts are recorded as a gain or loss under Other Financial Items. A hedge of
a forecasted transaction or of the variability of cash flows to be received or
paid related to a recognized asset or liability is designated as a cash flow
hedge.[Missing Graphic Reference] When the interest swap qualifies for hedge
accounting the Company has formally designated the swap instrument as a hedge of
cash flows to be paid on the underlying loan, and when the hedge is effective,
the changes in the fair value of the swap is recognized in the "Accumulated
other comprehensive loss" line of the Consolidated Balance Sheets. Ineffective
portions of the hedges are charged to the income statement. When the hedged item
affects the income statement, the gain or loss included in accumulated other
comprehensive income (loss) is reported on the same line in the Consolidated
Statements of Income as the hedged item.
 
 Financial
instruments such as forward contracts to purchase shares that do not qualify as
derivative instruments are not recognized on the balance sheet, unless deemed
impaired. Such instruments are off-balance transactions and result in only
disclosures.
 
 Income
taxes
 Seadrill
is a Bermuda company. Currently, Seadrill is not required to pay taxes in
Bermuda on ordinary income or capital gains. The Company has received written
assurance from the Minister of Finance in Bermuda that, it will be exempt from
taxation until March 2016. Certain subsidiaries operate in other jurisdictions
where taxes are imposed. Consequently income taxes have been recorded in these
jurisdictions when appropriate.
 
 Significant
judgment is involved in determining the Group-wide provision for income taxes.
There are certain transactions for which the ultimate tax determination is
unclear due to uncertainty in the ordinary course of business. The Group
recognizes tax liabilities based on its assessment of whether its tax positions
are sustainable and on estimates of taxes that will ultimately be
due.
 
 Income
tax expense consists of taxes currently payable and changes in deferred tax
assets and liabilities calculated according to local tax rules. Deferred tax
assets and liabilities are based on temporary differences that arise between the
carrying values for financial reporting purposes and the amounts used for
taxation purposes of assets and liabilities and the future tax benefits of tax
loss carry forwards. A deferred tax asset is recognized only to the extent that
it is more likely than not that future taxable profits will be available against
which the asset can be utilized. The amount of deferred tax provided is based
upon the expected manner of settlement of the carrying amount of assets and
liabilities, using tax rates enacted or substantially enacted at the balance
sheet date. The impact of tax law changes is recognized in periods when the
change is enacted or substantially enacted.
 
 Deferred
charges
 Loan
related costs, including debt arrangement fees, are capitalized and amortized
over the term of the related loan and are included in interest
expense.
 
 Convertible
debt
 Convertible
bond loans issued by the Company include both a loan component (host contract)
and an option to convert the loan to shares (embedded derivative).
 
 An
embedded derivative, such as a conversion option, may be separated from its host
contract and accounted for separately if certain criteria are met (including if
the contract that embodies both the embedded derivative and the host contract is
not measured at fair value, the economic characteristics and risks of the
embedded derivative instrument are not clearly and closely related to the
economic characteristics and risks of the host contract and if a separate
instrument with the same terms as the embedded instrument would be a
derivative).
    F-14
 
 If an
embedded derivative instrument is separated from its host contract, the host
contract shall be accounted for based on generally accepted accounting
principles applicable to instruments of that type which do not contain embedded
derivative instruments.
 
 Total
Return Equity Swaps
 From time
to time, the Company enters into total return equity swaps ("TRS") indexed to
the Company's own shares, where the counterparty acquires shares in the Company
and the Company carries the risk of fluctuations in the share price of the
acquired shares. The fair value of each TRS is recorded as an asset or
liability, with the changes in fair value recorded in the consolidated statement
of operations. The Company may, from time to time, enter into TRS arrangements
indexed to shares in other companies and these are accounted for in the same
way.
 
 Share-based
compensation
 The
Company has established an employee share ownership plan under which employees,
directors and officers of the Group may be allocated options to subscribe for
new shares in the ultimate parent, Seadrill Limited. The compensation cost for
stock options is recognized as an expense over the service period based on the
fair value of the options granted.
 
 The fair
value of the share options issued under the Company's employee share option
plans is determined at grant date taking into account the terms and conditions
upon which the options are granted, and using a valuation technique that is
consistent with generally accepted valuation methodologies for pricing financial
instruments, and that incorporates all factors and assumptions that
knowledgeable, willing market participants would consider in determining fair
value. The fair value of the share options is recognized as personnel expenses
with a corresponding increase in equity over the period during which the
employees become unconditionally entitled to the options. Compensation cost is
initially recognized based upon options expected to vest with appropriate
adjustments to reflect actual forfeitures. National insurance contributions
arising from such incentive programs are expensed when the options are
exercised.
 
 Provisions
 A
provision is recognized in the balance sheet when the Company has a present
legal or constructive obligation as a result of a past event, and it is probable
that an outflow of economic benefits will be required to settle the obligation
and a reliable estimate of the amount can be made. If the effect is material,
provisions are determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time value of money
and, where appropriate, the risks specific to the liability.
 
 Segment
reporting
 The
Company has three reportable business segments which include mobile units,
tender rigs and well services. The mobile unit segment reflects the activities
of the Company's drillships, semi-submersible and jack-up rigs. The tender rigs
business segment includes activities of the Company tender and semi-tender
units. The well services business segment includes the activities of Seawell,
the Company's 74% owned subsidiary (as of December 31, 2009) which performs
various services related to platform drilling, drilling facility engineering,
well intervention and oilfield services.
 
 Related
parties
 Parties
are related if one party has the ability, directly or indirectly, to control the
other party or exercise significant influence over the other party in making
financial and operating decisions. Parties are also related if they are subject
to common control or common significant influence. All transactions between the
related parties are based on the principle of arm's length (estimated market
value).
 
 Issuance
of shares by a subsidiary/associate
 For
periods up to December 31, 2008, the Company recognized a profit when its
subsidiary or associate issues its stock to third parties at a price per share
in excess of its carrying amount if such profit was realizable. If such profit
was not realizable, it was recorded as an increase to additional paid in
capital. As of January 1, 2009 ASC 810-10-65 (FAS 160) was implemented which
precludes a company from recognizing a profit when its subsidiary or associate
issues its stock to third parties at a price per share in excess of its carrying
amount if such profit is realizable. Effective from January 1, 2009 any profit
of future issuance of shares by a subsidiary/associate will hence be recorded as
equity transactions.
    F-15
  
 Earnings
per share
 Basic
earnings per share ("EPS") is calculated based on the income (loss) for the
period available to common stockholders divided by the weighted average number
of shares outstanding for basic EPS for the period. Diluted EPS includes the
effect of the assumed conversion of potentially dilutive instruments which for
the Company includes share options and convertible debt. The determination of
dilutive earnings per share requires the Company to potentially make certain
adjustments to net income and for the weighted average shares outstanding used
to compute basic earnings per share unless anti-dilutive.
 
 Reclassifications
 Certain
reclassifications have been made to prior period amounts to conform with the
current year presentation. These reclassifications did not have a material
effect on the consolidated financial statements.
 
 New
Accounting Pronouncements
 In
December 2007, the Financial Accounting Standards Board ('FASB') issued
Statements No. 141(R), Business Combinations, ("FAS 141(R)", (codified in ASC
805), and No. 160 Noncontrolling Interests in Consolidated Financial Statements,
("FAS 160"), (codified in ASC 810). Together these statements can affect the way
companies account for future business combinations and noncontrolling interests.
ASC 805 requires, amongst other changes, recognition of subsequent changes in
the fair value of contingent consideration in the Statement of Operations rather
than against Goodwill, and transaction costs to be recognized immediately in the
Statement of Operations. ASC 810-10-65-1 clarifies the classification of
noncontrolling interests in consolidated balance sheets and the accounting for
and reporting of transactions between the reporting entity and holders of such
noncontrolling interests. In particular the noncontrolling interest in
subsidiaries should be presented in the consolidated balance sheet within
equity, but separate from the parent's equity. Similarly the amount of net
income attributable to the parent and to the minority interest be clearly
identified and presented on the consolidated statement of
income.  Both these Statements are effective for transactions
completed in fiscal years beginning after December 15, 2008. Adoption of of
these Statements by the Company in the financial statements beginning January 1,
2009 did not have a material effect on the Company's consolidated financial
statements except that noncontrolling interests is classified as a component of
equity.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1 (codified in ASC 825), Guidance
on Interim Fair Value Disclosures, which expands the fair value disclosures
required for all financial instruments within the scope of this topic to interim
periods for publicly traded entities. Entities must disclose the method(s) and
significant assumption used to estimate the fair value of financial instruments
in financial statements on an interim basis and to highlight any changes in the
methods and significant assumptions from prior periods. The guidance is
effective for interim and annual periods ending after June 15, 2009 and adoption
of this FSP did not have a material effect  on our consolidated
financial statements.
 
 In April
2009, the FASB issued FSP FAS 115-2 (codified in ASC 320) which provides
additional guidance to highlight and expand on the factors that should be
considered in estimating fair value when there has been a significant decrease
in market activity for a financial asset.  The guidance is effective
for interim and annual periods ending after June 15, 2009. Adoption of this FSP
did not have a material effect t on our consolidated financial statements.
 
 In May
2009, the FASB issued Statement No. 165 Subsequent Events, ('FAS 165'),
(codified in ASC 855). This Statement provides guidance on management's
assessment of subsequent events. The guidance clarifies that management must
evaluate, as of each reporting period, events or transactions that occur after
the balance sheet date "through the date that the financial statements are
issued or are available to be issued." Management must perform its assessment
for both interim and annual financial reporting periods. The new guidance is
effective prospectively for interim and annual periods ending after June 15,
2009. Adoption of the Statement did not have a material effect on the Company's
consolidated financial statements. In February 2010, the FASB amended the
subsequent events guidance issued in May 2009 to remove the requirement for SEC
filers to disclose a date through which subsequent events have been evaluated in
both issued and revised financial statements. The amendment is effective upon
issuance. The adoption of this guidance did not have a material effect on our
consolidated financial condition or results of operations.
 
 In June
2009, the FASB issued Statement No. 168, Statement on Codification and Hierarchy
of Generally Accepted Accounting Principles, ('FAS 168'), (codified in ASC 105).
The standard is a replacement for FAS 162. The GAAP hierarchy will be modified
to include only two levels of GAAP; authoritative and nonauthoritative. The
standard is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of this Standard did not
have a material effect on the Company's consolidated financial statements.
 
  F-16
 
 
 In June
2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No.
46(R) (FAS 167) (codified in ASC 810). The amended guidance requires companies
to qualitatively assess the determination of the primary beneficiary of a
variable-interest entities ("VIEs") based on whether the entity (1) has the
power to direct the activities of the VIE that most significantly impact the
entity's economic performance and (2) has the obligation to absorb losses of the
entity that could potentially be significant to the VIE or the right to receive
benefits from the entity that could potentially be significant to the VIE. It
also requires additional disclosures for any enterprise that holds a variable
interest in a VIE. The new accounting and disclosure requirements became
effective for the Company from January 1, 2010. The Company is currently
assessing the impact of this amendment on its consolidated financial statements.
 
 In
January 2010, the FASB issued ASC 820 Improving Disclosures about Fair Value
Measurements. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. The Company is
currently assessing the impact of this amendment on its consolidated financial
statements.
  Note
3 – Segment information
 
 Operating
segments
 
 The
Company provides drilling and related services to the offshore oil and gas
industry. The split of our organization into segments is based on differences in
management structure and reporting, economic characteristics, customer base,
asset class and contract structure. As of December 31, 2009, the Company reports
its business in the following three operating segments:
 
 ·           Mobile
Units: The Company offers services encompassing drilling, completion and
maintenance of offshore wells. The drilling contracts relate to semi-submersible
rigs, jack-ups and drillships.
 
 ·           Tender
Rigs: The Company operates self-erecting tender rigs and semi-submersible tender
rigs, which are used for production drilling and well maintenance in Southeast
Asia and West Africa.
 
 ·           Well
Services: The Company performs production drilling and maintenance activities on
several fixed installations in the North Sea. The Company also provides wireline
services including well maintenance, modification and abandonment.
 
 Segment
results are evaluated on the basis of operating profit, and the information
given below is based on information used for internal reporting. The accounting
principles for the segments are the same as for the Company's consolidated
financial statements.
 
 Revenues
(including gain on sale of drilling units)
 (In
      millions of US dollar)
              
              2009
              
              
              2008
              
              
              2007Mobile
      Units
              
              
              2,323.2
              
              
              
              1,224.2
              
              
              
              961.6Tender
      Rigs
              
              
              392.0
              
              
              
              341.4
              
              
              
              265.7Well
      Services
              
              
              609.8
              
              
              
              620.3
              
              
              
              449.0Total
              
              
              3,325.0
              
              
              
              2,185.9
              
              
              
              1,676.3
  Depreciation
and amortization
 (In
      millions of US dollar)
              
              2009
              
              
              2008
              
              
              2007Mobile
      Units
              
              
              332.8
              
              
              
              173.0
              
              
              
              135.1Tender
      Rigs
              
              
              41.8
              
              
              
              41.7
              
              
              
              38.6Well
      Services
              
              
              21.3
              
              
              
              18.5
              
              
              
              9.2Total
              
              
              395.9
              
              
              
              233.2
              
              
              
              182.9
 
   F-17
 
 Operating
income - net income (loss)
 (In
      millions of US dollar)
              
              2009
              
              
              2008
              
              
              2007Mobile
      Units
              
              
              1,141.3
              
              
              
              467.7
              
              
              
              348.6Tender
      Rigs
              
              
              173.5
              
              
              
              126.1
              
              
              
              97.0Well
      Services
              
              
              57.5
              
              
              
              54.9
              
              
              
              43.3Operating
      income
              
              
              1,372.3
              
              
              
              648.7
              
              
              
              488.8Unallocated
      items:Total
      financial items
              
              
              100.8
              
              
              
              (748.3
              )
              
              
              (102.1
              )Income
      taxes
              
              
              (120.0
              )
              
              
              (48.3
              )
              
              
              78.3Gain
      on issuance of shares by subsidiary
              
              
              -
              
              
              
              25.2
              
              
              
              50.0Net
      income (loss)
              
              
              1,353.1
              
              
              
              (122.7
              )
              
              
              515.0
 
 Total
assets
 (In
      millions of US dollar)
              
              2009
              
              
              2008Mobile
      Units
              
              
              11,995.3
              
              
              
              10,667.0Tender
      Rigs
              
              
              1,246.6
              
              
              
              1,147.1Well
      Services
              
              
              589.5
              
              
              
              490.4Total
              
              
              13,831.4
              
              
              
              12,304.5
 
 
 Goodwill:
 (In
      millions of US dollar)
              
              2009
              
              
              2008Mobile
      Units
              
              
              1,170.9
              
              
              
              1,170.9Tender
      Rigs
              
              
              149.3
              
              
              
              149.3Well
      Services
              
              
              275.8
              
              
              
