**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      20-F**





(Mark
      One)


[
      ]  **REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) or (g)**


**OF
      THE SECURITIES
      EXCHANGE ACT OF 1934**





OR





[X]  **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**








For
      the
      fiscal year ended December 31, 2006





OR





[
      ]   **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF THE SECURITIES EXCHANGE ACT OF 1934**


OR





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


**OF
      THE SECURITIES
      EXCHANGE ACT OF 1934**


Date
      of event
      requiring this shell company report.............................





Commission
      file number 1- 12874








**TEEKAY
      SHIPPING CORPORATION**


(Exact
      name of Registrant as specified in its charter)








Republic
      of The Marshall Islands


(Jurisdiction
      of incorporation or organization)








Bayside
      House, Bayside Executive Park, West Bay Street & Blake Road, P.O. Box
      AP-59212, Nassau,


Commonwealth
      of the Bahamas


(Address
      of principal executive offices)





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





**Title
                of each class**
            **Name
                of each exchange on which registered**Common
                Stock, par value of $0.001 per share
            New
                York Stock Exchange





Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act.





None





Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act.





None





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





72,831,823
      shares of Common Stock, par value of $0.001 per share.





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





Yes
      [ ]
      No [X]


1


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





Yes
      [X]
      No [ ]





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





Large
      Accelerated Filer [X]     Accelerated
      Filer [ ]    Non-Accelerated
      Filer [ ]





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





Item
      17 [
      ] Item 18 [X]





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





Yes
      [ ]
      No [X]





2


**TEEKAY
      SHIPPING CORPORATION**


**INDEX
      TO REPORT ON FORM 20-F**








**Page****PART
                I.**Item
                1.
            Identity
                of Directors, Senior Management and Advisors
            Not
                applicableItem
                2.
            Offer
                Statistics and Expected Timetable
            Not
                applicableItem
                3.
            Key
                Information
            5Item
                4.
            Information
                on the Company
            12Item
                4A.
            Unresolved
                Staff Comments
            Not
                applicableItem
                5.
            Operating
                and Financial Review and Prospects
            25Item
                6.
            Directors,
                Senior Management and Employees
            44Item
                7.
            Major
                Shareholders and Related Party Transactions
            48Item
                8.
            Financial
                Information
            49Item
                9.
            The
                Offer and Listing
            50Item
                10.
            Additional
                Information
            50Item
                11.
            Quantitative
                and Qualitative Disclosures About Market Risk
            51Item
                12.
            Description
                of Securities Other than Equity Securities
            Not
                applicable**PART
                II.**Item
                13.
            Defaults,
                Dividend Arrearages and Delinquencies
            53Item
                14.
            Material
                Modifications to the Rights of Security Holders and Use of
                Proceeds
            53****Item
                15.
            Controls
                and Procedures
            53Item
                16A.
            Audit
                Committee Financial Expert
            54Item
                16B.
            Code
                of Ethics
            54Item
                16C.
            Principal
                Accountant Fees and Services
            54Item
                16D.
            Exemptions
                from the Listing Standards for Audit Committees
            55Item
                16E.
            Purchases
                of Equity Securities by the Issuer and Affiliated
                Purchasers
            55**PART
                III.**Item
                17.
            Financial
                Statements
            Not
                applicableItem
                18.
            Financial
                Statements
            55Item
                19.
            Exhibits
            56Signature
            
            57








3


**PART
      I**




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




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




·
              *our
                    future growth prospects;*
 ·
                  *tanker
                        market fundamentals, including the balance of supply and
                        demand in the
                        tanker market, spot tanker charter rates, OPEC and non-OPEC
                        oil
                        production;*
 ·
                      *expected
                            demand in the offshore oil production sector and the
                            demand for
                            vessels;*
 ·
                          *future
                                capital expenditure commitments and the financing
                                requirements for such
                                commitments;*
 ·
                              *delivery
                                    dates of and financing for newbuildings, and
                                    the commencement of service
                                    of newbuildings under long-term time charter
                                    contacts;*
 ·
                                  *future
                                        cash flow from vessel operations and strategic
                                        position;*
 ·
                                      *the
                                            growth prospects of the LNG shipping
                                            sector and including increased
                                            competition;*
 ·
                                          *the
                                                expected impact of International
                                                Maritime Organization and other
                                                regulations, as well as our expected
                                                compliance with such regulations;*
 ·
                                              *the
                                                    expected lifespan of our vessels;*
 ·
                                                  *the
                                                        expected impact of heightened
                                                        environmental and quality
                                                        concerns of
                                                        insurance underwriters, regulators
                                                        and charterers;*
 ·
                                                      *the
                                                            growth of the global
                                                            economy and global oil
                                                            demand;
                                                            and*
  ·
                                                              *our
                                                                    intention to
*create
                                                                    a new publicly-listed
                                                                    entity for our
                                                                    conventional
                                                                    tanker
                                                                    business;**
 ·
                                                            *our
                                                                  pending acquisition
                                                                  of 50 percent of
                                                                  OMI Corporation;
                                                                  and*
 ·
                                                          *our
                                                                exemption to tax
                                                                on our U.S. Source international
                                                                transportation
                                                                income.*


*Forward-looking
      statements include, without limitation, any statement that may predict,
      forecast, indicate or imply future results, performance or achievements, and
      may
      contain the words believe, anticipate, expect, estimate, project, will be,
      will
      continue, will likely result, or words or phrases of similar meanings. These
      statements involve known and unknown risks and are based upon a number of
      assumptions and estimates that are inherently subject to significant
      uncertainties and contingencies, many of which are beyond our control. Actual
      results may differ materially from those expressed or implied by such
      forward-looking statements. Important factors that could cause actual results
      to
      differ materially include, but are not limited to: changes in production of
      or
      demand for oil, petroleum products and LNG, either generally or in particular
      regions; greater or less than anticipated levels of tanker newbuilding orders
      or
      greater or less than anticipated rates of tanker scrapping; changes in trading
      patterns significantly impacting overall tanker tonnage requirements; changes
      in
      applicable industry laws and regulations, and the timing of implementation
      of
      new laws and regulations; changes in typical seasonal variations in tanker
      charter rates; changes in the offshore production of oil or demand for shuttle
      tankers, FSOs and FPSOs; the potential for early termination of long-term
      contracts and our inability to renew or replace long-term contracts; changes
      affecting the offshore tanker market; conditions in the United States capital
      markets, particularly those affecting valuations of master limited partnerships;
      shipyard production delays; the cyclical nature of the tanker industry and
      our
      dependence on oil markets; competitive factors in the markets in which we
      operate; and other factors detailed from time to time in our periodic
      reports.*




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





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





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


Not
      applicable.


4
 **Item
          2. Offer Statistics and Expected Timetable**


Not
      applicable.




**Item
      3. Key Information**





**Selected
      Financial Data**





Set
      forth
      below is selected consolidated financial and other data of Teekay Shipping
      Corporation together with its subsidiaries (sometimes referred to as "Teekay,"
      the "Company," “we” or “us”), for 2006, 2005, 2004, 2003 and 2002, which have
      been derived from our consolidated financial statements. The data below should
      be read in conjunction with the consolidated financial statements and the notes
      thereto and the Report of Independent Registered Public Accounting Firm therein,
      with respect to the consolidated financial statements for 2006, 2005 and 2004,
      and "Item 5. Operating and Financial Review and Prospects," included herein.





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


**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(in
                thousands, except share and per share data and
                ratios)****Income
                Statement Data:**Revenues
            
            $
            2,013,306
            
            $
            1,954,618
            
            $
            2,219,238
            
            $
            1,576,095
            
            $
            783,327Total
                operating expenses(1)
            
            
            (1,591,457
            )
            
            (1,322,842
            )
            
            (1,398,052
            )
            
            (1,283,131
            )
            
            (663,981
            )Income
                from vessel operations
            
            
            421,849
            
            
            631,776
            
            
            821,186
            
            
            292,964
            
            
            119,346Interest
                expense
            
            
            (171,643
            )
            
            (132,428
            )
            
            (121,518
            )
            
            (80,999
            )
            
            (57,974
            )Interest
                income
            
            
            56,224
            
            
            33,943
            
            
            18,528
            
            
            3,921
            
            
            3,494Equity
                income from joint ventures
            
            
            5,940
            
            
            11,141
            
            
            13,730
            
            
            6,970
            
            
            4,523Gain
                (loss) on sale of marketable securities
            
            
            1,422
            
            
            -
            
            
            93,175
            
            
            517
            
            
            (1,130
            )Foreign
                exchange (loss) gain
            
            
            (45,382
            )
            
            59,810
            
            
            (42,704
            )
            
            (3,855
            )
            
            3,897Other
                - net
            
            
            (6,166
            )
            
            (33,342
            )
            
            (24,957
            )
            
            (42,154
            )
            
            (18,765
            )Net
                income
            
            
            262,244
            
            
            570,900
            
            
            757,440
            
            
            177,364
            
            
            53,391**Per
                Share Data:**Net
                income — basic(2)
            
            $
            3.58
            
            $
            7.30
            
            $
            9.14
            
            $
            2.22
            
            $
            0.67Net
                income — diluted(2)
            
            
            3.49
            
            
            6.83
            
            
            8.63
            
            
            2.18
            
            
            0.66Cash
                dividends declared(2)
            
            
            0.86
            
            
            0.62
            
            
            0.51
            
            
            0.45
            
            
            0.43**Balance
                Sheet Data (at end of year):**Cash,
                cash equivalents and marketable securities
            
            $
            343,914
            
            $
            236,984
            
            $
            427,037
            
            $
            387,795
            
            $
            298,255Restricted
                cash
            
            
            679,992
            
            
            311,084
            
            
            448,812
            
            
            2,672
            
            
            8,785Vessels
                and equipment
            
            
            5,308,068
            
            
            3,721,674
            
            
            3,531,287
            
            
            2,574,860
            
            
            2,066,657Total
                assets
            
            
            7,733,476
            
            
            5,294,100
            
            
            5,503,740
            
            
            3,588,044
            
            
            2,723,506Total
                debt (including capital lease obligations)
            
            
            3,719,683
            
            
            2,432,978
            
            
            2,744,545
            
            
            1,636,758
            
            
            1,130,822Capital
                stock
            
            
            588,651
            
            
            471,784
            
            
            534,938
            
            
            492,653
            
            
            470,988Total
                stockholders’ equity
            
            
            2,528,222
            
            
            2,236,542
            
            
            2,237,358
            
            
            1,651,827
            
            
            1,421,898Number
                of outstanding shares of common stock(2)
            
            
            72,831,923
            
            
            71,375,593
            
            
            82,951,275
            
            
            81,222,350
            
            
            79,384,120**Other
                Financial Data:**Net
                revenues(3)
            
            $
            1,491,189
            
            $
            1,535,449
            
            $
            1,786,843
            
            $
            1,181,439
            
            $
            543,872Net
                operating cash flow
            
            
            545,716
            
            
            609,042
            
            
            814,704
            
            
            455,575
            
            
            179,531Total
                debt to total capitalization(4)
                (5)
            
            
            55.5
            %
            
            49.1
            %
            
            54.9
            %
            
            49.5
            %
            
            43.9
            %Net
                debt to total net capitalization(5)
                (6)
            
            
            47.5
            %
            
            42.8
            %
            
            45.3
            %
            
            44.5
            %
            
            36.4
            %Capital
                expenditures:Vessel
                and equipmentpurchases,
                gross(7)
            
            $
            442,470
            
            $
            555,142
            
            $
            548,587
            
            $
            372,433
            
            $
            135,650___________________________


(1)
            Total
                operating expenses includes writedown / (gain) loss on sale of vessels
                and
                equipment, and restructuring charges as
                follows:


**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(in
                thousands)**Writedown
                / (gain) on sale of vesselsand
                equipment
            
            $
            (1,341
            )
            $
            (139,184
            )
            $
            (79,254
            )
            $
            90,389
            
            $
            -Restructuring
                charges
            
            
            8,929
            
            
            2,882
            
            
            1,002
            
            
            6,383
            
            
            -7,588
            
            
            (136,302
            )
            
            (78,252
            )
            
            96,772
            
            
            -





(2)
            On
                May 17, 2004, we effected a two-for-one stock split relating to our
                common
                stock. All relevant per share data and number of outstanding shares
                of
                common stock give effect to this stock split
                retroactively.





(3)
            Consistent
                with general practice in the shipping industry, we use net revenues
                (defined as revenues less voyage expenses) as a measure of equating
                revenues generated from voyage charters to revenues generated from
                time
                charters, which assists us in making operating decisions about the
                deployment of our vessels and their performance. Under time charters
                the
                charterer pays the voyage expenses, whereas under voyage charter
                contracts
                the ship-owner pays these expenses. Some voyage expenses are fixed,
                and
                the remainder can be estimated. If we, as the ship owner, pay the
                voyage
                expenses, we typically pass the approximate amount of these expenses
                on to
                our customers by charging higher rates under the contract or billing
                the
                expenses to them. As a result, although revenues from different types
                of
                contracts may vary, the net revenues after subtracting voyage expenses,
                which we call “net revenues,” are comparable across the different


5
 
 types
                    of contracts. We principally use net revenues, a non-GAAP financial
                    measure, because it provides more meaningful information to us
                    than
                    revenues, the most directly comparable GAAP financial measure.
                    Net
                    revenues are also widely used by investors and analysts in the
                    shipping
                    industry for comparing financial performance between companies
                    and to
                    industry averages. The following table reconciles net revenues
                    with
                    revenues.


**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(in
                thousands)**Revenues
            
            $
            2,013,306
            
            $
            1,954,618
            
            $
            2,219,238
            
            $
            1,576,095
            
            $
            783,327Voyage
                expenses
            
            
            (522,117
            )
            
            (419,169
            )
            
            (432,395
            )
            
            (394,656
            )
            
            (239,455
            )Net
                revenues
            
            
            1,491,189
            
            
            1,535,449
            
            
            1,786,843
            
            
            1,181,439
            
            
            543,872




(4)
            Total
                capitalization represents total debt, minority interest and total
                stockholders' equity.