              227.1Total
              
              
              1,596.0
              
              
              
              1,547.3
 
 Total
liabilities
 (In
      millions of US dollar)
              
              2009
              
              
              2008Mobile
      Units
              
              
              7,764.1
              
              
              
              7,922.2Tender
      Rigs
              
              
              778.9
              
              
              
              723.2Well
      Services
              
              
              475.5
              
              
              
              437.1Total
              
              
              9,018.5
              
              
              
              9,082.5
 
 
 Capital
expenditures – fixed assets
 (In
      millions of US dollar)
              
              2009
              
              
              2008
              
              
              2007Mobile
      Units
              
              
              1,091.4
              
              
              
              2,581.5
              
              
              
              1,654.7Tender
      Rigs
              
              
              246.8
              
              
              
              177.0
              
              
              
              66.0Well
      Services
              
              
              31.2
              
              
              
              53.9
              
              
              
              18.0Total
              
              
              1,369.4
              
              
              
              2,812.4
              
              
              
              1,738.7
   F-18
   Geographic
segment data
 
 Revenues
are attributed to geographical segments based on the country of operations for
drilling activities, i.e. the country where the revenues are generated. The
following presents the Company's revenues and fixed assets by geographic
area:
 
 Revenues
(including gain on sale of assets)
 (In
      millions of US dollar)
              
              2009
              
              
              2008
              
              
              2007Norway
              
              
              1,234.5
              
              
              
              967.3
              
              
              
              859.4UK
              
              
              149.1
              
              
              
              172.0
              
              
              
              73.6Brunei
              
              
              42.0
              
              
              
              30.3
              
              
              
              23.5Thailand
              
              
              111.9
              
              
              
              110.1
              
              
              
              38.5Malaysia
              
              
              108.3
              
              
              
              249.1
              
              
              
              136.7Congo
              
              
              70.4
              
              
              
              87.2
              
              
              
              66.8Nigeria
              
              
              154.7
              
              
              
              65.4
              
              
              
              56.7Australia
              
              
              112.5
              
              
              
              190.5
              
              
              
              269.7USA
              
              
              147.5
              
              
              
              78.7
              
              
              
              -Brazil
              
              
              500.5
              
              
              
              25.1
              
              
              
              -China
              
              
              177.6
              
              
              
              25.5
              
              
              
              -Indonesia
              
              
              178.7
              
              
              
              -
              
              
              
              -Philippines
              
              
              53.7
              
              
              
              -
              
              
              
              -Vietnam
              
              
              104.6
              
              
              
              -
              
              
              
              -Angola
              
              
              27.1
              
              
              
              -
              
              
              
              -Red
      Sea
              
              
              0.9
              
              
              
              -
              
              
              
              -Other
              
              
              151.0
              
              
              
              184.7
              
              
              
              151.4Total
              
              
              3,325.0
              
              
              
              2,185.9
              
              
              
              1,676.3
 
 
 Fixed assets – operating drilling units1)
 (In
      millions of US dollar)
              
              2009
              
              
              2008Norway
              
              
              2,125.8
              
              
              
              1,285.2UK
              
              
              -
              
              
              
              -Brunei
              
              
              42.4
              
              
              
              54.4Thailand
              
              
              120.1
              
              
              
              319.0Malaysia
              
              
              125.6
              
              
              
              530.1Congo
              
              
              -
              
              
              
              93.6Nigeria
              
              
              625.8
              
              
              
              158.7Australia
              
              
              -
              
              
              
              296.2USA
              
              
              527.9
              
              
              
              539.9Brazil
              
              
              1,882.5
              
              
              
              698.6China
              
              
              605.2
              
              
              
              631.4Indonesia
              
              
              720.9
              
              
              
              -Vietnam
              
              
              192.5
              
              
              
              -Angola
              
              
              86.1
              
              
              
              -Red
      Sea
              
              
              195.8
              
              
              
              -Other
              
              
              263.7
              
              
              
              38.4Total
              
              
              7,514.3
              
              
              
              4,645.5
 
 1)The
fixed assets referred to in the table are the Company's operating drilling
units. Asset locations at the end of a period are not necessarily
indicative of the geographic distribution of the revenues or operating profits
generated by such assets during such period.
   F-19
 
 Note
4 – Taxation
 Income
taxes consist of the follows:
 Year
      ended December 31(In
      millions of US dollar)
              
              2009
              
              
              2008
              
              
              2007Current
      tax expense:Bermuda
              
              
              -
              
              
              
              -
              
              
              
              -Foreign
              
              
              118.2
              
              
              
              69.1
              
              
              
              56.3Deferred
      tax expense:Bermuda
              
              
              -
              
              
              
              -
              
              
              
              -Foreign
              
              
              (2.9
              )
              
              
              28.8
              
              
              
              (134.6
              )Deferred
      taxes acquired during the year
              
              
              -
              
              
              
              (6.2
              )
              
              
              -Tax
      related to internal sale of assets in
      subsidiary,  amortizedfor
      group purposes
              
              
              4.7
              
              
              
              (43.4
              )
              
              
              -Total
      provision
              
              
              120.0
              
              
              
              48.3
              
              
              
              (78.3
              )Effective
      tax rate
              
              
              8.1
              %
              
              
              (48.5
              %)
              
              
              (20.2
              %)
 
 Norwegian
tax rules allow for the offset of taxable income in one entity against taxable
losses or carryforward losses in another entity within the same tax jurisdiction
to reduce payable taxes (group tax relief). In 2009, 2008 and 2007 these rules
reduced the company's payable tax by US$ 0.0, US$14.1 million and US$14.9
million respectively not reflected in the current tax expense above. However,
the total tax expense is unaffected by these rules.
 
 The
Company, including its subsidiaries, is taxable in several jurisdictions based
on its rig operations. A loss in one jurisdiction may not be offset against
taxable income in another jurisdiction. Thus, the Company may pay tax within
some jurisdictions even though it might have an overall loss at a consolidated
level.
   F-20
  
 The
income taxes for the years ended December 31 differed from the amount computed
by applying the statutory income tax rate of 0 % as follows:
  Year
      ended December 31(In
      millions of US dollar)
              
              2009
              
              
              2008
              
              
              2007Income
      taxes at statutory rate
              
              
              -
              
              
              
              -
              
              
              
              -Effect
      of transfers to new tax jurisdictions
              
              
              4.7
              
              
              
              (43.4
              )
              
              
              (75.0
              )Effect
      of change in taxable currency
              
              
              -
              
              
              
              -
              
              
              
              (21.3
              )Effect
      of taxable income in various countries
              
              
              115.3
              
              
              
              91.7
              
              
              
              18.0Total
              
              
              120.0
              
              
              
              48.3
              
              
              
              (78.3
              )
 
 Deferred
Income Taxes
 
 Deferred
income taxes reflect the impact of temporary differences between the amount of
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. The net deferred tax assets (liabilities)
consist of the following:
 
 Deferred Tax
Assets:
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008
              
              
              December
                31,
      2007Pension
              
              
              10.6
              
              
              
              7.4
              
              
              
              16.0Tax
      loss carry forward
              
              
              5.4
              
              
              
              15.7
              
              
              
              12.2Unfavorable
      contracts
              
              
              6.9
              
              
              
              12.0
              
              
              
              26.4Other
              
              
              4.1
              
              
              
              0.0
              
              
              
              5.6Gross
      deferred tax asset
              
              
              27.0
              
              
              
              35.1
              
              
              
              60.2
 
 Deferred
Tax Liability:
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008
              
              
              December
                31,
      2007Property,
      plant and equipment
              
              
              84.7
              
              
              
              74.8
              
              
              
              135.5Long
      term maintenance
              
              
              15.3
              
              
              
              15.3
              
              
              
              11.0Gain
      from sale of fixed assets
              
              
              42.2
              
              
              
              57.4
              
              
              
              0.5Other
              
              
              0.0
              
              
              
              3.2
              
              
              
              0.0Gross
      deferred tax liability
              
              
              142.2
              
              
              
              150.7
              
              
              
              147.0Net
      deferred tax
              
              
              115.2
              
              
              
              115.6
              
              
              
              86.8
  Net
deferred taxes are classified as follows:
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008
              
              
              December
                31,
      2007Short-term
      deferred tax asset
              
              
              0.5
              
              
              
              0.0
              
              
              
              5.6Long-term
      deferred tax asset
              
              
              13.4
              
              
              
              9.8
              
              
              
              3.7Short-term
      deferred tax liability
              
              
              4.6
              
              
              
              0.4
              
              
              
              0.1Long-term
      deferred tax liability
              
              
              124.5
              
              
              
              125.0
              
              
              
              96.1Net
      deferred tax
              
              
              115.2
              
              
              
              115.6
              
              
              
              86.8
 
 Future
taxable income justifies the inclusion of tax loss carry forward in the
calculation of net deferred taxes.
  F-21
 
 In the
fourth quarter of 2007 the Company established a new office and moved several
Norwegian legal entities holding four rigs and one newbuilding contract to a
different tax jurisdiction. The Company carried out an analysis under the
current tax regulations relating to these transfers in accordance with ASC Topic
740 Income Taxes, and
based on this analysis the Company recognized a tax benefit of approximately
US$75 million in 2007.
 
 With
effect from January 1, 2007 the Company introduced US dollar as the functional
currency for several Norwegian subsidiaries for statutory as well as tax
reporting purposes. As a result, and for consolidation purposes, deferred taxes
have been recalculated and adjusted as at January 1, 2007. The effect of the
adjustment was a reduction of approximately US$21.3 million in the deferred tax
liability as of December 31, 2006. The recalculation and adjustment of the tax
position at January 1, 2007 and the calculation of current and deferred taxes
for 2007 have been based on the Company's interpretation of current tax
regulations.
 
 At
December 31, 2008 the Company performed
an analysis for uncertain tax positions in the various jurisdictions in which
the Company operates, in accordance with ASC Topic 740 Income Taxes. Based on
the analysis no provision was made for the uncertain tax positions relating to
the move of legal entities to a new tax jurisdiction or the use of US dollar as
the functional currency for tax reporting purposes.
  In late
March 2010, the Company received a notice from the Norwegian tax authorities,
although not taking any final position, questioning:
 
 a)
                the
      Company's tax positions from 2007 relating to a possible taxable gain
      arising from the transfer of certain legal entities to a different tax
      jurisdiction.  These positions also affect the relevant filed
      tax assessments for 2008 and 2009.  To the extent there is a
      taxable gain, there is also an uncertainty related to the amount of such a
      gain, and this, in turn, is affected by the timing of the transfer of the
      legal entities in question of their domiciles to a new tax
      jurisdiction.  In the Company's opinion, the transfer by the
      legal entities of their domiciles took place in December 2007, and that
      there was no legal basis for taxation of such a gain. The tax authorities
      have indicated that they are of the opinion that the move took place in
      the first half of 2008.  The government changed its taxation of
      these kinds of transactions in the second half of 2008. Even if the tax
      authorities conclude that the move took place in first half of 2008, the
      Company's position is that there was no taxable gain as the tax
      authorities are seeking to apply new tax laws retroactively, and that a
      recent decision of the Supreme Court in Norway holds, in a similar case,
      that such retroactive application is against the law. Consequently, the
      Company has not made a provision for any tax related to the move of tax
      jurisdiction.
 
 b)
                the
      principles for conversion of the functional currency for several Norwegian
      subsidiaries for tax reporting purposes. In the Company's view, applicable
      tax legislation is subject to various interpretations related to the
      calculation of the tax basis measured in Norwegian kroner. Seadrill is of
      the opinion that it is more likely than not that the current position
      taken by the Company will prevail and no tax provision has been
      made.
 
 At
December 31, 2009 the Company performed an analysis for uncertain tax positions
in the various jurisdictions in which the Company operates, in accordance with
ASC Topic 740 Income Taxes. The
Company believes that it is more likely than not that a provision for an
estimated total tax exposure up to approximately $190 million will not be
required.
 The
parent company, Seadrill Limited, is headquartered in Bermuda which is a
non-taxable jurisdiction.  Other jurisdictions in which the Company
and its subsidiaries operate are taxable based on rig operations. A loss in one
jurisdiction may not be offset against taxable income in another
jurisdiction.  Thus, the Company may pay tax within some jurisdictions
even though it may have an overall loss at the consolidated
level.  The following table summarizes the earliest tax years that
remain subject to examination by the major taxable jurisdictions in which the
Company operates:
 
 Jurisdiction
                Earliest
      Open YearAustralia
                2008Nigeria
                2007Norway
                2007Thailand
                2003
   F-22
 
 
 Note
5 – Earnings per share
 
 The
components of the numerator and denominator for the calculation of basic and
diluted earnings per share resulting from continuing operations are as
follows:
 
 Net
      income
              
              
              Weighted
      average million of shares outstanding
              
              Earnings
      per share2007Earnings
      per share
              
              
              502.0
              
              
              
              392.8
              
              
              1.28Effect
      of dilution:Convertible
      bonds
              
              
              
              
              
              
              29.0Share
      options
              
              
              
              
              
              
              1.5Diluted
      earnings per share
              
              
              502.0
              
              
              
              423.3
              
              
              1.202008Earnings
      per share
              
              
              (164.4
              )
              
              
              398.3
              
              
              (0.41
              )Effect
      of dilution:Convertible
      bonds
              
              
              
              
              
              
              -Share
      options
              
              
              
              
              
              
              -Diluted
      earnings per share*
              
              
              (164.4
              )
              
              
              398.3
              
              
              (0,41
              )2009Earnings
      per share
              
              
              1,261.2
              
              
              
              398.5
              
              
              3.16Effect
      of dilution:Convertible
      bonds
              
              
              49.6
              
              
              
              36.8Share
      options
              
              
              
              
              
              
              1.5Diluted
      earnings per share
              
              
              1,310.8
              
              
              
              436.8
              
              
              3.00
 
 *Due to a net loss in 2008, share
options and the convertible bond have been excluded from the calculation of
diluted earnings per share, as they would have an antidilutive
effect.
  Note
6 – Other revenues
 
 Other
revenues comprise the following items:
 Year
      ended December 31(In
      millions of US dollar)
              
              2009
              
              
              2008
              
              
              2007Amortization
      of unfavorable contracts
              
              
              43.0
              
              
              
              65.3
              
              
              
              87.0Other
              
              
              0
              
              
              
              9.2
              
              
              
              0Total
              
              
              43.0
              
              
              
              74.5
              
              
              
              87.0
    F-23
 
 The
unfavourable contract values arose from the acquisition of Smedvig and Eastern
Drilling and represent the net present value of the existing contracts compared
to the current market rates, discounted at the weighted average cost of capital.
The estimated unfavourable contract values are amortized and recognized under
other revenues over the terms of the contracts, ranging from two to five
years.
 
 Note
7 – Gain on sale of assets
 
 The
Company has recognized the following gains and losses on sales of
assets:
 
 (In
      millions of US dollar)
              
              Net
      proceeds
              
              
              Book
      value on disposal
              
              
              Gain/LossYear
      ended December 31, 2009:Sale
      of jack-up rig West
      Ceres
              
              
              178.0
              
              
              
              157.0
              
              
              
              21.0Gain
      on disposal of jack-up rig West
    Atlas
              
              
              200.0
              
              
              
              142.0
              
              
              
              58.0Gain
      on sale of Seadrill's share in Chestnut
      field
              
              
              4.1
              
              
              
              0.1
              
              
              
              4.0Loss
      related to jack-up West
      Elara*
              
              
              10.8
              
              
              
              22.8
              
              
              
              -12.0Total
      for year ended December 31, 2009
              
              
              392.9
              
              
              
              321.9
              
              
              
              71.1Year
      ended December 31, 2008:Sale
      of jack-up West Titiania
              
              
              131.4
              
              
              
              51.3
              
              
              
              80.1Total
      for year ended December 31,2008
              
              
              131.4
              
              
              
              51.3
              
              
              
              80.1Year
      ended December 31,2007Sale
      of FPSO Crystal
      Sea
              
              
              80.0
              
              
              
              25.3
              
              
              
              54.7Sale
      of FPSO Crystal Ocean
              
              
              90.0
              
              
              
              20.5
              
              
              
              69.5Total
      for year ended December 31, 2007
              
              
              170.0
              
              
              
              45.8
              
              
              
              124.2
 
 * Loss
incurred due to the PPL yard exercising their option to purchase the
construction contract of jack-up rig West Elara.
 
 Note:
FPSO is an acronym for floating production, storage and offloading
vessels.
  Note
8 – Operational leases
 
 The
Company has operating leases relating to premises, the most significant being
its offices in Stavanger, Singapore, Houston, Rio de Janeiro and Aberdeen. In
the years ended December 31, 2009, 2008 and 2007 rental expenses amounted to
$13.7 million, $9.1 million and $8.4 million, respectively. Future minimum
rental payments are as follows:
  Year
              
              US$million2010
              
              
              20.02011
              
              
              18.12012
              
              
              15.92013
              
              
              14.32014
              
              
              14.5Thereafter
              
              
              30.0Total
              
              
              112.8
 
 
 Note
9 – Impairment loss on marketable securities and investments in associated
companies
 
 The
Company holds a number of shares and share purchase agreements in Pride
International Inc, Scorpion Offshore Ltd and SapuraCrest Bhd. As of December 31,
2008, the Company determined that the declines in fair value were other than
temporary based primarily upon its evaluation of the severity of the excess of
its cost basis over the market price of the security and the prospects for
recovery within 2009.  As a result of this evaluation the Company
recognized an impairment charge so that its adjusted cost basis as of December
31, 2008 was equal to the market price of the securities. No impairment losses
have been recognized in 2009 for these items.
   F-24
 
 
 The total
impairment loss of US$615.0 million recorded in the year ended December 31, 2008
relates to write-downs in the values of marketable securities ($147.4 million),
forward share contracts accounted for as marketable securities ($157.9 million)
and associated companies ($309.7 million).
  Note
10 – Other financial items
 
 In the
twelve months ended December 31, 2009, the Company recorded a gain of $15.9
million on the partial redemption of its investment in the Petromena NOK2,000
million bond, and the receipt of shares to the value of $25.2 million in Seahawk
as a dividend in kind paid by Pride (see Note 13 – Marketable securities). These
items are included in "other financial items" totaling $54.5
million.
 Other
financial items in the years ended December 31, 2008, 2007 consist of gains on
the sale of marketable securities.
  Note
11 – Gain on issuance of shares by subsidiary
 
 In
October 2007 Seawell issued 20 million new shares of par value $2.00 each for a
price of NOK13.75 per share, raising a total of NOK275 million. The Company did
not participate in this share issuance and as a result its holding was reduced
from 100 percent to 80 percent. A gain of $50.0 million was recorded in the
income statement as a result of this share issuance by Seawell.
  In April
2008 Seawell issued 10 million new shares of par value $2.00 each for a price of
NOK19.50 per share, raising a total of NOK195 million. The Company subscribed
for two million of the new shares and at the same time sold 831,400 shares. As a
result, the Company's shareholding was reduced from 80 percent to 73.79 percent.
A gain of $25.2 million was recorded in the income statement as a result of
these transactions.
  Note
12 – Restricted cash
 
 Restricted
cash includes:
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008CIRR
      deposits (see Note below)
              
              
              411.4
              
              
              
              387.4Margin
      calls related to share forward agreements
              
              
              71.5
              
              
              
              206.2Cash
      collateral of performance guarantees issued by bank
              
              
              -
              
              
              
              5.9Restricted
      deposit related to loan facility
              
              
              10.0
              
              
              
              10.0Tax
      withholding deposits
              
              
              20.2
              
              
              
              17.1Total
      restricted cash
              
              
              513.1
              
              
              
              626.6Long-term
      restricted cash (related to CIRR deposits and loan
    facility)
              
              
              371.0
              
              
              
              345.9Short-term
      restricted cash
              
              
              142.1
              
              
              
              280.7
  Note:
CIRR deposits are cash deposited with commercial banks, which match Commercial
Interest Reference Rate ("CIRR") loans from Exportfinans ASA, the Norwegian
export credit agency (see Note 22). The deposits are used to make repayments of
the CIRR loans.
  Note
13 – Marketable securities
 
 Marketable
securities held by the Company are equity securities considered to be
available-for-sale securities.
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Original
      cost
              
              
              425.2
              
              
              
              282.1Unrealized
      holding gain/(loss)
              
              
              317.1
              
              
              
              (147.4
              )Carrying
      value
              
              
              742.3
              
              
              
              134.7
 The
unrealized holding gain of $317.1 as of December 31, 2009 was recorded in
accumulated other comprehensive income. The unrealized holding loss of $147.4 as
of December 31, 2008 was recorded as an impairment charge in 2008.
 
 
 F-25
 
 Note
14 – Accounts receivable
 
 Accounts
receivable are presented net of allowances for doubtful accounts. The allowance
for doubtful accounts receivables at December 31, 2009 was $13.0 million (2008:
$13.0 million).
 
 The
Company has a disputed receivable with Gazprom relating to drilling operation in
2005 and 2006 (see legal proceedings in Note 32). Apart from this, at December
31, 2009 the Company does not have any material receivables more than 90 days
overdue.
 
 The
Company did not recognize any bad debt expense in 2009 or 2008.
  Note
15 – Other current assets
 
 Other
current assets include:
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Unbilled
      revenue
              
              
              108.8
              
              
              
              34.3Prepaid
      expenses/accrued revenue
              
              
              31.2
              
              
              
              160.2Deferred
      charges – short term portion
              
              
              23.2
              
              
              
              17.2Receivable
      for margin calls *
              
              
              -
              
              
              
              159.9Unrealized
      gain on total return swap agreements
              
              
              40.9
              
              
              
              -Other
              
              
              123.0
              
              
              
              44.3Total
      other current assets
              
              
              327.1
              
              
              
              415.9
 
 
 *
Receivable for margin calls relates to share forward purchase contracts. The
related liability for the share forward purchase contracts is recorded in other
current liabilities (see note 23).
   F-26
   Note
16 – Investment in associated companies
 
 The
Company has the following investments that are recorded using the equity
method:
  December
                31,
      2009
              
              
              December
                31,
      2008
              
              
              December
                31,
      2007Scorpion
      Offshore Limited ("Scorpion")
              
              
              38.6
              %
              
              
              39.6
              %
              
              
              -SapuraCrest
      Bhd ("SapuraCrest")
              
              
              23.6
              %
              
              
              24.3
              %
              
              
              -Varia
      Perdana Sdn Bhd ("Varia Perdana")
              
              
              49.0
              %
              
              
              49.0
              %
              
              
              49.0
              %Tioman
      Drilling Company Sdn Bhd ("Tioman")
              
              
              49.0
              %
              
              
              49.0
              %
              
              
              49.0
              %PT
      Apexindo Pratama Duta Tbk ("Apexindo")
              
              
              -
              
              
              
              -
              
              
              
              31.7
              %
  Summarized
balance sheet information of the Company's equity method investees is as
follows:
 
 As
      of December 31 2009(in
      US$millions)
              
              Current
      assets
              
              
              Non-current
                assets
              
              
              Current
      liabilities
              
              
              Non-current
      liabilitiesScorpion
              
              
              187.1
              
              
              
              1,134.0
              
              
              
              225.8
              
              
              
              589.6SapuraCrest
              
              
              791.6
              
              
              
              352.5
              
              
              
              612.2
              
              
              
              124.7Varia
      Perdana
              
              
              116.7
              
              
              
              162.1
              
              
              
              21.4
              
              
              
              45.0Tioman
              
              
              86.6
              
              
              
              0.3
              
              
              
              73.0
              
              
              
              0.4TOTAL
              
              
              1,182.0
              
              
              
              1,648.9
              
              
              
              932.4
              
              
              
              759.7
 
 
 As
      of December 31 2008(in
      US$millions)
              
              Current
      assets
              
              
              Non-current
      assets
              
              
              Current
      liabilities
              
              
              Non-current
      liabilitiesScorpion
              
              
              103.6
              
              
              
              916.6
              
              
              
              97.4
              
              
              
              550.4SapuraCrest
              
              
              684.5
              
              
              
              339.0
              
              
              
              505.8
              
              
              
              134.2Varia
      Perdana
              
              
              109.3
              
              
              
              177.1
              
              
              
              37.5
              
              
              
              57.4Tioman
              
              
              104.5
              
              
              
              1.1
              
              
              
              92.9
              
              
              
              -TOTAL
              
              
              1,001.9
              
              
              
              1,433.8
              
              
              
              733.6
              
              
              
              742.0
  Summarized
statement of operations information for the Company's equity method investees is
as follows:
 
 Year
      ended December 31 2009(in
      US$millions)
              
              Operating
      revenues
              
              
              Net
      operating
                income
              
              
              Net
      incomeScorpion
              
              
              345.4
              
              
              
              109.1
              
              
              
              60.6SapuraCrest
              
              
              1,062.9
              
              
              
              116.9
              
              
              
              98.5Varia
      Perdana
              
              
              144.7
              
              
              
              93.3
              
              
              
              92.0Tioman
              
              
              239.4
              
              
              
              8.6
              
              
              
              6.9TOTAL
              
              
              1,792.4
              
              
              
              327.9
              
              
              
              258.0
  
 Year
      ended December 31 2008(in
      US$millions)
              
              Operating
      revenues
              
              
              Net
      operating
                income
              
              
              Net
      incomeScorpion
              
              
              161.0
              
              
              
              (12.0
              )
              
              
              (30.1
              )SapuraCrest
              
              
              1,039.7
              
              
              
              115.8
              
              
              
              75.2Varia
      Perdana
              
              
              157.4
              
              
              
              72.8
              
              
              
              69.9Tioman
              
              
              255.0
              
              
              
              (0.1
              )
              
              
              0.3Apexindo
              
              
              41.2
              
              
              
              13.4
              
              
              
              6.5TOTAL
              
              
              1,654.3
              
              
              
              189.9
              
              
              
              121.8
 
 
 F-27
 
 Year
      ended December 31 2007(in
      US$millions)
              
              Operating
      revenues
              
              
              Net
      operating
                income
              
              
              Net
      incomeScorpion
              
              
              -
              
              
              
              -
              
              
              
              -SapuraCrest
              
              
              -
              
              
              
              -
              
              
              
              -Varia
      Perdana
              
              
              108.7
              
              
              
              34.4
              
              
              
              31.4Tioman
              
              
              190.2
              
              
              
              8.5
              
              
              
              6.2Apexindo
              
              
              200.0
              
              
              
              100.9
              
              
              
              34.4TOTAL
              
              
              498.9
              
              
              
              143.8
              
              
              
              72.0
  Scorpion
Offshore Limited is a company incorporated in Bermuda and listed on the Oslo
Stock Exchange, which operates a fleet of jack-up drilling rigs.
 
 SapuraCrest
Bhd is a company incorporated and listed on the stock exchange in Malaysia,
which provides drilling and related services to offshore oil and gas industries
in Malaysia and other countries.
 
 Varia
Perdana Sdn Bhd is a company incorporated in Malaysia, which operates a fleet of
tender rigs. It is a subsidiary of SapuraCrest Bhd.
 
 Tioman
Drilling Company Sdn Bhd is a company incorporated in Malaysia, which provides
well services. It is a subsidiary of SapuraCrest Bhd.
 
 Apexindo
is a company incorporated in Indonesia, which provides drilling and related
services in Indonesia and other countries.
 
 At the
year-end the book values of the Company's investment in associated companies are
as follows:
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Scorpion
              
              
              103.9
              
              
              
              53.1SapuraCrest
              
              
              86.2
              
              
              
              62.8Apexindo
              
              
              -
              
              
              
              -Tioman
              
              
              6.7
              
              
              
              6.2Varia
      Perdana
              
              
              124.2
              
              
              
              118.0Total
              
              
              321.0
              
              
              
              240.1
  In 2008,
the Company recorded impairment charges of $247.5 and $62.2 relating to the
investments in Scorpion and SapuraCrest, respectively, (see note 9). The book
value at December 31, 2008 has been determined using the quoted market price of
the Company's shares in these two companies. There are no quoted market values
for Varia Perdana or Tioman.
 
 At
year-end the share of recorded equity in the statutory accounts of the Company's
associated companies are as follows:
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008
              
              
              December
                31,
      2007Scorpion
              
              
              200.3
              
              
              
              149.8
              
              
              
              -SapuraCrest
              
              
              98.9
              
              
              
              62.4
              
              
              
              -Apexindo
              
              
              -
              
              
              
              -
              
              
              
              68.4Tioman
              
              
              6.7
              
              
              
              6.2
              
              
              
              6.2Varia
      Perdana
              
              
              104.1
              
              
              
              89.4
              
              
              
              62.9Total
              
              
              410.0
              
              
              
              307.8
              
              
              
              137.5
  The
difference between the book value and the recorded equity is due to the surplus
values and goodwill related to the rig fleet at the time of acquisition (Varia
Perdana/Tioman Drilling), and due to uncertainty in the market relating to the
financing and market conditions for the jack-up fleet (SapuraCrest and
Scorpion).
  Note 17 – Newbuildings
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Opening
      balance
              
              
              3,660.5
              
              
              
              3,339.8Additions
              
              
              1,072.9
              
              
              
              2,439.9Capitalized
      interest and loan related costs
              
              
              80.3
              
              
              
              151.3Re-classified
      as Drilling Units
              
              
              (3,382.8
              )
              
              
              (2,270.5
              )Closing
      balance
              
              
              1,430.9
              
              
              
              3,660.5
 
 F-28
 
 Note
18 – Drilling units
  (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Cost
              
              
              8,251.7
              
              
              
              5,056.2Accumulated
      depreciation
              
              
              (737.4
              )
              
              
              (410.7
              )Net
      book value
              
              
              7,514.3
              
              
              
              4,645.5
 
 Depreciation
and amortization expense was $368.9 million, $208.5 million and $169.8 million
for the years ended December 31, 2009, 2008 and 2007, respectively.
  Note
19 – Goodwill and other intangible assets
 
 In the
years ended December 31, 2008 and 2007 the Company acquired several entities
which have been consolidated into its financial statements since their
acquisition dates – see Note 25 "Acquisitions". The assets and liabilities of
the acquired entities were measured at fair value at their date of acquisition,
and the purchase price paid in excess of the net fair value of the identifiable
assets and liabilities acquired was allocated to goodwill. Goodwill relates to
human capital, synergies and expected market opportunities. All of the goodwill
acquired in the years ended December 31, 2008 and 2007 was assigned to the Well
Services operating segment, apart from $209.8 million arising in 2007 on the
step-up acquisition of Eastern Drilling AS which was assigned to the Mobile
Units operating segment. There were no acquisitions in 2009.
 