(5)
              Until
                  ended February 16, 2006, we had $143.7 million of Premium Equity
                  Participating Security Units due May 18, 2006 (or *Equity
                  Units)*outstanding. If these Equity Units were presented as equity, our
                  total
                  debt to total capitalization would have been 46.2% as of December
                  31, 2005
                  (December 31, 2004 - 52.1% and December 31, 2003 - 45.2%) and our
                  net debt
                  to total capitalization would have been 39.5% as of December 31,
                  2005
                  (December 31, 2004 - 41.9% and December 31, 2003 - 39.8%). We believe
                  that
                  this presentation as equity for the purposes of these calculations
                  is
                  consistent with the requirement of each Equity Unit holder to purchase
                  for
                  $25 a specified fraction of a share of our common stock on February
                  16,
                  2006. Please read Item 18 - Financial Statements: Note 9 - Long-Term
                  Debt.
 (6)
                Net
                    debt represents total debt less cash, cash equivalents, restricted
                    cash
                    and short-term marketable securities. Total net capitalization
                    represents
                    net debt, minority interest and total stockholders' equity.
 (7)
                  Excludes
                      vessels purchased in connection with our acquisitions of Ugland
                      Nordic
                      Shipping AS in 2001, Navion AS in 2003, Teekay Shipping Spain
                      S.L. (*or
                      Teekay Spain)*in
                      2004 and Teekay Petrojarl ASA (or*Petrojarl*)
                      in 2006. Please read Item 5 - Operating and Financial Review
                      and
                      Prospects.


**Risk
        Factors**





***The
      cyclical nature of the tanker industry causes volatility in our
      profitability.***





Historically,
      the tanker industry has been cyclical, experiencing volatility in profitability
      due to changes in the supply of, and demand for, tanker capacity. Increases
      or
      decreases in the supply of tankers could have a material adverse effect on
      our
      business, financial condition and results of operations, particularly with
      respect to our spot tanker segment, which accounted for approximately 42% and
      51% of our net revenues during 2006 and 2005, respectively. The cyclical nature
      of the tanker industry may cause significant increases or decreases in the
      revenue we earn from our vessels and may also cause significant increases or
      decreases in the value of our vessels. The supply of tanker capacity is
      influenced by the number and size of new vessels built, vessels scrapped,
      converted and lost, the number of vessels that are out of service and
      regulations that may effectively cause early obsolescence of tonnage. The demand
      for tanker capacity is influenced by, among other factors: global and regional
      economic conditions; increases and decreases in production of and demand for
      crude oil and petroleum products; increases and decreases in OPEC oil production
      quotas; the distance crude oil and petroleum products need to be transported
      by
      sea; and developments in international trade and changes in seaborne and other
      transportation patterns. ****





Because
      many of the factors influencing the supply of and demand for tanker capacity
      are
      unpredictable, the nature, timing and degree of changes in tanker industry
      conditions are also unpredictable.





***We
      depend upon oil markets, changes in which could result in decreased demand
      for
      our vessels and services.***





Demand
      for our vessels and services in transporting crude oil and petroleum products
      depends upon world and regional oil markets. Any decrease in shipments of crude
      oil and petroleum products in those markets could have a material adverse effect
      on our business, financial condition and results of operations. **** Historically,
      those markets have been volatile as a result of the many conditions and events
      that affect the price, production and transport of oil and petroleum products,
      as well as competition from alternative energy sources. A slowdown of the United
      States and world economies may result in reduced consumption of crude oil and
      petroleum products and a decreased demand for our vessels and services.





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





Terrorist
      attacks and war may adversely affect our business, operating results, financial
      condition, ability to raise capital or future growth. Continuing hostilities
      in
      the Middle East may lead to additional armed conflicts or to further acts of
      terrorism and civil disturbance in the United States or elsewhere, which may
      contribute further to economic instability and disruption of oil and LNG
      production and distribution, which could result in reduced demand for our
      services. In addition, oil and LNG facilities, shipyards, vessels, pipelines
      and
      oil and gas fields could be targets of future terrorist attacks. Any such
      attacks could lead to, among other things, bodily injury or loss of life, vessel
      or other property damage, increased vessel operational costs, including
      insurance costs, and the inability to transport oil and LNG to or from certain
      locations. Terrorist attacks, war or other events beyond our control that
      adversely affect the distribution, production or transportation of oil or LNG
      to
      be shipped by us could entitle our customers to terminate charter contracts,
      which could harm our cash flow and our business.





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





Because
      our operations are primarily conducted outside of the United States, they may
      be
      affected by economic, political and governmental conditions in the countries
      where we are engaged in business or where our vessels are registered. Any
      disruption caused by these factors could harm our business. In particular,
      changing laws and policies affecting trade, investment and changes in tax
      regulations could have a materially adverse effect on our business, cash flow
      and financial results. As well, we derive a substantial portion of our revenues
      from shipping oil and LNG


6


from
      politically unstable regions. Past political conflicts in these regions,
      particularly in the Arabian Gulf, have included attacks on ships, mining of
      waterways and other efforts to disrupt shipping in the area. In addition to
      acts
      of terrorism, vessels trading in this and other regions have also been subject,
      in limited circumstances, to piracy. Future hostilities or other political
      instability in the Arabian Gulf or other regions where we operate or may operate
      could have a material adverse effect on the growth of our business, results
      of
      operations and financial condition. In addition, tariffs, trade
      embargoes and other economic sanctions by Spain, the United States or other
      countries against countries in the Middle East, Southeast Asia or elsewhere
      as a
      result of terrorist attacks, hostilities or otherwise may limit trading
      activities with those countries, which could also harm our business.  Finally,
      a government could requisition one or more of our vessels, which is most likely
      during war or national emergency. Any such requisition would cause a loss of
      the
      vessel and could harm our business, cash flow and financial
      results.




***Our
      dependence on spot voyages may result in significant fluctuations in the
      utilization of our vessels and our profitability.***





During
      2006 and 2005, we derived approximately 42% and 51%, respectively, of our net
      revenues from the vessels in our spot tanker segment. Our spot tanker segment
      consists of conventional crude oil tankers and product carriers operating on
      the
      spot market or subject to time charters or contracts of affreightment priced
      on
      a spot-market basis or short-term fixed-rate contracts. We consider contracts
      that have an original term of less than three years in duration to be
      short-term. Part of our conventional Aframax and Suezmax tanker fleets and
      our
      large and small product tanker fleets are among the vessels included in our
      spot
      tanker segment. Our shuttle tankers may also trade in the spot market when
      not
      otherwise committed to perform under time charters or contracts of
      affreightment. Due to our dependence on the spot charter market, declining
      charter rates in a given period generally will result in corresponding declines
      in operating results for that period. The spot charter market is highly
      competitive and spot charter rates are subject to significant fluctuations
      based
      on tanker and oil supply and demand. Charter rates have varied significantly
      in
      the last few years. Future spot charters may not be available at rates that
      will
      be sufficient to enable our vessels to be operated profitably or to provide
      sufficient cash flow to service our debt obligations.





***Reduction
      in oil produced from offshore oil fields could harm our shuttle tanker and
      FPSO
      business.***





As
      at
      December 31, 2006, we had 42 vessels (including 12 chartered-in vessels) in
      our
      shuttle tanker fleet and four FPSO units. **** A
      majority of our shuttle tankers and all of our FPSOs earn revenue that depends
      upon the volume of oil we transport or the volume of oil produced from offshore
      oil fields. Oil production levels are affected by several factors, all of which
      are beyond our control, including:




·
            geologic
                factors, including general declines in production that occur naturally
                over time;




·
            the
                rate of technical developments in extracting oil and related
                infrastructure and implementation costs; and




·
            operator
                decisions based on revenue compared to costs from continued operations.