 As
described in Note 2 "Accounting policies", the Company tests the value of
goodwill at the end of each financial year and if the book value exceeds the
fair value then an impairment loss is taken. In the years ended December 31,
2009 and 2008 no impairment losses were necessary. Also in these years, there
was no goodwill included in disposals.
 
 Goodwill:
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Net
      book balance at January 1
              
              
              1,547.3
              
              
              
              1,509.5Goodwill
      acquired during the year
              
              
              -
              
              
              
              112.2Impairment
      losses
              
              
              -
              
              
              
              -Currency
      adjustments
              
              
              48.7
              
              
              
              (74.4
              )Net
      book balance at December 31
              
              
              1,596.0
              
              
              
              1,547.3
 
 Other
intangible assets:
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Net
      book balance at January 1
              
              
              20.1
              
              
              
              -Intangible
      assets acquired during the year
              
              
              -
              
              
              
              23.7Depreciation
              
              
              (4.1
              )
              
              
              (2.2
              )Currency
      adjustments
              
              
              7.5
              
              
              
              (1.4
              )Net
      book balance at December 31
              
              
              23.5
              
              
              
              20.1
  Note
20– Equipment
 Equipment
consists of office equipment, furniture and fittings.
 
 (In
      millions of US dollar)
                
                December
                  31,
      2009
                
                
                December
                  31,
      2008Cost
                
                
                210.6
                
                
                
                164.4Accumulated
      depreciation
                
                
                (95.5
                )
                
                
                (81.3
                )Net
      book value
                
                
                115.1
                
                
                
                83.1
 
 Depreciation
and amortization expense was $27.0 million, $24.7 million, and $13.1 million for
the years ended December 31, 2009, 2008 and 2007, respectively.
 F-29
  Note
21 - Other non-current assets
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Other
      non-current assets consists of:Long-term
      part of deferred charges
              
              
              57.8
              
              
              
              43.8Non-current
      receivables
              
              
              1.3
              
              
              
              1.3Other
              
              
              36.1
              
              
              
              43.4Total  other
      non-current assets
              
              
              95.2
              
              
              
              88.5
  Deferred
charges represent debt arrangement fees that are capitalized and amortized to
interest expense over the life of the debt instrument.
  (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Debt
      arrangement fees
              
              
              119.6
              
              
              
              76.3Accumulated
      amortization
              
              
              (38.6
              )
              
              
              (15.3
              )Total
      book value
              
              
              81.0
              
              
              
              61.0Less:
      Short-term portion
              
              
              (23.2
              )
              
              
              (17.2
              )Long-term
      portion
              
              
              57.8
              
              
              
              43.8Amortization
      for the period
              
              
              23.3
              
              
              
              12.7
  Note
22 – Long-term interest bearing debt and interest expenses
 
 As of
December 31, 2009 and 2008, the Company had the following debt
facilities:
 
 (inUS$millions)
                
                2009
                
                
                2008Credit
      facilitiesUS$1,500
      facility
                
                
                1,140.7
                
                
                
                1,339.3US$1,500
      facility
                
                
                658.8
                
                
                
                -US$185
      facility
                
                
                45.0
                
                
                
                71.6US$100
      facility
                
                
                41.7
                
                
                
                91.6US$800
      facility
                
                
                724.8
                
                
                
                668.3US$585
      facility
                
                
                436.3
                
                
                
                485.9US$100
      facility
                
                
                86.1
                
                
                
                96.9US$1000
      facility
                
                
                -
                
                
                
                792.1NOK
      1,500 facility (Seawell)
                
                
                210.6
                
                
                
                203.4NOK
      other loans and leasing
                
                
                5.6
                
                
                
                3.3Total
      Bank Loans + other
                
                
                3,349.6
                
                
                
                3,752.4Ship
      Finance International LoansUS$1,500
      facilityUS$165
      facility
                
                
                -
                
                
                
                106.7US$170
      facility
                
                
                110.8
                
                
                
                120.8US$700
      facility
                
                
                618.7
                
                
                
                688.5US$1,400
      facility
                
                
                1,255.3
                
                
                
                1,142.8Total
      Ship Finance Facilities
                
                
                1,984.8
                
                
                
                2,058.8Bonds
      and convertible bondsBonds
                
                
                250.9
                
                
                
                245.4Convertible
      bonds
                
                
                1,399.2
                
                
                
                1,000.0Total
      Bonds
                
                
                1,650.1
                
                
                
                1,245.4Other
      credit facilities with corresponding restricted cash
    deposit
                
                
                411.4
                
                
                
                380.2Total
      interest bearing debt
                
                
                7,395.9
                
                
                
                7,436.8Less: current
      portion
                
                
                (774.1
                )
                
                
                (746.1
                )Long-term
      portion of interest bearing debt
                
                
                6,621.8
                
                
                
                6,690.7
  F-30
 
 The
outstanding debt as of December 31, 2009 is repayable as follows:
 
 (inUS$millions)
                Year
      ending December 312010
              
              
              774.12011
              
              
              834.72012
              
              
              2126.32013
              
              
              2,028.12014
      amd therafter
              
              
              1,733.5Effect
      of amortization of convertible bond
              
              
              (100.8
              )Total
      debt
              
              
              7,395.9
  Credit
facilities
 
 $1,500
million secured credit facilities
 In June
2007 the Company entered into a $1,500 million senior secured loan facility with
a syndicate of banks to partly fund the acquisition of four drilling units,
West Epsilon, West
Navigator, West Alpha
and West Venture, which
have been pledged as security. The net book value at December 31, 2009 of the
units pledged as security is $1,349.8 million. At December 31 2009 the
outstanding balance was $1,141 million, and in addition an undrawn but committed
and available amount of $70 million. The facility bears interest at LIBOR plus a
margin of between 0.90% and 1.35% per annum depending on the ratio of net debt
to EBITDA, and is repayable over a term of seven years. At maturity a balloon
payment of $600 million is due.
 
 $1,500
million secured credit facilities
 In June
2009 the Company established a $1,500 million senior secured loan facility with
a syndicate of banks and export credit facility agents, to partly fund the
acquisition of the jack-up rigs West Capella, West Sirius, West
Arieland West
Aquarius, which have been pledged as security. The net book value at
December 31, 2009 of the units pledged as security is $1,935.3 million. The
facility bears interest at LIBOR plus 3.25% per annum and is repayable over a
term of five years. At maturity a balloon payment of $288.2 million is due. The
outstanding balance at December 31 2009 was $659 million, and in addition an
undrawn but committed amount of $753 million, though in part available only
subject to the delivery of West Orion ($150 million) and West Gemini ($150
million).
 
 $185
million secured term loan
 In July
2005 the Company entered into a $185 million secured term loan facility with a
bank to partly fund the acquisition of the jack-up rigs West Larissa and West Janus, which have been
pledged as security. The net book value at December 31, 2009 of the units
pledged as security is $69.1 million. The facility bears interest at LIBOR plus
1.25% per annum and is repayable over a term of five years. At maturity a
balloon payment of $25 million is due.
 
 $100
million secured term loan
 In
October 2005 the Company entered into a $100 million secured term loan facility
with a bank to partly fund the acquisition of the jack-up rigs West Atlas and West Triton, which have been
pledged as security. Pursuant to the incident at the Montana field the West
Atlas was declared a Total Loss (as defined in the Loan Agreement), and 50 % of
the loan was prepaid. The net book value at December 31, 2009 of the unit
pledged as security is $143.0 million. The facility bears interest at LIBOR plus
1.25% per annum and is repayable over a term of five years. At maturity a
balloon payment of $37.5 million is due.
 
 $800
million secured term loan
 In August
2005 the Company entered into a $300 million secured term loan facility with a
syndicate of banks to partly fund the acquisition of two semi-submersible rigs,
West Eminence and West Phoenix, which have been
pledged as security. The facility was amended and increased in 2006 to $800
million. The net book value at December 31, 2009 of the units pledged as
security is $1,481.4. The facility consists of two tranches, and bears interest
at LIBOR plus 1.70% and 3.25%per annum. The final repayment of $367.5 million is
due in 2013.
    F-31
 
 $585
million secured term loan
 In
December 2006 the Company entered into a $585 million secured term loan facility
with a syndicate of banks to partly fund the acquisition of eight tender rigs,
which have been pledged as security. The net book value at December 31, 2009 of
the units pledged as security is $424.0 million. The facility bears interest at
LIBOR plus between 0.70% and 1.00% per annum depending on the ratio of net debt
to EBITDA, and is repayable over a term of six years. At maturity a balloon
payment of $300 million is due.
 
 $100
million secured term loan
 In April
2008 the Company entered into a $100 million secured term loan facility with a
two banks to partly fund the acquisition of the tender rig T-11, which has been pledged
as security. The net book value at December 31, 2009 of the unit pledged as
security is $89.7 million. The facility bears interest at a fixed rate of 3.025%
per annum and is repayable over a term of six years. At maturity a balloon
payment of $60 million is due.
 
 NOK1,500
million Senior Debt facility
 
 In
December 2007 the Company's 73.79% subsidiary Seawell entered into a five year
$260.2 million (NOK1,500 million) multi-tranche Senior Debt facility with a
syndicate of banks to finance working capital. The facility bears interest at
NIBOR plus 1.50% per annum.
 
 Other
Seawell NOK loans
 
 Two
Seawell subsidiaries acquired in 2008, Seawell Oiltools AS (formerly Peak Well Solutions
AS) and Tecwel AS, have loans totaling $5.6 million (NOK32.5
million).
 
 Ship
Finance International Loans
 In
February 2007 the Company entered into a sale and leaseback agreement for the
jack-up rig West
Prospero with Rig Finance II Ltd, a subsidiary of Ship Finance. Rig
Finance II Ltd is consolidated as a VIE by the Company. In February 2007 Rig
Finance II Ltd entered into a US$170 million secured term loan facility with a
syndicate of banks to partly fund the acquisition of West Prospero, which has been
pledged as security. The net book value at December 31, 2009 of the unit pledged
as security is $195.8 million. The facility bears interest at LIBOR plus 0.90 %
to 1.20% per annum depending on the ratio of market value to loan, and is
repayable over a term of six years.
 
 In May
2008 the Company entered into a sale and leaseback agreement for the drillship
West Polaris with SFL
West Polaris Limited, a subsidiary of Ship Finance. SFL West Polaris Limited is
consolidated as a VIE by the Company. In July 2008 SFL West Polaris Limited
entered into a US$700 million secured term loan facility with a syndicate of
banks to partly fund the acquisition of West Polaris, which has been
pledged as security. The net book value at December 31, 2009 of the unit pledged
as security is $662.0 million. The facility bears interest at LIBOR plus 1.25%
per annum and is repayable over a term of five years.
 
 In
September 2008 the Company entered into a sale and leaseback agreement for the
two semi-submersible rigs West
Taurus and West
Hercules with SFL Deepwater Ltd, a subsidiary of Ship Finance. SFL
Deepwater Ltd is consolidated as a VIE by the Company. In September 2008 SFL
Deepwater Ltd entered into a $1,400 million secured term loan facility with a
syndicate of banks to partly fund the acquisition of West Taurus and West Hercules,which have
been pledged as security. The net book value at December 31, 2009 of the units
pledged as security is $1,120.3 million. The facility bears interest at LIBOR
plus 1.40% per annum and is repayable over a term of five years.
 
 Bonds
and convertible bonds
 
 $30
million floating rate bond
 
 In
February 2005 the Company's acquired subsidiary Smedvig raised $30.0 million
through the issue of a seven year bond which matures in February 2012. The bond
bears quarterly interest of LIBOR plus 2.03%.
   F-32
 
 NOK500
million floating rate bonds
 In
September 2005 the Company raised $86.7 million (NOK500 million) through the
issue of a seven year bond. The bond bears quarterly interest of NIBOR plus
1.60% per annum.
 
 NOK800
million floating rate bonds
 In
November 2009, the Company raised $134.2 million  (NOK800 million)
trough the issue of a two year bond. The bond bears quarterly interest at NIBOR
plus 2.75% per annum.
 
 3.625%
Convertible Bonds due 2012
 In
November 2007 the Company issued at par $1,000 million of convertible bonds.
Interest on the bonds is fixed at 3.625% per annum, payable semi-annually in
arrears. The bonds may be converted into Seadrill Limited common shares by the
holders at any time up to 10 banking days prior to November 8, 2012. The
conversion price set at the time of issuance was $34.474 per share, representing
a 45% premium to the share price at the time. Since then, dividend distributions
have reduced the conversion price to $31.58. The bond contains covenants, the
principle one requiring the Company to maintain a market adjusted equity ratio
of at least 30%.
 
 The
Company has a right to redeem the bonds at par plus accrued interest at any time
following November 29, 2010, if the Company's share price is greater than 130%
of the prevailing conversion price on at least 20 trading days during a period
of 30 consecutive days, or at any time provided that 90% or more of the
principal issued has been redeemed or converted to shares. The convertible bonds
are tradable, and their market price on April 08, 2010 was 103.00 percent of
nominal value. If the bonds were converted into shares at the current conversion
price of $31.58, a further 31,665,661 new shares would be issued.
 
 4.875%
Convertible Bonds due 2014
 In
September 2009 the Company issued at par $500 million of convertible bonds.
Interest on the bonds is fixed at 4.875% per annum, payable semi-annually in
arrears. The bonds may be converted into Seadrill Limited common shares by the
holders at any time up to 10 banking days prior to September 29, 2014. The
conversion price set at the time of issuance was $25.18 per share, representing
a 35% premium to the share price at the time. Since then, dividend distributions
have reduced the conversion price to $24.59. The bond contains covenants, the
principle one requiring the Company to maintain a market adjusted equity ratio
of at least 30%.
 
 The
Company has a right to redeem the bonds at par plus accrued interest at any time
following October 20, 2012, if the Company's share price is greater than 130% of
the prevailing conversion price on at least 20 trading days during a period of
30 consecutive days, or at any time provided that 90% or more of the principal issued has been
redeemed or converted to shares. The obligation of the Company to issue shares
on the exercise of any bondholder's conversion rights may, at the sole
discretion of the Company, be settled, in whole or in part, by cash payment.The
convertible bonds are tradable, and their market price on April 08, 2010
was 120.75 percent of nominal value. If the bonds were converted into shares at
the current conversion price of $24.59, a further 20,333,468 new shares would be
issued.
 
 Commercial
Interest Reference Rate (CIRR) Credit Facilities
 
 In April
2008 the Company entered into a CIRR term loan for NOK850 million with
Eksportfinans ASA, the Norwegian export credit agency. The loan bears fixed
interest at 4.56% per annum and is repayable over a term of eight years. The
outstanding balance at December 31, 2009 was $121.5 million (NOK699.8
million).
 
 In June
2008 the Company entered into a CIRR term loan for NOK904 million with
Eksportfinans ASA. The loan bears fixed interest at 4.15% per annum and is
repayable over a term of eight years. The outstanding balance at December 31,
2009 was $129.1 million (NOK744.4 million).
 
 In July
2008 the Company entered into a CIRR term loan for NOK1,011 million with
Eksportfinans ASA. The loan bears fixed interest at 4.15% per annum and is
repayable over a term of twelve years. The outstanding balance at December 31,
2009 was $160.8 million (NOK927.0 million).
  F-33
 
 In
connection with the above three CIRR fixed interest term loans totalling $411.4
million (NOK2,371.2 million), interest rate swaps and collateral cash deposits
equal to the total outstanding loan balances have been established with
commercial banks. The collateral cash deposits are reduced in parallel with
repayments of the CIRR loans and receive fixed interest at the same rates as
those paid on the CIRR loans. The collateral cash deposits are classified as
"restricted cash" in the balance sheet, and the effect of these arrangements is
that the CIRR loans have no effect on net interest bearing debt.
 
 Covenants
on loans and bonds
 In
addition to security provided to lenders in the form of pledged assets,
agreements relating to long-term debt generally contain financial covenants, the
main ones being as follows:
 
 ·
              Minimum
      liquidity requirements: to maintain cash and cash equivalents of at least
      $100 million within the group.
 
 ·
              Interest
      coverage ratio: to maintain an EBITDA to interest expense ratio of at
      least 2.5:1.
 
 ·
              Current
      ratio: to maintain current assets to current liabilities ratio of at least
      1:1. Current assets are defined as book value less minimum liquidity, but
      including up to 20% of shares in listed companies owned 20% or more.
      Current liabilities are defined as book value less the current portion of
      long term debt.
 
 ·
              Equity
      ratio: to maintain total equity to total assets ratio of at least 30%.
      Both equity and total assets are adjusted for the difference between book
      and market values of drilling
units.
  ·
              Leverage
      ratio: to maintain a ratio of net debt to EBITDA no greater than 4.5:1.
      Net debt is calculated as all interest bearing debt less cash and cash
      equivalents excluding minimum liquidity
  requirements.
 
 The main
covenants for the Company's bonds are to maintain adjusted shareholders' equity
of at least $1,500 million and a ratio of adjusted shareholders' equity to total
liabilities of at least 30% to 40%. Adjusted shareholder's equity is book value
of equity adjusted for the difference between book and market values of drilling
units.
 
 As of
December 31, 2009, the Company is in compliance with all of the covenants under
its long-term debt facilities.
 
 Note
23 – Other current liabilities
 
 Other
current liabilities are comprised of the following:
  (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Taxes
      payable
              
              
              45.4
              
              
              
              61.1Employee
      withheld taxes, social security and vacation payment
              
              
              64.1
              
              
              
              53.3Short-term
      portion of unfavorable contract values
              
              
              39.5
              
              
              
              43.0Accrued
      interest expense
              
              
              36.7
              
              
              
              33.4Liabilities
      relating to investment in shares (1)
              
              
              498.7
              
              
              
              336.5Unrealized
      loss on forward contracts not classified as derivatives
(2)
              
              
              -
              
              
              
              157.9Short
      term portion of deferred mobilization revenues
              
              
              65.6
              
              
              
              21.6Derivative
      financial instruments (3)
              
              
              101.5
              
              
              
              168.8Other
      current liabilities
              
              
              323.8
              
              
              
              316.3Total
      other current liabilities
              
              
              1,175.3
              
              
              
              1,191.9
 
 
 (1)
Liabilities relating to the Company's share forward contracts are recorded as
short-term debt.
 
 (2)
Accrual for loss relating to forward share contracts where the contracts were
not defined as derivative, while the loss was expensed as of December 31,
2008.
 
 (3)
Derivative financial instruments consist of unrealized losses on interest rate
swap agreements, currency forward contracts and total return swap agreements
(see Note 31).
   F-34
 
 Note
24 – Other non-current liabilities
 
 Other
non-current liabilities are comprised of the following:
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Accrued
      pension liabilities
              
              
              37.7
              
              
              
              55.8Long-term
      portion of unfavorable contract values
              
              
              23.4
              
              
              
              62.8Long
      term portion of deferred mobilization revenues
              
              
              138.9
              
              
              
              56.2Other
      non-current liabilities
              
              
              38.1
              
              
              
              34.2Total
      other non-current liabilities
              
              
              238.1
              
              
              
              209.0
  Note
25 – Acquisitions
 
 Acquisitions
in 2009
 
 There
have been no acquisitions in 2009.
 
 Acquisitions
in 2008
 
 Noble
Drilling
 
 In April
2008 the Company acquired the entire issued share capital of Noble Drilling UK
Limited ("Noble Drilling"), a well services company incorporated in the United
Kingdom. Noble Drilling was the North Sea Platform Division of Noble
Corporation, a company incorporated in Switzerland and listed on the NYSE. The
purchase price was $53.9 million, including working capital.
 
 Peak
Well
 
 In March
2008 the Company acquired the entire issued share capital of Peak Well Solutions
AS ("Peak Well"), a well services company incorporated in Norway. The purchase
price was $85.0 million, including working capital.
 
 Tecwel
 
 In May
2008 the Company acquired the entire issued share capital of Tecwel AS
("Tecwel"), a well services company incorporated in Norway. The purchase price
was $34.3 million, including working capital.
 
 The
purchase price of the acquired companies has been allocated as
follows:
 
 (in
      US dollar million)
              
              Noble
      Drilling
              
              
              Peak
      Well
              
              
              Tecwel
              
              
              TotalAssets:Intangible
      assets
              
              
              8.5
              
              
              
              14.1
              
              
              
              12.2
              
              
              
              34.9Goodwill
              
              
              30.5
              
              
              
              61.0
              
              
              
              20.7
              
              
              
              112.2Fixed
      assets
              
              
              -
              
              
              
              6.3
              
              
              
              3.7
              
              
              
              10.0Receivables
      and other current assets
              
              
              17.6
              
              
              
              14.8
              
              
              
              5.2
              
              
              
              37.6Total
      assets
              
              
              56.6
              
              
              
              96.2
              
              
              
              41.9
              
              
              
              194.7Liabilities:Deferred
      tax
              
              
              2.4
              
              
              
              0.4
              
              
              
              3.4
              
              
              
              6.2Payables
      and other current liabilities
              
              
              0.3
              
              
              
              10.8
              
              
              
              4.2
              
              
              
              15.3Total
      liabilities
              
              
              2.7
              
              
              
              11.2
              
              
              
              7.6
              
              
              
              21.5Purchase
      Price
              
              
              53.9
              
              
              
              85.0
              
              
              
              34.3
              
              
              
              173.2
   
 F-35
 
 Acquisition
in 2007
 
 Eastern
Drilling
 
 At
December 31, 2006 the Company owned approximately 60.4% of the shares in Eastern
Drilling.AS ("Eastern Drilling") -see below. On April 18, 2007 the Company made
a mandatory offer for all of the outstanding shares in Eastern Drilling at a
price of NOK135 per share. The offer price was determined by a ruling of the
Oslo Stock Exchange Appeals Committee following a disagreement between the
Company and the Oslo Stock Exchange relating to the Company's use in 2006 of
Total Return Swap Agreements linked to Eastern Drilling shares. Following the
mandatory offer, Eastern Drilling becoming a wholly-owned subsidiary of the
Company and the total cost of increasing the Company's shareholding from 60.4%
to 100% amounted to $401.8 million.
 
 Wellbore
 
 In
November 2007 the Company acquired a controlling interest in Wellbore Solutions
AS ("Wellbore"), a well services company incorporated in Norway. The purchase
price was $4.6 million, including working capital.
 
 The
purchase price of Wellbore and Eastern Drilling has been allocated as follows:
 
 (in
      US dollar million)
              
              Wellbore
              
              
              Eastern
                Drilling
              
              
              TotalAssetsGoodwill
              
              
              2.9
              
              
              
              213.6
              
              
              
              216.5Settlement
      of non-controlling interest
              
              
              -
              
              
              
              209.8
              
              
              
              209.8Deferred
      tax assets (on Unfavorable Contracts)
              
              
              -
              
              
              
              8.4
              
              
              
              8.4Other
      non current assets
              
              
              1.1
              
              
              
              -
              
              
              
              1.1Receivables
      and other current assets
              
              
              0.6
              
              
              
              -
              
              
              
              0.6Total
      assets
              
              
              4.6
              
              
              
              431.8
              
              
              
              436.4Liabilities:
      unfavorable contracts
              
              
              -
              
              
              
              30.0
              
              
              
              30.0Purchase
      price
              
              
              4.6
              
              
              
              401.8
              
              
              
              406.4
  Note
26 – Non-controlling interest
 
 The
Company's consolidated Statement of Operations, Balance Sheet and Statement of
Cash Flows include Seawell, whose issued share capital is 73.79% owned by the
Company. The part of Seawell's total shareholders' equity not attributable to
the Company is included in non-controlling interest.
 
 In 2007
and 2008 the Company entered into five sale and leaseback arrangements for
drilling rigs with Ship Finance, who incorporated subsidiary companies for the
sole purpose of owning and leasing the rigs. The Company has recognised these
subsidiary companies as VIEs and concluded that the Company is their primary
beneficiary. Accordingly, these subsidiary companies are included in the
Company's consolidated accounts, with the Ship Finance equity in these companies
included in non-controlling interest.
 
 For the
years ended December 31, 2008 and 2007, the Other Comprehensive Income in these
VIEs is not included in non-controlling interest, as it represents fair value
adjustments to interest rate swaps designated as hedges on variable interest
rate loans taken out by the VIEs, these swaps having been requirements of the
lease contracts between the VIEs and Seadrill. Due to new accounting rules
effective from January 1, 2009, the Other Comprehensive Income generated after
this date has been allocated to non-controlling Interest.
 
 Changes
in non-controlling interest in 2009, 2008 and 2007 are as follows:
  (in
      US dollar million)
              
              Eastern
      Drilling
              
              
              Seawell
              
              
              Ship
      Finance
              
              
              TotalJanuary
      1, 2007
              
              
              162.1
              
              
              
              -
              
              
              
              49.9
              
              
              
              212.0Changes
      in 2007
              
              
              (162.1
              )
              
              
              1.2
              
              
              
              40.5
              
              
              
              (120.4
              )2007
      net income
              
              
              -
              
              
              
              1.2
              
              
              
              11.8
              
              
              
              13.0January
      1, 2008
              
              
              -
              
              
              
              2.4
              
              
              
              102.2
              
              
              
              104.6Changes
      in 2008
              
              
              -
              
              
              
              6.5
              
              
              
              440.0
              
              
              
              446.52008
      net income
              
              
              -
              
              
              
              5.1
              
              
              
              36.6
              
              
              
              41.7December
      31, 2008
              
              
              -
              
              
              
              14.0
              
              
              
              578.8
              
              
              
              592.8Changes
      in 2009
              
              
              -
              
              
              
              8.7
              
              
              
              (59.5
              )
              
              
              (50.8
              )2009
      net income
              
              
              -
              
              
              
              7.5
              
              
              
              84.4
              
              
              
              91.9December
      31, 2009
              
              
              -
              
              
              
              30.2
              
              
              
              603.7
              
              
              
              633.9
 
   F-36
 
 Note
27 – Share capital
  2009
              
              
              2008
              
              
              2007All
      shares are common shares of $2.00 par value each
              
              Shares
              
              
              $millions
              
              
              Shares
              
              
              $millions
              
              
              Shares
              
              
              $millionsAuthorized
      share capital
              
              
              800,000,000
              
              
              
              1,600.0
              
              
              
              800,000,000
              
              
              
              1,600.0
              
              
              
              800,000,000
              
              
              
              1,600.0Issued
      and fully paid share capital
              
              
              399,133,216
              
              
              
              798.3
              
              
              
              399,133,216
              
              
              
              798.3
              
              
              
              399,133,216
              
              
              
              798.3Treasury
      shares held by Company
              
              
              (110,200
              )
              
              
              (0.3
              )
              
              
              (717,800
              )
              
              
              (1.4
              )
              
              
              (608,700
              )
              
              
              (1.2
              )Outstanding
      shares in issue
              
              
              399,023,016
              
              
              
              798.0
              
              
              
              398,415,416
              
              
              
              796.9
              
              
              
              398,524,516
              
              
              
              797.1
 
 
 As of
December 31, 2009, the Company's shares are listed on the Oslo Stock Exchange.
In April 2010, the Company was also listed on the New York Stock Exchange (refer
note 34 subsequent events).
 
 The
Company was incorporated on May 10, 2005 and 6,000 ordinary shares of par value
$2.00 each were issued. Since incorporation the number of issued shares has
increased from 6,000 to 399,133,216 of par value $2.00 each at December 31,
2009. No shares were issued in 2009.
 
 A share
repurchase program was approved by the Board in 2007 giving the Company the
authorization to buy back shares. Shares bought back under the authorization may
be cancelled or held as treasury shares. Treasury shares may be held to meet the
Company's obligations relating to the share option scheme (see Note 28). As at
December 31, 2009 the Company holds 110,200 treasury shares and net shares
outstanding at December 31, 2009 were 399,023,016.
 