Factors
      that may affect an operator’s decision to initiate or continue production
      include: changes in oil prices; capital budget limitations; the availability
      of
      necessary drilling and other governmental permits; the availability of qualified
      personnel and equipment; the quality of drilling prospects in the area; and
      regulatory changes. In addition, the volume of oil we transport may be adversely
      affected by extended repairs to oil field installations or suspensions of field
      operations as a result of oil spills, operational difficulties, strikes,
      employee lockouts or other labor unrest. The rate of oil production at fields
      we
      service may decline from existing or future levels, and may be terminated.
      If
      such a reduction or termination occurs, the spot market rates, if any, in the
      conventional oil tanker trades at which we may be able to redeploy the affected
      shuttle tankers may be lower than the rates previously earned by the vessels
      under the contracts of affreightment, which would adversely affect our business
      and operating results.





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




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





***The
      redeployment risk of FPSO units is high given their lack of alternative uses
      and
      significant costs.***





FPSO
      units are specialized vessels that have very limited alternative uses and high
      fixed costs. In addition, FPSO units typically require substantial capital
      investments prior to being redeployed to a new field and production service
      agreement. Unless extended, each of our FPSO production service agreements
      will
      expire during the next 10 years. Our clients may also terminate these contracts
      prior to their expiration under specified circumstances. Any idle time prior
      to
      the commencement of a new contract or our inability to redeploy the vessels
      at
      acceptable rates may have an adverse affect on our business and operating
      results.





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





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





·
            prevailing
                economic conditions in oil, natural gas and energy
                markets;





·
            a
                substantial or extended decline in demand for oil, natural gas or,
                LNG;





·
            increases
                in the supply of vessel capacity,
                and





7


·
            the
                cost of retrofitting or modifying existing vessels, as a result of
                technological advances in vessel design or equipment, changes in
                applicable environmental or other regulation or standards, or
                otherwise.





If
      a
      charter terminates, we may be unable to re-deploy the vessel at attractive
      rates
      and, rather than continue to incur costs to maintain and finance it, may seek
      to
      dispose of it. Our inability to dispose of the vessel at a reasonable value
      could result in a loss on its sale and adversely affect our results of
      operations and financial condition.





***Our
      growth depends on continued growth in demand for LNG and LNG shipping as well
      as
      offshore oil transportation, production, processing and storage
      services.***





A
      significant portion of our growth strategy focuses on continued expansion in
      the
      LNG shipping sector and on the expansion in the shuttle tanker, FSO and FPSO
      sectors.





Expansion
      of the LNG shipping sector depends on continued growth in world and regional
      demand for LNG and LNG shipping and the supply of LNG. Demand for LNG and LNG
      shipping could be negatively affected by a number of factors, such as increases
      in the costs of natural gas derived from LNG relative to the cost of natural
      gas
      generally, increases in the production of natural gas in areas linked by
      pipelines to consuming areas, increases in the price of LNG relative to other
      energy sources, the availability of new energy sources, and negative global
      or
      regional economic or political conditions. Reduced demand for LNG and LNG
      shipping would have a material adverse effect on future growth of our liquefied
      gas segment, and could harm that segment’s results. Growth of the LNG market may
      be limited by infrastructure constraints and community and environmental group
      resistance to new LNG infrastructure over concerns about the environment, safety
      and terrorism. If the LNG supply chain is disrupted or does not continue to
      grow, or if a significant LNG explosion, spill or similar incident occurs,
      it
      could have a material adverse effect on our business, results of operations
      and
      financial condition.





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





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





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





·
            decreases
                in the consumption of oil due to increases in its price relative
                to other
                energy sources, other factors making consumption of oil less attractive
                or
                energy conservation measures;





·
            availability
                of new, alternative energy
                sources; and





·
            negative
                global or regional economic or political conditions, particularly
                in oil
                consuming regions, which could reduce energy consumption or its
                growth.





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





***The
      intense competition in our markets may lead to reduced profitability or
      expansion opportunities*** *.*





Our
      crude
      oil and product tankers and LNG carriers operate in highly competitive markets.
      Competition arises primarily from other Aframax, Suezmax, shuttle tanker and
      LNG
      carrier owners, including major oil companies and independent companies. We
      also
      compete with owners of other size tankers. Our market share is insufficient
      to
      enforce any degree of pricing discipline in the markets in which we operate
      and
      our competitive position may erode in the future. Any new markets that we enter
      could include participants that have greater financial strength and capital
      resources than we have. We may not be successful in entering new markets.





One
      of
      our objectives is to enter into additional long-term, fixed-rate time charters
      for our LNG carriers, shuttle tankers, FSO and FPSO units. The process of
      obtaining new long-term time charters is highly competitive and generally
      involves an intensive screening process and competitive bids, and often extends
      for several months. We expect substantial competition for providing services
      for
      potential LNG, shuttle tanker, FSO and FPSO projects from a number of
      experienced companies, including state-sponsored entities and major energy
      companies. Many of these competitors have greater experience in these markets
      and significantly greater financial resources than do we. We anticipate that
      an
      increasing number of marine transportation companies, including many with strong
      reputations and extensive resources and experience will enter the LNG
      transportation, FSO and FPSO sectors. This increased competition may cause
      greater price competition for time charters. As a result of these factors,
      we
      may be unable to expand our relationships with existing customers or to obtain
      new customers on a profitable basis, if at all, which would have a material
      adverse effect on our business, results of operations and financial
      condition.





***The
      loss of any key customer could result in a significant loss of revenue in a
      given period.***





We
      have
      derived, and believe that we will continue to derive, a significant portion
      of
      our revenues from a limited number of customers. One customer accounted for
      15%,
      or $307.9 million, of our consolidated revenues during 2006 (20% or $392.2
      million - 2005 and 17% or $373.7 million - 2004). The loss of any significant
      customer or a substantial decline in the amount of services requested by a
      significant customer could have a material adverse effect on our business,
      financial condition and results of operations.





***Our
      substantial debt levels may limit our flexibility in obtaining additional
      financing and in pursuing other business opportunities***





As
      of
      December 31, 2006, our consolidated debt and capital lease obligations totaled
      $3.7 billion and we had the capacity to borrow an additional
      $1.6 billion under our credit facilities. These facilities may be used by
      us for general corporate purposes. Our consolidated debt and capital lease
      obligations could increase substantially. We will continue to have the ability
      to incur additional debt, subject to limitations in our credit facilities.
      Our
      level of debt could have important consequences to us, including the
      following:


8


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





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





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





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





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





***The
      oil tanker and LNG carrier industries are subject to substantial environmental
      and other regulations, which may significantly increase our
      expenses.***





Our
      operations are affected by extensive and changing environmental protection
      laws
      and other regulations and international conventions. We have incurred, and
      expect to continue to incur, substantial expenses in complying with these laws
      and regulations, including expenses for vessel modifications and changes in
      operating procedures. Additional laws and regulations may be adopted that could
      limit our ability to do business or further increase our costs. In addition,
      failure to comply with applicable laws and regulations may result in
      administrative and civil penalties, criminal sanctions or the suspension or
      termination of our operations.





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





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





OPA
      90
      and CERCLA do not preclude claimants from seeking damages for the discharge
      of
      oil and hazardous substances under other applicable law, including maritime
      tort
      law. Such claims could include attempts to characterize seaborne transportation
      of LNG as an ultra-hazardous activity, which attempts, if successful, would
      lead
      to our being strictly liable for damages resulting from that activity.





Following
      the example of OPA 90, the International Maritime Organization (or *IMO* ),
      the
      United Nations’ agency for maritime safety, has adopted regulations for tanker
      design and inspection that are designed to reduce oil pollution in international
      waters. In December 2003 the IMO announced regulations accelerating the phase
      out of single-hull tankers. The regulations impose a more rigorous inspection
      regime for older tankers and ban the carriage of heavy oils on single-hull
      tankers. We have sold all of our vessels affected by these regulations. Please
      read Item 4 - Information on the Company: Regulations.





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





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





***We
      may not be able to successfully integrate future
      acquisitions.***




A
      principal component of our strategy is to continue to grow by expanding our
      business both in the geographic areas and markets where we have historically
      focused as well as into new geographic areas, market segments and services.
      We
      may not be successful in expanding our operations and any expansion may not
      be
      profitable. Our strategy of growth through acquisitions involves business risks
      commonly encountered in acquisitions of companies, including:




·
            interruption
                of, or loss of momentum in, the activities of one or more of an acquired
                company’s businesses and our businesses;




9


·
            additional
                demands on members of our senior management while integrating acquired
                businesses, which would decrease the time they have to manage our
                business, service existing customers and attract new
                customers;




·
            difficulties
                in integrating the operations, personnel and business culture of
                acquired
                companies;




·
            difficulties
                of coordinating and managing geographically separate organizations;




·
            adverse
                effects on relationships with our existing suppliers and customers,
                and
                those of the companies acquired;




·
            difficulties
                entering geographic markets or new market segments in which we have
                no or
                limited experience; and




·
            loss
                of key officers and employees of acquired
                companies.





Our
      failure to effectively integrate businesses we may acquire in the future may
      harm our business and results of operations.




***We
      may not realize expected benefits from acquisitions, and implementing our
      strategy of growth through acquisitions may harm our financial condition and
      performance.***





Acquisitions
      may not be profitable to us at the time of their completion and may not generate
      revenues sufficient to justify our investment. In addition, our acquisition
      growth strategy exposes us to risks that may harm our results of operations
      and
      financial condition, including risks that we may: fail to realize anticipated
      benefits, such as cost-savings, revenue and cash flow enhancements and earnings
      accretion; decrease our liquidity by using a significant portion of our
      available cash or borrowing capacity to finance acquisitions; incur additional
      indebtedness, which may result in significantly increased interest expense
      or
      financial leverage, or issue additional equity securities to finance
      acquisitions, which may result in significant shareholder dilution; incur or
      assume unanticipated liabilities, losses or costs associated with the business
      acquired; or incur other significant charges, such as impairment of goodwill
      or
      other intangible assets, asset devaluation or restructuring
      charges.




***The
      strain that growth places upon our systems and management resources may harm
      our
      business.***





Our
      growth has placed and will continue to place significant demands on our
      management, operational and financial resources. As we expand our operations,
      we
      must effectively manage and monitor operations, control costs and maintain
      quality and control in geographically dispersed markets. In addition, our two
      limited partnership’s have increased our complexity and thus has placed
      additional demands on our management. Our future growth and financial
      performance will also depend on our ability to recruit, train, manage and
      motivate our employees to support our expanded operations and continue to
      improve our customer support, financial controls and information
      systems.





These
      efforts may not be successful and may not occur in a timely or efficient manner.
      Failure to effectively manage our growth and the system and procedural
      transitions required by expansion in a cost-effective manner could have a
      material adverse affect on our business.





***Our
      insurance may not be sufficient to cover losses that may occur to our property
      or as a result of our operations.***





The
      operation of oil tankers, LNG carriers, FSO and FPSO units is inherently risky.
      Although we carry hull and machinery (marine and war risk) protection and
      indemnity insurance, all risks may not be adequately insured against, and any
      particular claim may not be paid. In addition, we do not generally carry
      insurance on our vessels covering the loss of revenues resulting from vessel
      off-hire time based on its cost compared to our off-hire experience. Any claims
      covered by insurance would be subject to deductibles, and since it is possible
      that a large number of claims may be brought, the aggregate amount of these
      deductibles could be material. Certain of our insurance coverage is maintained
      through mutual protection and indemnity associations, and as a member of such
      associations we may be required to make additional payments over and above
      budgeted premiums if member claims exceed association reserves.





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





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




*Marine
      transportation is inherently
      risky, and an incident involving significant loss of or environmental
      contamination by any of our vessels could harm our reputation and
      business.*


10
 Our
        vessels and their cargoes are at risk of being damaged or lost because of
        events
        such as:





·
            marine
                disasters;





·
            bad
                weather;





·
            mechanical
                failures;





·
            grounding,
                fire, explosions and collisions;





·
            piracy;





·
            human
                error; and





·
            war
                and terrorism.





An
      accident involving any of our vessels could result in any of the
      following:





·
            death
                or injury to persons, loss of property or environmental damage or
                pollution;





·
            delays
                in the delivery of cargo;





·
            loss
                of revenues from or termination of charter
                contracts;





·
            governmental
                fines, penalties or restrictions on conducting
                business;





·
            higher
                insurance rates; and





·
            damage
                to our reputation and customer relationships
                generally.





Any
      of
      these results could have a material adverse effect on our business, financial
      condition and operating results.




***Our
      operating results are subject to seasonal fluctuations*** *.*





We
      operate our conventional tankers in markets that have historically exhibited
      seasonal variations in demand and, therefore, in charter rates. This seasonality
      may result in quarter-to-quarter volatility in our results of operations. Tanker
      markets are typically stronger in the winter months as a result of increased
      oil
      consumption in the northern hemisphere. In addition, unpredictable weather
      patterns in these months tend to disrupt vessel scheduling. The oil price
      volatility resulting from these factors has historically led to increased oil
      trading activities in the winter months. As a result, our revenues have
      historically been weaker during the second and third quarters, and, conversely,
      revenues have been stronger during the first and fourth quarters.





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





***We
      expend substantial sums during construction of newbuildings and the conversion
      of tankers to FPSOs or FSOs without earning revenue and without assurance that
      they will be completed.***





We
      are
      typically required to expend substantial sums as progress payments during
      construction of a newbuilding, but we do not derive any revenue from the vessel
      until after its delivery. In addition, under some of our time charters if our
      delivery of a vessel to a customer is delayed, we may be required to pay
      liquidated damages in amounts equal to or, under some charters, almost double
      the hire rate during the delay. For prolonged delays, the customer may terminate
      the time charter and, in addition to the resulting loss of revenues, we may
      be
      responsible for additional substantial liquidated charges.





If
      we
      were unable to obtain financing required to complete payments on any of our
      newbuilding orders, we could effectively forfeit all or a portion of the
      progress payments previously made. As of December 31, 2006, we had 26
      newbuildings on order with deliveries scheduled between January 2007 and August
      2009. As of December 31, 2006, progress payments made towards these
      newbuildings, excluding payments made by our joint venture partners, totaled
      $701.9 million. We ordered two shuttle tanker newbuildings in January 2007
      and
      expect to order additional newbuildings in the future.




In
      addition, conversion projects expose us to a numbers of risks, including lack
      of
      shipyard capacity and the difficulty of completing the conversion in a timely
      and cost effective manner. There can be no assurance that such conversion
      projects will be successful.