 In
September 2008, the shareholders in the annual general meeting approved the
reduction of the share premium account from US $1,955.4 to nil and the transfer
of the balance of $1,955.4 to the Company's Contributed Surplus
  Note
28 – Share option plans
 
 Seadrill
Scheme:
 
 In May
2005, a general meeting of the Company approved authorizing the Board of
Directors to establish and maintain an option scheme (the "Seadrill Scheme") for
encouraging the holding of shares in the Company. The Seadrill Scheme will
expire in May 2016.  The Seadrill Scheme permits the board of
directors, at its discretion, to grant options to acquire shares in the Company
to employees and directors of the Company or its subsidiaries.  The
options are not transferable. The subscription price is at the discretion of the
board of directors provided the subscription price is never reduced below the
par value of the share. The subscription price for certain options granted under
the scheme will be reduced by the amount of all dividends declared by the
Company in the period from the date of grant until the date the option is
exercised. Options granted under the scheme will vest at a date determined by
the board at the date of the grant.  The options granted under the
plan to date vest over a period of one to three years.  There is no
maximum number of shares authorised for awards of equity share options and
authorised, unissued or treasury shares of the Company may be used to satisfy
exercised options.
   F-37
  
 In May
2009, 214 employees still holding valid 2008 granted share options were offered
a repricing of these options and an extention of their maturity date to May
2014.  The new strike was NOK90.833 ($14.09) for non-American employees and
NOK104.64 ($16.23) for the American employees.  The repricing created an
additional cost of $4 million, recognized as expenses of $1.4 million in 2009,
$1.7 million 2010 and $0.9 million in 2011/12.  The fair value of each
option was estimated on the date of the grant using a Black Scholes option
valuation model, with the following assumptions:  risk-free interest
rate of 3.8%, volatility of 40%, a dividend yield of 0% and an expected option
term of 5 years.  The risk-free interest rates were estimated using
the published Norwegian treasury yield curve in effect at the time of grant for
instruments with a similar life. The dividend yield has been estimated at 0% as
the exercise price is reduced by all dividends declared by the Company from the
date of grant to the exercise date.  It was assumed that 90% of
options granted under the plan will vest.  The expected term is based
on historical information of past employee behavior regarding exercises and
forfeiture of options. The Company uses a blended volatility for the volatility
assumption, to reflect the expectation of how the share price will react to the
future cyclicality of the Company's industry. The blended volatility is
calculated using two components. The first component is derived from volatility
computed from historical data for a period of time approximately equal to the
expected term of the stock option, starting from the date of grant. The second
component is the implied volatility derived from the Company's "at-the-money"
long-term call options. The two components are equally weighted to create a
blended volatility.
 
 The fair
value of share options granted is recognized as personnel expenses, and in the
year ended December 31, 2009, $14.9 million were expensed in the income
statement. There were no effects on taxes in the financial statements. However
if the option is exercised a tax benefit will be recorded, as the gain is
recorded as deductible for tax purposes. If the Company has to expense social
security taxes related to the benefit of options exercised such expenses will be
recorded at the exercise date.
 
 The
following summarizes share option transactions related to the Seadrill Scheme in
2009, 2008 and 2007:
  2009
              
              
              2008
              
              
              2007Options
              
              
              Weighted
      average exercise price
                US$
              
              
              Options
              
              
              Weighted
      average exercise price
                US$
              
              
              Options
              
              
              Weighted
      average exercise price
                US$Outstanding
      at beginning of year
              
              
              5,978,100
              
              
              
              18.11
              
              
              
              4,088,700
              
              
              
              13.30
              
              
              
              3,916,667
              
              
              
              12.17Granted
              
              
              1,026,000
              
              
              
              14.45
              
              
              
              2,658,000
              
              
              
              25.38
              
              
              
              700,000
              
              
              
              18.17Exercised
              
              
              (607,600
              )
              
              
              14.84
              
              
              
              (490,900
              )
              
              
              14.86
              
              
              
              (427,967
              )
              
              
              11.47Forfeited
              
              
              (196,667
              )
              
              
              19.42
              
              
              
              (277,700
              )
              
              
              18.59
              
              
              
              (100,000
              )
              
              
              14.07Outstanding
      at end of year
              
              
              6,199,833
              
              
              
              13.87
              
              
              
              5,978,100
              
              
              
              18.11
              
              
              
              4,088,700
              
              
              
              13.30Exercisable
      at end of year
              
              
              2,682,811
              
              
              
              12.20
              
              
              
              1,839,133
              
              
              
              11.90
              
              
              
              922,033
              
              
              
              11.75
 
 Options
granted in 2006 had initial exercise prices between $2.23 and NOK102 ($16.28)
per share, may be exercised one third each year beginning 12 months after they
were granted, and expire between May 2010 and September 2011. Options granted in
2007 had initial exercise prices between NOK98.63 ($15.23) and NOK129.63
($22.35) per share, may be exercised one third each year beginning 12 months
after they were granted, and expire in September 2011. Options granted in 2008
had been repriced with exercise prices now being NOK 90.83 ($14.09) and
NOK104.64 ($16.24) per share; they may be exercised one third each year
beginning 12 months after they were granted, and expire in May 2014. These same
prices and dates apply to the options granted in 2009.
 
 The
weighted average grant-date fair value of options granted during 2009 is $5.63
per share (2008: $12.59 per share, 2007: $6.70 per share). The exercise price of
all options is reduced by the amount of any dividends declared.
 
 As of
December 31, 2009 there was $12.4 million in unrecognized compensation costs
relating to non-vested options granted under the Options Schemes (2008: $19.4
million). This amount will be recognized as expenses of $8.7 million in 2010,
$3.3 million in 2011 and $0.5 million in 2012.
 
 There
were 6,199,833 options outstanding at December 31, 2009 (2008: 5,978,100). Their
weighted average remaining contractual life was 38 months (2008: 38 months) and
their weighted average fair value was $10.35 per option (2008: $10.49 per
option). The weighted average parameters used in calculating these weighted
average fair values are as follows: risk-free interest rate 4.02% (2008: 4.69%),
volatility 37% (2008: 35%), dividend yield 0% (2008: 0%), option holder
retirement rate 6% (2008: 5%) and expected term 5 years (2008: 5
years).
 
 During
2009 the total intrinsic value of options exercised was $5.3 million on the day
of exercise. The intrinsic value of options full vested but not exercised at
December 31, 2009 was $35.6 million and their average remaining term was 19
months.
   F-38
 
 Seawell
Scheme:
 
 In
addition to the Seadrill Scheme, in 2007 the Company's 73.79% owned subsidiary
Seawell introduced an option scheme under which its senior management and
directors may be granted options to subscribe for new shares. In 2007 options
for 4,097,000 shares in Seawell were granted, which may be exercised by one
third per year, first time on January 1, 2009. Therefore as at December 31,
2009, one third of the options granted under program 1 are exercisable. The
options are not transferable and may be withdrawn upon termination of
employment. The exercise price was initially NOK13.75 ($1.96) per share
increasing by 6 percent on each anniversary date. Options issued under the 2007
Program may be exercised up to October 5, 2012.
 
 No
options were granted in 2008, but in 2009 options for 1,600,000 shares were
issued under a new program. Options issued under the 2009 program may be
exercised up to December 31, 2015. The exercise price is NOK 10 per share. They
may be exercised by one third per year, first time on January 1, 2010.
 
 The fair
value of share options granted is recognized as personnel expenses, and in the
year ended December 31, 2009, $1.1 million were expensed in the income
statement.
 
 As in the
Seadrill Scheme, Seawell has used the Black & Scholes pricing model to
estimate the fair value of the options granted. The following table
summarizes the information of share options outstanding as of December 31,
2009:
 
 Option
      program
              
              2007
      Program
              
              
              2009
      ProgramNumber
      of shares
              
              
              4,097,000
              
              
              
              1,600,000Exercise
      price
              
              
              14.80-18.40
              
              
              
              10.00Remaining
      contractual life (months)
              
              
              45
              
              
              
              72Pricing
      model assumptions:Risk
      free interest rate (percent)
              
              
              5.55
              
              
              
              3.65Expected
      life (years)
              
              
              5
              
              
              
              6.92Volatility
              
              
              37
              %
              
              
              41
              %Expected
      retirement of option holders
              
              
              10
              %
              
              
              10
              %Expected
      dividend
              
              
              0
              
              
              
              0Average
      fair value of grants
              
              
              4.50
              
              
              
              3.39
 
 As of
December 31, 2009, total unrecognized compensation costs related to all unvested
share-based awards totaled NOK 3.3 million, which is expected to be recognized
as expenses in 2010 and 2011 by, NOK 2.8 million and NOK 0.5 million,
respectively. When
any options are exercised, employers' national insurance contributions will be
payable by Seawell, while the option holders will be charged for their
individual income taxes.
  Note
29 - Pension benefits
 
 The
Company has a defined benefit pension plan covering substantially all Norwegian
employees. A significant part of this plan is administered by a life insurance
company.
 
 The
primary benefits for the onshore employees in Norway are a retirement pension of
approximately 66 percent of salary at retirement age of 67 years, together with
a long-term disability pension. The retirement pension per employee is capped at
an annual payment of 66 percent of the total of 12 times the Norwegian Social
Security Base. Most employees in this group may choose to retire at 62 years of
age on a pre-retirement pension. Offshore employees in Norway have retirement
and long-term disability pension of approximately 60 percent of salary at
retirement age of 67. Offshore employees on mobile units may choose to retire at
60 years of age on a pre-retirement pension. Offshore employees on fixed
installations have the same pre-retirement pension, but the employees may not
retire until they are 62 years of age.
 
 On
December 31, 2006, Seadrill adopted the recognition and disclosure provisions of
ASC Topic 715 Compensation –
Retirement Benefits (formerly SFAS No.158, Employer's Accounting for
Defined Benefit Pension and other Postretirement Plans, an amendment of formerly
FASB Statements No. 87, 88 and 123(R)). ASC Topic 715 requires the recognition
of the funded status of the Defined Benefit and Postretirement Benefits Other
Than Pensions ("OPEB") plans on the December 31, 2006 balance sheet with a
corresponding adjustment to accumulated other comprehensive income. The
adjustment to accumulated other comprehensive income at adoption represents the
net unrecognized actuarial losses, unrecognized prior service costs, and
unrecognized transition obligation remaining from the initial application of ASC
Topic 715, all of which were previously netted against the plans' funded status
on the balance sheet. These amounts will be subsequently recognized as net
periodic pension cost pursuant to our historical accounting policy for
amortizing such amounts. Further, actuarial gains and losses that arise in
subsequent periods and are not recognized as net periodic pension cost in the
same periods will be recognized as a component of other comprehensive income.
Those amounts will be subsequently recognized as a component of net periodic
pension cost on the same basis as the amounts recognized in accumulated other
comprehensive income.
 
 
 F-39
 
 Effect
of formerly SFAS No. 158 on the consolidated balance sheet
 
 (in
      US dollar million)
              
              2009
              
              
              2008Non-current
      liabilities
              
              
              (23.7
              )
              
              
              (1.7
              )Deferred
      tax
              
              
              6.6
              
              
              
              0.5Shareholders
      equity
              
              
              (17.1
              )
              
              
              (1.3
              )
 
 
 Annual
pension cost
 
 (in
      US dollar million)
              
              2009
              
              
              2008
              
              
              2007Benefits
      earned during the year
              
              
              18.0
              
              
              
              19.3
              
              
              
              20.4Interest
      cost on prior years' benefit obligation
              
              
              9.2
              
              
              
              7.7
              
              
              
              6.3Gross
      pension cost for the year
              
              
              27.2
              
              
              
              27.0
              
              
              
              26.7Expected
      return on plan assets
              
              
              (7.3
              )
              
              
              (6.0
              )
              
              
              (4.9
              )Administration
      charges
              
              
              0.5
              
              
              
              0.4
              
              
              
              0.2Net
      pension cost for the year
              
              
              20.3
              
              
              
              21.4
              
              
              
              22.0Social
      security cost
              
              
              2.9
              
              
              
              3.0
              
              
              
              3.1Amortization
      of actuarial gains/losses
              
              
              (0.5
              )
              
              
              (0.7
              )
              
              
              (0.1
              )Amortization
      of prior service cost
              
              
              -
              
              
              
              -
              
              
              
              -Amortization
      of net transition assets
              
              
              -
              
              
              
              -
              
              
              
              0.1Total
      net pension cost
              
              
              22.6
              
              
              
              23.7
              
              
              
              25.1
 
 The
funded status of the defined benefit plan
  (in
      US dollar million)
              
              December
      31, 2009
              
              
              December
      31, 2008Projected
      benefit obligations
              
              
              171.5
              
              
              
              141.8Plan
      assets at market value
              
              
              (138.9
              )
              
              
              (92.9
              )Accrued
      pension liability exclusive social security
              
              
              32.6
              
              
              
              48.9Social
      security related to pension obligations
              
              
              5.1
              
              
              
              6.9Accrued
      pension liabilities
              
              
              37.7
              
              
              
              55.8
 
 Change
in benefit obligations
 (in
      US dollar million)
              
              2009
              
              
              2008Benefit
      obligations at beginning of year
              
              
              141.7
              
              
              
              158.3Interest
      cost
              
              
              9.2
              
              
              
              7.7Current
      service cost
              
              
              18.0
              
              
              
              19.3Benefits
      paid
              
              
              (1.4
              )
              
              
              (1.2
              )Change
      in unrecognized actuarial gain
              
              
              (26.4
              )
              
              
              (1.9
              )Foreign
      currency translations
              
              
              30.3
              
              
              
              (40.4
              )Benefit
      obligations at end of year
              
              
              171.5
              
              
              
              141.8
 
 Change
in pension plan assets
 (in
      US dollar million)
              
              2009
              
              
              2008Fair
      value of plan assets at beginning of year
              
              
              92.9
              
              
              
              108.1Estimated
      return
              
              
              7.3
              
              
              
              6.0Contribution
      by employer
              
              
              27.2
              
              
              
              10.3Administration
      charges
              
              
              (0.5
              )
              
              
              (0.4
              )Benefits
      paid
              
              
              (1.2
              )
              
              
              (1.0
              )Change
      in unrecognized actuarial loss
              
              
              (8.4
              )
              
              
              (3.3
              )Foreign
      currency translations
              
              
              21.6
              
              
              
              (26.8
              )Fair
      value of plan assets at end of year
              
              
              138.9
              
              
              
              92.9
 
 Pension
obligations are actuarially determined and are critically affected by the
assumptions used, including the expected return on plan assets, discount rates,
compensation increases and employee turnover rates. The Company periodically
reviews the assumptions used, and adjusts them and the recorded liabilities as
necessary.
    F-40
 
 The
expected rate of return on plan assets and the discount rate applied to
projected benefits are particularly important factors in calculating the
Company's pension expense and liabilities. The Company evaluates assumptions
regarding the estimated rate of return on plan assets based on historical
experience and future expectations on investment returns, which are calculated
by a third party investment advisor utilizing the asset allocation classes held
by the plan's portfolios. The discount rate is based on the Norwegian government
10 year-bond effective yield. Changes in these and other assumptions used in the
actuarial computations could impact the projected benefit obligations, pension
liabilities, pension expense and other comprehensive income.
 
 Assumptions
      used in calculation of pension obligations
              
              2009
              
              
              2008
              
              
              2007Rate
      of compensation increase at the end of year
              
              
              4.25
              %
              
              
              4.50
              %
              
              
              4.50
              %Discount
      rate at the end of year
              
              
              5.40
              %
              
              
              5.80
              %
              
              
              5.30
              %Prescribed
      pension index factor
              
              
              2.50
              %
              
              
              2.50
              %
              
              
              2.75
              %Expected
      return on plan assets for the year
              
              
              5.60
              %
              
              
              6.30
              %
              
              
              5.75
              %Employee
      turnover
              
              
              4.00
              %
              
              
              4.00
              %
              
              
              4.00
              %Expected
      increases in Social Security Base
              
              
              4.00
              %
              
              
              4.25
              %
              
              
              4.25
              %Expected
      annual early retirement from age 60/62:Offshore
      personnel fixed installations
              
              
              30.0
              %
              
              
              30.0
              %
              
              
              30.0
              %Offshore
      personnel Mobile units and onshore employees
              
              
              50.0
              %
              
              
              50.0
              %
              
              
              50.0
              %
 
 The
weighted-average asset allocation of funds related to the Company's defined
benefit plan at December 31, 2009 was as follows:
 
 Pension
      benefit plan assets
              
              2009
              
              
              2008Equity
      securities
              
              
              13.5
              %
              
              
              3.8
              %Debt
      securities
              
              
              59.0
              %
              
              
              58.7
              %Real
      estate
              
              
              16.6
              %
              
              
              16.8
              %Money
      market
              
              
              8.5
              %
              
              
              14.0
              %Other
              
              
              2.4
              %
              
              
              6.7
              %Total
              
              
              100.0
              %
              
              
              100.0
              %
 
 The
investment policies and strategies for the pension benefit plan funds do not use
target allocations for the individual asset categories. The investment
objectives are to maximize returns subject to specific risk management policies.
The Company diversifies its allocation of plan assets by investing in both
domestic and international fixed income securities and domestic and
international equity securities. These investments are readily marketable and
can be sold to fund benefit payment obligations as they become payable. The
estimated yearly return on pension assets was 5.6 percent in 2009 and 2.2
percent in 2008.
 
 Cash
flows - Contributions expected to be paid
 
 The table
below shows the Company's expected annual pension plan contributions under
defined benefit plans for the years 2010-2019. The expected payments are based
on the assumptions used to measure the Company's obligations at December 31,
2009 and include estimated future employee services.
 
 (in
      US dollar million)
              
              
              December
      31 20092010
              
              
              
              18.02011
              
              
              
              19.42012
              
              
              
              20.82013
              
              
              
              22.42014
              
              
              
              24.02015-2019
              
              
              
              150.1Total
      payments expected during the next 10 years
              
              
              
              254.6
  F-41
 
 Note
30 – Related party transactions
 
 The
Company transacts business with the following related parties, being companies
in which our principal shareholders Hemen Holding Ltd and Farahead Investments
Inc (hereafter jointly referred to as "Hemen") and companies associated with
Hemen have a significant interest:
 
 -
Ship Finance International Limited ("Ship Finance")
 
 -
Scorpion Offshore Ltd ("Scorpion")
 
 -
Metrogas Holdings Inc ("Metrogas")
 
 -
Frontline Management (Bermuda) Limited ("Frontline")
 
 -
Aktiv Kapital ASA ("Aktiv")
 
 The
Company has entered into sale and lease back contracts for several drilling
units with Ship Finance, a company in which our principal shareholders Hemen and
companies associated with Hemen have a significant interest. Hemen is controlled
by trusts established by the Company's President and Chairman Mr. John
Fredriksen for the benefit of his immediate family. The company has determined
that the Ship Finance subsidiaries, which own the units, are variable interest
entities (VIEs), and that the Company is the primary beneficiary of the risks
and rewards connected with the ownership of the units and the charter contracts.
Accordingly, these VIEs are fully consolidated in the Company's consolidated
accounts. The equity attributable to Ship Finance in the VIEs is included in
non-controlling interests in the Company's consolidated accounts (See also note
33).
 
 In the 12
months ended December 31, 2009, the Company incurred the following lease costs
on units leased back from Ship Finance subsidiaries.
 
 RigWest
      Ceres
              20.4West
      Prospero
              29.8West
      Polaris
              127.3West
      Hercules
              122.3West
      Taurus
              102.1Total
              401.9
 
 
 In July
2009 the Company exercised its option to repurchase the jack-up rig West Ceresfrom Rig Finance
Ltd, the Ship Finance subsidiary which owned the unit, at the option price of
$135.5 million. Accordingly, Rig Finance Ltd will no longer be consolidated as a
VIE by the Company.
 
 In
November 2008, the Company granted Ship Finance an unsecured credit facility of
$115.0 million, to be repaid in full by December 31, 2009. This facility is
shown in the balance sheet as short- term "Amount due from related party" as of
December 31, 2008. Ship Finance repaid $25.0 million in the first quarter of
2009, and the balance of $90.0 million was sold to Metrogas, a company
indirectly controlled by trusts established by Mr. John Fredriksen for the
benefit of his immediate family. The balance of $90.0 million was purchased back
from Metrogas in the fourth quarter of 2009. At the same time the repayment
schedule was amended to provide a maturity date of January 31, 2011.
Consequently this facility is shown in the balance sheet as long term "Amount
due from related party" as of December 31, 2009. The agreed interest payable by
Ship Finance is based upon arms-length principles and is paid monthly. Interest
of $8.8 and $2.1 million was received from Ship Finance in the twelve months
ended December 31, 2009 and 2008 respectively.
 
 In April
2009, the Company obtained an unsecured credit facility loan of $60.0 million
from Metrogas. The amount was repaid in June 2009. Interest payable in
accordance with the arms-length principles amounted to $0.7 million in the
twelve months ended December 31, 2009.
 
 F-42
 
 
 In
November 2009, the Company provided a short-term unsecured loan of $27.7 million
to Scorpion, increased to $79.7 million in December 2009. This facility is shown
in the balance sheet as short- term "Amount due from related party" as of
December 31, 2009. Interest payable in accordance with the arms-length
principles amounted to $1.0 million in the twelve months ended December 31, 2009
(See also note 34 "Subsequent Events").
 
 Frontline
provides management support and administrative services for the Company, and
charged the Company fees of $0.2 million, $0.2 million and $0.1 million for
these services in the years 2009, 2008 and 2007, respectively. These amounts are
included in "General and administrative expenses", as they do not merit separate
disclosure.
 
 In 2007
the Company sold the FPSOs Crystal Sea and Crystal Ocean.Aktiv was
entitled to a 5% share of the gain on the sales and at December 31, 2007 the
Company recorded a provision of $7.3 million payable to Aktiv, included in
"Other current liabilities". This was settled in the first quarter of 2008.
  Note
31 – Risk management and financial instruments
 
 The
majority of the Company's gross earnings from rigs and vessels are receivable in
US dollars and the majority its other transactions, assets and liabilities are
denominated in US dollars, the functional currency of the Company. However, the
Company has operations and assets in a number of countries worldwide and incurs
expenditures in other currencies, causing its results from operations to be
affected by fluctuations in currency exchange rates, primarily relative to the
US dollar. The Company is also exposed to changes in interest rates on variable
interest rate debt, and to the impact of changes in currency exchange rates on
NOK denominated debt. There is thus a risk that currency and interest rate
fluctuations will have a negative effect on the value of the Company's cash
flows.
 
 Interest
rate risk management
 
 The
Company's exposure to interest rate risk relates mainly to its variable interest
rate debt and balances of surplus funds placed with financial institutions. This
exposure is managed through the use of interest rate swaps and other derivative
arrangements. The Company's policy is to obtain the most favourable interest
rate borrowings available without increasing its foreign currency exposure.
Surplus funds are generally placed in fixed deposits with reputable financial
institutions, yielding higher returns than are available on cash at bank. Such
deposits generally have short-term maturities, in order to provide the Company
with flexibility to meet all requirements for working capital and capital
investments.
 
 The
extent to which the Company utilizes interest rate swaps and other derivatives
to manage its interest rate risk is determined by reference to its net debt
exposure and its views regarding future interest rates. At December 31, 2009,
the Company had interest rate swap agreements with an outstanding prcincipal of
$2,854 million(2008: 1,740 million). In addition, the Company had outstanding
cross currency interest rate swaps at December 31, 2009 with a principal amount
of USD 174.4(2008: 34.3 million) These agreements do not qualify for hedge
accounting, and accordingly any changes in the fair values of the swap
agreements are included in the Consolidated Statement of Operations under
"Gain/(loss) on derivative financial instruments". The combined total fair value
of the interest rate swaps and cross currency interest swaps outstanding
December 31, 2009 amounted to minus $ 67.4 million.
  The
Company's interest rate swap and cross currency interest rate swap agreements as
at December 31, 2009, were as follows:
  Oustanding
      principal
              Receive
      rate
              Pay
      rate
              Length
      of contract(In
      US$millions)50
              3
      month LIBOR
              4.6300%
              May
      2005 - May 201534
      (NOK 220 mill)
              3
      month NIBOR+1.2%
              3
      month LIBOR+1.3%
              Sept
      2005 - Sept 2012124
              6
      month LIBOR
              3.8250%
              April
      2008 - Sept 2016350
              3
      month LIBOR
              4.1030%
              June
      2008 - June 2013300
              3
      month LIBOR
              4.1450%
              June
      2008 - June 2013350
              3
      month LIBOR
              4.4600%
              Sept
      2008 - Sept 2013500
              3
      month LIBOR
              2.0550%
              Mar
      2009 - Mar 2014250
              3
      month LIBOR
              2.7075%
              May
      2009 - May 2014250
              3
      month LIBOR
              2.6210%
              May
      2009 - May 2014250
              3
      month LIBOR
              3.6400%
              Dec
      2008 - Dec 2011300
              3
      month LIBOR
              3.1600%
              Dec
      2008 - Dec 2018140
      (NOK 800 mill)
              3
      month NIBOR +2.75%
              3
      month LIBOR + 2.9475 %
              Nov
      2009 – Nov 2011130
      (NOK 750 mill)
              1
      month NIBOR
              3.355%
              April
      2009 - October 2012
    F-43
 
 The
counterparties to the above contracts are DnB NOR Bank ASA, Swedbank AB, Fokus
Bank, and ING Bank N.V. Credit risk exists to the extent that the counterparties
are unable to perform under the contracts, but this risk is considered remote as
the counterparties are all banks which have provided the Company with loan
finance and the interest rate swaps are related to those financing
arrangements.
  Interest
rate hedge accounting
 
 Two of
the subsidiaries of Ship Finance consolidated by the Company as VIE's have
entered into interest rate swaps in order to mitigate the Company's exposure to
variability in cash flows for future interest payments on the loans taken out to
finance the acquisition of West Polaris and West Taurus.  These
interest rate swaps qualify for hedge accounting and any changes in their fair
value are included in "Other comprehensive income/loss". Below is a summary of
the notional amounts, fixed interest rates payable and durations of these
interest rate swaps.
  Outstanding
      principal
              Receive
      rate
              
              Pay
      rate
              
              Length
      of contractIn
      US$million)19
      (West Polaris
      )
              1
      month LIBOR
              
              
              3.8945
              %
              July
      2008 - Oct 2012649
      (West
      Taurus)
              1
      month LIBOR
              
              
              2.1900
              %
              Dec
      2008 - Aug 2013
 
 In the
year ended December 31, 2009 the above two VIE Ship Finance subsidiaries
recorded fair value gains of $15.1 million on their interest rate swaps. These
gains were recorded by those VIEs as "Other comprehensive income" but due to
their ownership by Ship Finance these gains are included in "Non-controlling
interest" on consolidation.
 
 Any
change in fair value resulting from hedge ineffectiveness is recognized
immediately in earnings. The two VIEs, and therefore the Company, did not
recognize any gain or loss due to hedge ineffectiveness in the consolidated
financial statements during the years ended December 31, 2009, 2008 and 2007
relating to derivative financial instruments.
 
 Foreign
currency risk management
 
 The
Company uses foreign currency forward contracts to manage its exposure to
foreign currency risk on certain assets, liabilities and future anticipated
transactions. Such derivative contracts do not qualify for hedge accounting
treatment and are recorded in the balance sheet under receivables if the forward
contracts have a net positive fair value, and under other short-term liabilities
if the forward contracts have a net negative fair value. At December 31, 2009,
the Company had forward contracts and cross currency interest rate swaps to sell
approximately $504 million between January 2010 and September 2012 at exchange
rates ranging from NOK5.71 to NOK6.40 per US dollar and from SGD1.39 to SGD1.42
per US dollar. The total fair value of currency forward contracts December 31,
2009 amounted to $10.6 million.
 
 Total
Return SWAP Agreements
 
 In June
and July 2008, the Company entered into Total Return Swap ("TRS") agreements
with a total of 4,500,000 shares in Seadrill as underlying security. The
agreements were scheduled to expire in December 2008 and the initially agreed
reference prices were in a range of NOK141.2 to NOK157.8 per share. In November
2008, these contracts were terminated and simultaneously the Company entered
into a new TRS agreement with 4,500,000 shares in Seadrill as underlying
security. This agreement was scheduled to expire in February 2009 and the agreed
reference price was NOK56.7 per share. In February 2009, the contract was
extended to August 2009 and the new reference price was NOK61.3 per share. In
August 2009, the contract was settled and simultaneously the Company entered
into a new TRS agreement with 4,500,000 in Seadrill as underlying security. This
agreement expires in February 2010 and the agreed reference price was NOK98.44
per share. The total fair value gain relating to TRS agreements in 2009 amounted
to $69.4 million.
 
 Credit
risk
 
 The
Company has financial assets, including cash and cash equivalents, marketable
securities, other receivables and certain amounts receivable on derivative
instruments, mainly forward exchange contracts and interest rate swaps. These
assets expose the Company to credit risk arising from possible default by the
counterparty. The Company considers the counterparties to be creditworthy
financial institutions and does not expect any significant loss to result from
non-performance by such counterparties. The Company, in the normal course of
business, does not demand collateral. The credit exposure of interest rate swap
agreements, currency option contracts and foreign currency contracts is
represented by the fair value of contracts with a positive fair value at the end
of each period, reduced by the effects of master netting agreements. It is the
Company's policy to enter into master netting agreements with the counterparties
to derivative financial instrument contracts, which give the Company the legal
right to discharge all or a portion of amounts owed to a counterparty by
offsetting them against amounts that the counterparty owes to the
Company.
 