***Exposure
        to currency exchange rate and interest rate fluctuations could result in
        fluctuations in our cash flows and operating results.***
 
 Substantially
        all of our revenues are earned in U.S. Dollars, although we are paid in Euros,
        Australian Dollars, Norwegian Kroner and British Pounds under some of our
        charters. A portion of our operating costs are incurred in currencies other
        than
        U.S. Dollars. This partial mismatch in operating revenues and expenses could
        lead to fluctuations in net income due to changes in the value of the U.S.
        dollar relative to other currencies, in particular the Norwegian Kroner,
        the
        Australian Dollar, the Canadian Dollar, the Singapore Dollar, the Japanese
 11
 Yen,
        the
        British Pound and the Euro. We also make payments under two Euro-denominated
        term loans. If the amount of these and other Euro-denominated obligations
        exceeds our
        Euro-denominated revenues, we must convert other currencies, primarily the
        U.S.
        Dollar, into Euros. An increase in the strength of the Euro relative to the
        U.S.
        Dollar would require us to convert more U.S. Dollars to Euros to satisfy
        those
        obligations.


Because
      we report our operating results in U.S. Dollars, changes in the value of the
      U.S. Dollar relative to other currencies also result in fluctuations of our
      reported revenues and earnings. Under U.S. accounting guidelines, all foreign
      currency-denominated monetary assets and liabilities, such as cash and cash
      equivalents, accounts receivable, restricted cash, accounts payable, long-term
      debt and capital lease obligations, are revalued and reported based on the
      prevailing exchange rate at the end of the period. This revaluation historically
      has caused us to report significant non-monetary foreign currency exchange
      gains
      or losses each period. The primary source of these gains and losses is our
      Euro-denominated term loans.





***We
      may not be exempt from United States tax on our United States source income,
      which would reduce our net income and cash flow by the amount of the applicable
      tax.***





If
      we are
      not exempt from tax under Section 883 of the United States Internal Revenue
      Code, the shipping income derived from the United States sources attributable
      to
      our subsidiaries' transportation of cargoes to or from the United States will
      be
      subject to U.S. federal income tax. If our subsidiaries were subject to such
      tax, our net income and cash flow would be reduced by the amount of such tax.
      Currently, we claim an exemption under Section 883. We cannot give any assurance
      that future changes and shifts in ownership of our stock will not preclude
      us
      from being able to satisfy the existing exemption.




In
      2006
      and 2005, approximately 17.4% and 13.1%, respectively, of our gross shipping
      revenues were derived from U.S. sources attributable to the transportation
      of
      cargoes to or from the United States. The average U.S. federal income tax on
      such U.S. source income, in the absence of the exemption under Section 883,
      would have been 4%, or approximately $7.0 million and $10.3 million,
      respectively, for 2006 and 2005.





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





A
      significant portion of our seafarers are employed under collective bargaining
      agreements. We may be subject to additional labor agreements in the future.
      We
      may be subject to labor disruptions if relationships deteriorate with the
      seafarers or the unions that represent them. The collective bargaining
      agreements may not prevent labor disruptions, particularly when the agreements
      are being renegotiated. Salaries are typically renegotiated annually or
      bi-annually for seafarers and annually for onshore operational staff. In certain
      cases, these negotiations have caused labor disruptions in the past and any
      future labor disruptions could harm our operations and could have a material
      adverse effect on our business, results of operations and financial
      condition.





**Item
      4. Information on the Company**





**A.
      Overview, History and Development**





**Overview**





We
      are a
      leading provider of international crude oil and petroleum product transportation
      services with our offshore fleet, which includes the world's largest fleet
      of
      shuttle tankers, our fixed-rate tanker fleet, and our spot tanker fleet, which
      includes the world's largest fleet of medium-size oil tankers. Since 2004,
      we
      have also transported liquefied natural gas (or *LNG* ).
      Our
      tankers and LNG carriers provide transportation services to major oil companies,
      oil traders and government agencies worldwide.





Our
      offshore segment includes our shuttle tanker operations, floating storage and
      off-take (or *FSO* )
      units,
      and our floating production, storage and offloading (or *FPSO* )
      units,
      which primarily operate under long-term fixed-rate contracts. As of December
      31,
      2006, our shuttle tanker fleet, which had a total cargo capacity of
      approximately 4.4 million deadweight tones (or *dwt* ),
      represented approximately 65% of the total tonnage of the world shuttle tanker
      fleet. Please read Item 4 - Information on the Company: Our Fleet.





Our
      fixed-rate tanker segment includes our conventional crude oil and product
      tankers on long-term fixed-rate time-charter contracts. Please read Item 4
      -
      Information on the Company: Our Fleet.





Our
      liquefied gas segment includes our LNG carriers and liquefied petroleum gas
      (or *LPG* )
      carriers. All of our LNG and LPG carriers are subject to long-term fixed-rate
      time charter contracts. As of December 31, 2006, this fleet, including
      newbuildings, had a total cargo carrying capacity of 2.2 million cubic
      meters.





Our
      spot
      tanker segment includes our conventional crude oil tankers and product carriers
      operating on the spot market or subject to time charters or contracts of
      affreightment priced on a spot-market basis or short-term fixed-rate contracts
      (contracts with an initial term of less than three years). As of December 31,
      2006, our Aframax tankers in this segment, which had a total cargo capacity
      of
      approximately 4.7 million dwt, represented approximately 7% of the total tonnage
      of the world Aframax fleet. Please read Item 4 - Information on the Company:
      Our
      Fleet.





The
      Teekay organization was founded in 1973. We are incorporated under the laws
      of
      the Republic of The Marshall Islands as Teekay Shipping Corporation and maintain
      our principal executive headquarters at Bayside House, Bayside Executive Park,
      West Bay Street & Blake Road, P.O. Box AP-59212, Nassau, The Bahamas. Our
      telephone number at such address is (242) 502-8820. Our principal operating
      office is located at Suite 2000, Bentall 5, 550 Burrard Street, Vancouver,
      British Columbia, Canada, V6C 2K2. Our telephone number at such address is
      (604)
      683-3529.




**Pending
        Acquisition**
 
 On
        April
        17, 2007, Teekay, A/S Dampskibsselskabet TORM (or *TORM* ),
        and
        OMI Corporation (or *OMI* )
        announced that Teekay and TORM had entered into a definitive agreement to
        acquire the outstanding shares of OMI. Please read Item 18 - Financial
        Statements: Note 22(c) - Subsequent Events.


12


**Business
        Acquisitions**
 
 *Acquisition
        of Petrojarl ASA*
 
 During
        2006, we acquired 64.5% of the outstanding shares of Petrojarl ASA, which
        is
        listed on the Oslo Stock Exchange, for $536.8 million. Petrojarl is a leading
        independent operator of FPSO units. On December 1, 2006, we renamed
        Petrojarl Teekay Petrojarl ASA. We financed our acquisition of Petrojarl
        through
        a combination of bank financing and cash balances.


Petrojarl,
      based in Trondheim, Norway, has a fleet of four owned FPSO units operating
      under
      long-term service contracts in the North Sea. To service these contracts,
      Petrojarl also charters two shuttle tankers and one FSO unit from us. We believe
      that the combination of Petrojarl’s offshore engineering expertise and
      reputation as a quality operator of FPSOs, and Teekay’s global marine operations
      and extensive customer network, positions us to competitively pursue new FPSO
      projects.