 F-44
 
 Fair
values
 
 Financial
instruments that are measured at fair value on a recurring
basis:
 
 Fair
      value
              
              
              Fair
      value measurements
                at
      reporting date usingQuoted
      Prices in Active Markets for Identical Assets
              
              
              Significant
      Other Observable Inputs
              
              
              Significant
      Unobservable Inputs(in
      millions of $)
              
              December
                31,
      2009
              
              
              (Level
      1)
              
              
              (Level
      2)
              
              
              (Level
      3)Assets:Marketable
      securities
              
              
              742.3
              
              
              
              551.3
              
              
              
              
              
              
              191.0Currency
      forward contracts –  short term receivable
              
              
              10.6
              
              
              
              
              
              
              
              10.6TRS
      equity swap contracts
              
              
              40.9
              
              
              
              
              
              
              
              40.9Total
      assets
              
              
              793.8
              
              
              
              551.3
              
              
              
              51.5
              
              
              
              191.0Liabilities:Interest
      rate swap contracts – short term payables
              
              
              101.5
              
              
              
              
              
              
              
              101.5Total
      liabilities
              
              
              101.5
              
              
              
              -
              
              
              
              101.5
              
              
              
              -
 
 ASC Topic
820 Fair Value Measurement and
Disclosures (formerly FAS 157) emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and should be
determined based on the assumptions that market participants would use in
pricing the asset or liability. As a basis for considering market participant
assumptions in fair value measurements, ASC Topic 820 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within levels one and two of the
hierarchy) and the reporting entity's own assumptions about market participant
assumptions (unobservable inputs classified within level three of the
hierarchy).
 
 Level one
inputs utilize unadjusted quoted prices in active markets for identical assets
or liabilities that the Company has the ability to access. Level two inputs are
inputs other than quoted prices included in level one that are observable for
the asset or liability, either directly or indirectly. Level two inputs may
include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability, other than quoted
prices, such as interest rates, foreign exchange rates and yield curves that are
observable at commonly quoted intervals. Level three inputs are unobservable
inputs for the asset or liability, which are typically based on an entity's own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company's assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
 
 Quoted
market prices are used to estimate the fair value of marketable securities,
which are valued at fair value on a recurring basis.
 
 The fair
value of total return equity swaps is calculated using the closing prices of the
underlying listed shares, dividends paid since inception and the interest rate
charged by the counterparty.
 
 The fair
values of interest rate swaps and forward exchange contracts are calculated
using well-established independent valuation techniques applied to contracted
cash flows and LIBOR and NIBOR interest rates as at December 31,
2009.
 
 Retained
Risk
 
 a) Physical Damage
Insurance
 The
Company retains the risk, through self-insurance, for the deductibles relating
to physical damage insurance on the Company's rig fleet, currently a maximum of
$2 million per occurrence.
   F-45
 
 b) Loss of Hire
Insurance
 The
Company purchases insurance to cover loss of revenue on the rig fleet following
extensive downtime caused by physical damage, where such damage is covered under
the Company's physical damage insurance. The Company's self-insured retentions
under the loss of hire insurance are up to 60 days after the occurrence of the
physical damage. Thereafter, under the terms of the insurance, the Company is
compensated for between 100 days and 290 days of lost revenue. The Company
retains the risk that the repair of physical damage takes longer than the total
number of days in the loss of hire policy.
 
 Concentration
of risk
 
 The
Company has financial assets, including cash and cash equivalents, marketable
securities, other receivables and certain derivative instrument receivable
amounts. These other assets expose the Company to credit risk arising from
possible default by the counterparty. There is also a concentration of credit
risk with respect to cash and cash equivalents to the extent that most of the
amounts are carried with DnB NOR Bank ASA, Nordea Bank Finland Plc, Fokus Bank,
and ING Bank N.V. The Company considers these risks to be remote.
 
 In the
year ended December, 31, 2009 16.6% of the Company's contract revenues were
received from Statoil ASA ("Statoil") (2008: 31.9%), 13.0% from Total S.A. Group
("Total") (2008:4.5%), 11.9% from Exxon Mobil Corp ("Exxon") (2008:4.9%) and
10.1% were received from Royal Dutch Shell Group ("Shell") (2008:
6.5%).  There is thus a concentration of revenue risk with Statoil,
Total, Exxon and Shell.
 
 Note
32 – Commitments and contingencies
 
 Pledged
assets
 
 The book
value of assets pledged under mortgages at December 31, 2009 was $7,514 million
(2008: $7,569 million).
 
 Purchase
Commitments
 
 At
December 31, 2009, the Company had contractual commitments under nine
newbuilding contracts totaling $1,678 million (2008: $2,891 million). The
contracts are for the construction of two semi-submersible rigs, three jack-up
rigs, a drillship and three tender rigs. The Company has an option not to take
delivery of one of the jack-up rigs and if this option is exercised the
commitments will be reduced by $184 million.
 
 The
maturity schedule for the contractual commitments as of December 31, 2009 is as
follows:
 
 2010
              
              
              2011
              
              
              2012
              
              
              2013
              
              
              2014
              
              
              2015
      and thereafterNewbuildings
              
              
              1,175.0
              
              
              
              503.0
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              
              1,175.0
              
              
              
              503.0
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
  Guarantees
 
 The
Company has issued guarantees in favor of third parties as follows, which is the
maximum potential future payment for each type of guarantee:
 
 (In
      millions of US dollar)
              
              December
                31,
      2009
              
              
              December
                31,
      2008Guarantees
      to customers of the Company's own performance
              
              
              257
              
              
              
              630Guarantee
      in favor of banks
              
              
              830
              
              
              
              45Guarantee
      in favor of suppliers
              
              
              1,548
              
              
              
              1,673Guarantee
      in favor of Variable Interest Entities
              
              
              2,479
              
              
              
              2,793Total
              
              
              5,114
              
              
              
              5,141
 
 
 Legal
Proceedings:
 
 The
Company is a party, as plaintiff or defendant, to several lawsuits in various
jurisdictions for demurrage, damages, off-hire and other claims and commercial
disputes arising from the operation of its drilling units, in the ordinary
course of business or in connection with its acquisition
activities.  The Company believes that the resolution of such claims
will not have a material adverse effect on the Company's operations or financial
condition. The Company's best estimate of the outcome of the various disputes
has been reflected in the financial statements of the Company as of December 31,
2009.
   
 F-46
 
 Gazprom
dispute
 At the
end of 2005 and the beginning of 2006, the Company had a dispute with Gazprom in
connection with the operations of the jack-up rig West Larissa, which was named
Ekha at that time.
 
 In May
2009, legal hearings took place in the High Court of Justice, London, and the
Court has issued a decision with the following main conclusions:
 ·
              The
      Company was awarded charter hire for the period November 23, 2005, to
      January 9, 2006, being the date up to when the incident occurred.
      Including interest this amounted to approximately $6.8 million.
 
 ·
              The
      Company was not awarded hire for the time after the incident, nor was the
      Company awarded any reimbursement for uninsured costs related to its
      claim.
 
 ·
              The
      Court has ruled that Gazprom is entitled to recover costs and expenses
      related to West
      Larissa, where Gazprom can demonstrate that these were wasted as a
      consequence of Seadrill's actions during the incident. The Judge also
      ruled that Gazprom wrongfully terminated the Contract, and has thus
      rejected Gazprom's claim for losses associated with the contracting of
      another rig.
 
 It is not
possible at this stage to quantify the net outcome of this ruling. The amount of
Gazprom's counter-claim, as well as responsibility for incurred legal costs,
will be decided in a separate hearing at a later stage. The Court's decision has
been appealed by the Company, and appeal hearings are scheduled to take place
during first half of 2010. The Company does not expect the final outcome to have
a significant effect on its financial results.
  Note
33 – Variable Interest Entities (VIEs)
 
 As at
December 31, 2009, the Company leased one drillship, jack-up rig, and two
semi-submersible rigs from VIEs under finance leases. Each of the units had been
sold by the Company to single purpose subsidiaries of Ship Finance Ltd and
simultaneously leased back by the Company on bareboat charter contracts for a
term of 15 years. The Company has several options to repurchase the units during
the charter periods, and obligations to purchase three of the assets at the end
of the 15 year lease terms. The following table gives a summary of the sale and
leaseback arrangements, as at December 31, 2009:
 
 
 Unit
                Effective
                  from
                
                Sale
      value
                  (US$millions)
                
                First
      repurchase option
                  (US$millions)
                
                Month
      of first repurchase
                  option
                
                Last
      repurchase option *
                  (US$millions)
                
                Month
      of last repurchase
                  Option
      *West
      Prospero
                July
      2007
                
                210.0
                
                142.0
                
                June
      2010
                
                60.0
                
                June
      2022West
      Polaris
                July
      2008
                
                850.0
                
                548.0
                
                September
      2012
                
                177.5
                
                June
      2023West
      Taurus
                Nov
      2008
                
                850.0
                
                418.0
                
                February
      2015
                
                149.0
                
                November
      2023West
      Hercules
                Oct  2008
                
                850.0
                
                579.5
                
                August
      2011
                
                135.0
                
                August
      2023
  * For the
units West Taurus and
West Hercules
repurchase obligations after 15 years have been agreed, at $149.0 and $135.0,
respectively. For the unit West Polaris, a put option
after 15 years has been agreed at $75.0.
 
 The
Company has determined that the Ship Finance subsidiaries, which own the units,
are variable interest entities (VIEs), and that the Company is the primary
beneficiary of the risks and rewards connected with the ownership of the units
and the charter contracts. Accordingly, these VIEs are fully consolidated in the
Company's consolidated accounts. The Company did not record any gains from the
sale of the units, as they continued to be reported as assets at their original
cost in the Company's balance sheet at the time of each transaction. The equity
attributable to Ship Finance in the VIEs is included in non-controlling
interests in the Company's consolidated accounts. At December 31, 2009 the units
are reported under drilling units in the Company's balance sheet.
 
 
 F-47
 
 The
bareboat charter rates are set on the basis of a Base LIBOR Interest Rate for
each bareboat charter contract, and thereafter are adjusted for differences
between the LIBOR fixing each month and the Base LIBOR Interest Rate for each
contract. A summary of the bareboat charter rates per day for each unit is given
below. The amounts shown are based on the Base LIBOR Interest Rate shown, and
reflect average rates for the year.
 
  2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014Base
      LIBOR Interest Rate
                
                
                (US$thousands)
                
                
                (US$thousands)
                
                
                (US$thousands)
                
                
                (US$thousands)
                
                
                (US$thousands)West
      Prospero
                
                
                5.10
                %
                
                
                67.5
                
                
                
                53.9
                
                
                
                52.9
                
                
                
                51.5
                
                
                
                46.1West
      Polaris
                
                
                2.85
                %
                
                
                346.5
                *
                
                
                344.5
                *
                
                
                323.5
                *
                
                
                222.3
                
                
                
                176.5West
    Taurus
                
                
                4.25
                %
                
                
                304.0
                *
                
                
                307.8
                *
                
                
                311.9
                *
                
                
                316.2
                *
                
                
                320.7West
      Hercules
                
                
                4.25
                %
                
                
                404.5
                
                
                
                378.8
                
                
                
                250.0
                
                
                
                250.0
                
                
                
                238.3
  
 * For a
period the interest rates for West Polaris and West Taurus have been fixed
at 3.894% and 2.174%, respectively, and the bareboat charter rate for these two
units is fixed regardless of movements in LIBOR interest rates. These fixed
charter rates are reflected in the above table.
 
 
 The
assets and liabilities in the statutory accounts of the VIEs are as
follows:
 
 In
      US dollar millions
              
              Rig
      Finance II Ltd.
              
              
              SFL
      West Polaris Limited
              
              
              SFL
      Deepwater Ltd.Name
      of unit
              
              West
      Prospero
              
              
              West
                Polaris
              
              
              West
      Taurus
                West
      HerculesInvestment
      in finance lease
              
              
              144.3
              
              
              
              763.6
              
              
              
              1,548.3Other
      assets
              
              
              23.4
              
              
              
              41.1
              
              
              
              66.1Total
      assets
              
              
              167.7
              
              
              
              804.7
              
              
              
              1,614.4Long
      term debt
              
              
              110.8
              
              
              
              546.5
              
              
              
              1,099.4Other
      liabilities
              
              
              0.1
              
              
              
              109.0
              
              
              
              165.9Total
      liabilities
              
              
              110.9
              
              
              
              655.5
              
              
              
              1,265.3Equity
              
              
              56.8
              
              
              
              149.2
              
              
              
              349.1Book
      value of units in the Company's consolidated accounts
              
              
              195.7
              
              
              
              662.0
              
              
              
              1,120.3
 
 
 Note
34 – Subsequent Events
 
 On
February 25, 2010, the Company declared a dividend of $0.55 per share to be paid
on or about March 26, 2010.
 
 On
February 25, 2010, the Company provided a short term secured loan of $49.5
million to Scorpion Offshore Limited, an associated company. The loan has
duration of two months and bears interest at 12% per annum.
 
 In March
2010, Seadrill registered their common shares under the Securities and Exchange
Act of 1934 and became a reporting issuer in the United States.
Seadrill was subsequently approved for the listing of its common shares with the
New York Stock Exchange (NYSE).
 
 In April
2010, the common shares were listed on the NYSE under the symbol
"SDRL".
 
 In April
2010, the Company announced that it will exercise its option to purchase a
drilling unit from the Jurong shipyard for approximately US$350 million,
excluding owner furnished equipment, loose drilling equipment, capitalized
interest and project management. The jack-up rig of the Gusto MSC CJ70 150A
design is currently under construction at the Jurong shipyard in Singapore. The rig
is scheduled to be completed at the end of the first quarter 2011.
 
 In April
2010, the Company completed a private placement of a total of 12.5 million
shares, representing approximately 3.1% of the issued capital, to a price of
NOK151.50 per share. Gross proceeds amounted to NOK1,894 million (approximately
US$322 million). The share capital of Seadrill, following the completion of the
equity issue in relation to the private placement, amounts to US$824,576,432
represented by 412,288,216 ordinary shares of US$2.00 par value. The net
proceeds from the private placement will be used to part finance the mandatory
offer for Scorpion Offshore, for equity in the potential acquisition of the CJ70
design jack-up rig, and for further opportunistic expansion of the
Company.
 
 In April
2010, the Company acquired 1.3 million shares in Scorpion Offshore Limited
("Scorpion"). The shares have been acquired at a price of NOK36.00 per share.
Seadrill is, following this acquisition, the owner of 35,938,903 shares in
Scorpion representing a total of 40.0% of Scorpion's issued shares. The
acquisition triggers an obligation on Seadrill to make a mandatory cash offer
for Scorpion's remaining shares or to reduce its holding below the 40% threshold
within four weeks from today. Seadrill has decided to make a cash offer for the
remaining shares in Scorpion. Seadrill is prepared, subsequent to the offer, to
be owner of anything between 40.0% and 100% of Scorpion.
 
 In April
2010 the Company provided Scorpion a secured loan of $240 million. The loan will
partly be used to repay Scorpions' exiting obligations to Seadrill, leaving the
total outstanding loan provided to Scorpion at $240 million. The loan matures in
5 years and bears interest at 10% per annum.
 
 On April
30, 2010, the Company received a partial repayment of the Petromena bond
amounting to $165 million.




F-48





SIGNATURES
  The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
 
 
 Seadrill
Limited
 (Registrant)
 
 
 
 
 Date:
      May 5, 2010By:
              /s/
      Alf C. ThorkildsenName:
                Title:
              Alf
      C. Thorkildsen
                Chief
      Executive Officer of Seadrill Management AS










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