*Acquisition
      of Teekay Shipping Spain S.L., formerly Naviera F. Tapias S.A.*





On
      April
      30, 2004, we acquired all of the outstanding shares of Naviera F. Tapias S.A.
      and its subsidiaries and renamed it Teekay Shipping Spain S.L. (or *Teekay
      Spain* ).
      Teekay
      Spain engages in the marine transportation of crude oil and LNG. We funded
      this
      acquisition with a combination of cash, cash generated from operations and
      borrowings under existing credit facilities. We believe the acquisition of
      the
      Teekay Spain business provided us with a strategic platform from which to expand
      our presence in the LNG shipping sector and immediate access to reputable LNG
      operations. We anticipate this will continue to benefit us when bidding on
      future LNG projects. In the transaction, we also entered into an agreement
      with
      an entity controlled by the former controlling shareholder of Teekay Spain
      to
      establish a 50/50 joint venture that will pursue new business in the oil and
      gas
      shipping sectors that relate only to the Spanish market or are led by Spanish
      entities or entities controlled by a Spanish company.





As
      at
      December 31, 2006, Teekay Spain’s LNG fleet consisted of four LNG carriers,
      which are all contracted under long-term fixed-rate time charters to major
      Spanish energy companies. As at December 31, 2006, Teekay Spain’s conventional
      crude oil tanker fleet consisted of five Suezmax tankers, all of which are
      contracted under long-term fixed-rate time charters with a major Spanish oil
      company.





Additional
      information about these acquisitions, including our financing of them, is
      included in Item 5 - Operating and Financial Review and Prospects.





**Public
      Offerings**




*Anticipated
      Public Offering by Teekay Tankers*


On
        April
        17, 2007, we announced our intention to create a new publicly-listed entity
        for
        our conventional tanker business (or *Teekay
        Tankers* ).
        It is
        anticipated that Teekay Tankers will initially own a portion of our conventional
        tanker fleet. Furthermore, it is expected that Teekay Tanker’s primary objective
        will be to grow through the acquisition of conventional tanker assets from
        third
        parties and from us, which may include the vessels to be acquired by us from
        our
        planned acquisition of 50 percent of OMI Corporation.
 
 We
        believe that creating Teekay Tankers, as a separate public company, will
        facilitate the growth of our conventional tanker business and further enhance
        our innovative corporate structure, which supports our strategy of creating
        value as an asset manager in the Marine Midstream space.
 
 We
        expect
        to file with the U.S. Securities and Exchange Commission a registration
        statement for the initial public offering of Teekay Tankers during the second
        half of 2007. The securities may not be sold, nor may offers to buy be accepted,
        prior to the time the registration statement becomes effective.


*Public
      Offering by Teekay Offshore Partners L.P.*





On
      December 19, 2006, our subsidiary, Teekay Offshore Partners L.P. (or *Teekay
      Offshore* )
      sold as
      part of its initial public offering 8.1 million of its common units,
      representing limited partner interests, at $21.00 per unit for net proceeds
      of
      $155.3 million. Teekay Offshore owns 26% of Teekay Offshore Operating L.P.
      (or *OPCO* ),
      including its 0.01% general partner interest. OPCO owns and operates a fleet
      of
      36 of our shuttle tankers (including 12 chartered-in vessels), four of our
      FSO
      vessels, and nine or our conventional Aframax tankers. We directly own 74%
      of
      OPCO and 59.8% of Teekay Offshore, including its 2% general partner interest.
      As
      a result, we effectively own 89.5% of OPCO. Please read Item 18 - Financial
      Statements: Note 4 - Public Offering of Teekay Offshore Partners
      L.P.





*Public
      Offerings by Teekay LNG Partners L.P.*





On
      May
      10, 2005, Teekay LNG Partners L.P. (or *Teekay
      LNG* )
      sold as
      part of an initial public offering 6.9 million of its common units at $22.00
      per
      unit for net proceeds of $135.7 million. In November 2005, Teekay LNG completed
      a follow-on public offering of 4.6 million common units at a price of $27.40
      per
      unit, for net proceeds of $120.0 million. We own a 67.8% interest in Teekay
      LNG,
      including its 2% general partner interest. Please read Item 18 - Financial
      Statements: Note 5 - Public Offerings of Teekay LNG Partners L.P.





**B.
      Operations**





Our
      organization is divided into the following key areas: the Offshore Segment
      (or *Teekay
      Navion Shuttle Tankers and Offshore),* the
      Liquefied Gas Segment (or *Teekay
      Gas Services* ), ** the
      Spot
      Tanker Segment and Fixed Rate Tanker Segment (collectively *Teekay
      Tanker Services* ).
      These
      centers of expertise work closely with customers to ensure a thorough
      understanding of our customers’ requirements and to develop tailored solutions.




·
            Teekay
                Navion Shuttle Tankers and Offshoreprovides marine transportation, processing and storage services to
                the
                offshore oil industry, including a wide range of shuttle tanker,
                FSO and
                FPSO services. Our expertise and partnerships allow us to create
                solutions
                for customers producing crude oil from offshore
                installations.




·
            Teekay
                Gas Servicesprovides gas transportation services, primarily under long-term fixed-rate
                contracts to major energy and utility companies. These services currently
                include the transportation of LNG and
                LPG.


13


·
            Teekay
                Tanker Servicesis
                responsible for the commercial management of our conventional crude
                oil
                and product tanker transportation services. We offer a full range
                of
                flexible, customer-focused shipping solutions through our worldwide
                network of commercial offices.





**Offshore
      Segment**





The
      main
      services our offshore segment provides to customers are:




·
            offloading
                and transportation of cargo from oil field installations to onshore
                terminals via dynamically-positioned offshore loading shuttle
                tankers;




·
            floating
                storage for oil field installations via FSO units;
                and




·
            floating
                production, processing and storage services via FPSO units.




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


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





As
      of
      December 31, 2006, there were approximately 65 vessels in the world shuttle
      tanker fleet (including newbuildings), the majority of which operate in the
      North Sea. Shuttle tankers also operate in Brazil, Canada, Russia, Australia
      and
      Africa. As of December 31, 2006, we owned 26 shuttle tankers and chartered-in
      an
      additional 12 shuttle tankers. Other shuttle tanker owners in the North Sea
      include Knutsen OAS Shipping AS, JJ Ugland Group and Penny Ugland, which as
      of
      December 31, 2006 controlled small fleets of two to ten shuttle tankers each.
      We
      believe that we have significant competitive advantages in the shuttle tanker
      market as a result of the quality, type and dimensions of our vessels combined
      with our market share in the North Sea.





*FSO
      Units*





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





Our
      FSO
      units are generally placed on long-term, fixed-rate time charters or bareboat
      charters as an integrated part of the field development plan, and thus provide
      stable cash flow to us. Under a bareboat charter, the customer pays a fixed
      daily rate for a fixed period of time for the full use of the vessel and becomes
      responsible for all crewing, management and navigation of the vessel and the
      expenses therefore.





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





*FPSO
      Units*





FPSO
      units are offshore production facilities that are typically ship-shaped and
      store processed crude oil in tanks located in the hull of the vessel. FPSO
      units
      are typically used as production facilities to develop marginal oil fields
      or
      deepwater areas remote from the existing pipeline infrastructure. Of four major
      types of floating production systems, FPSO units are the most common type.
      Typically, the other types of floating production systems do not have
      significant storage and need to be connected into a pipeline system or use
      an
      FSO unit for storage. FPSO units are less weight-sensitive than other types
      of
      floating production systems and their extensive deck area provides flexibility
      in process plant layouts. In addition, the ability to utilize surplus or aging
      tanker hulls for conversion to an FPSO unit provides a relatively inexpensive
      solution compared to the new construction of other floating production systems.
      A majority of the cost of an FPSO comes from its top-side production equipment
      and thus FPSO’s are expensive relative to conventional tankers. An FPSO unit
      carries on-board all the necessary production and processing facilities normally
      associated with a fixed production platform. As the name suggests, FPSOs are
      not
      fixed permanently to the seabed but are designed to be moored at one location
      for long periods of time. In a typical FPSO unit installation, the untreated
      wellstream is brought to the surface via subsea


14


equipment
      on the sea floor that is connected to the FPSO unit by flexible flow lines
      called risers. The risers carry oil, gas and water from the ocean floor to
      the
      vessel, which processes it onboard. The resulting crude oil is stored in the
      hull of the vessel and subsequently transferred to tankers either via a buoy
      or
      tandem loading system for transport to shore.





Traditionally,
      for large field developments, the major oil companies have owned and operated
      new, custom built FPSO units. FPSO units for smaller fields have generally
      been
      provided by independent FPSO contractors under life-of-field production
      contracts, where the contract's duration is for the useful life of the oil
      field. FPSO
      units have been used to develop offshore fields around the world since the
      late
      1970s. As of December 31, 2006, there were approximately 118 FPSO units
      operating and 46 FPSO units on order in the world fleet. At
      December 31, 2006, we had five FPSO units, including one on order. Most
      independent FPSO contractors have backgrounds in marine energy transportation,
      oil field services and/or oil field engineering and construction. The major
      independent FPSO contractors are SBM Offshore, Prosafe, Bluewater, BW Offshore,
      Modec, Fred Olsen, Aker and Maersk.




During
      2006, approximately 39% of our net revenues were **** earned
      by
      the vessels in the offshore segment, compared to approximately 32% in 2005
      and
      29% in 2004. Please read Item 5 - Operating and Financial Review and Prospects:
      Results of Operations.




**Liquefied
        Gas Segment**
 
 The
        vessels in our liquefied gas segment compete in the LNG and LPG markets.
        LNG
        carriers are usually chartered to carry LNG pursuant to time charter contracts
        with a duration between 20 and 25 years, and with charter rates payable to
        the
        owner on a monthly basis. LNG shipping historically has been transacted with
        these long-term, fixed-rate time charter contracts. LNG projects require
        significant capital expenditures and typically involve an integrated chain
        of
        dedicated facilities and cooperative activities. Accordingly, the overall
        success of an LNG project depends heavily
        on long-range planning and coordination of project activities, including
        marine
        transportation. Although most shipping requirements for new LNG projects
        continue to be provided on a long-term basis, spot voyages (typically consisting
        of a single voyage) and short-term time charters of less than 12 months duration
        have grown from 1% of the market in 1992 to approximately 13% in 2006.


In
      the
      LNG market, we compete principally with other private and state-controlled
      energy and utilities companies that generally operate captive fleets, and
      independent ship owners and operators. Many major energy companies compete
      directly with independent owners by transporting LNG for third parties in
      addition to their own LNG. Given the complex, long-term nature of LNG projects,
      major energy companies historically have transported LNG through their captive
      fleets. However, independent fleet operators have been obtaining an increasing
      percentage of charters for new or expanded LNG projects as major energy
      companies have continued to divest non-core businesses. The
      major
      operators of LNG carriers are Malaysian International Shipping, NYK Line, Shell
      Group and Mitsui O.S.K.





LNG
      carriers transport LNG internationally between liquefaction facilities and
      import terminals. After natural gas is transported by pipeline from production
      fields to a liquefaction facility, it is supercooled to a temperature of
      approximately negative 260 degrees Fahrenheit. This process reduces its volume
      to approximately 1 / 600 th of its
      volume in a gaseous state. The reduced volume facilitates economical storage
      and
      transportation by ship over long distances, enabling countries with limited
      natural gas reserves or limited access to long-distance transmission pipelines
      to meet their demand for natural gas. LNG carriers include a sophisticated
      containment system that holds and insulates the LNG so it maintains its liquid
      form. The LNG is transported overseas in specially built tanks on double-hulled
      ships to a receiving terminal, where it is offloaded and stored in heavily
      insulated tanks. In regasification facilities at the receiving terminal, the
      LNG
      is returned to its gaseous state (or *regasified* )
      and
      then shipped by pipeline for distribution to natural gas customers.





Most
      new
      LNG carriers, including all of our vessels, are being built with a membrane
      containment system. These systems consist of insulation between thin primary
      and
      secondary barriers and are designed to accommodate thermal expansion and
      contraction without overstressing the membrane. New LNG carriers are generally
      expected to have a lifespan of approximately 40 years. Unlike the oil tanker
      industry, there currently are no regulations that require the phase-out from
      trading of LNG carriers after they reach a certain age. As at December 31,
      2006,
      there were approximately 222 vessels in the world LNG fleet, with an average
      age
      of approximately 12 years, and an additional 138 LNG carriers under construction
      or on order for delivery through 2010.





Our
      liquefied gas segment primarily consists of LNG carriers subject to long-term,
      fixed-rate time-charter contracts. The acquisition of Teekay Spain on April
      30,
      2004 established our entry into the LNG shipping sector with four LNG carriers.
      As at December 31, 2006, we had an additional eight newbuilding LNG carriers
      on
      order, all of which were scheduled to commence operations upon delivery under
      long-term fixed-rate time charters and in which our interests range from 40%
      to
      70%. In addition, as at December 31, 2006, we had four LPG carriers, including
      three under construction.





During
      2006, approximately 7% of our net revenues were **** earned
      by
      the vessels in the fixed-rate LNG segment, compared to approximately 7% in
      2005
      and 3% in 2004. Please read Item 5 - Operating and Financial Review and
      Prospects: Results of Operations.





**Spot
      Tanker Segment**





The
      vessels in our spot tanker segment compete primarily in the Aframax tanker
      market. In the Aframax market, international seaborne oil and other petroleum
      products transportation services are provided by two main types of operators:
      captive fleets of major oil companies (both private and state-owned) and
      independent ship owner fleets. Many major oil companies and other oil trading
      companies, the primary charterers of our vessels, also operate their own vessels
      and transport their own oil and oil for third party charterers in direct
      competition with independent owners and operators. Competition for charters
      in
      the Aframax spot charter market is intense and is based upon price, location,
      the size, age, condition and acceptability of the vessel, and the reputation
      of
      the vessel's manager.





We
      compete principally with other Aframax owners in the spot charter market through
      the global tanker charter market. This market is comprised of tanker broker
      companies that represent both charterers and ship owners in chartering
      transactions. Within this market, some transactions, referred to as "market
      cargoes," are offered by charterers through two or more brokers simultaneously
      and shown to the widest possible range of owners; other transactions, referred
      to as "private cargoes," are given by the charterer to only one broker and
      shown
      selectively to a limited number of owners whose tankers are most likely to
      be
      acceptable to the charterer and are in position to undertake the voyage.





As
      of
      December 31, 2006, other large operators of Aframax tonnage (including
      newbuildings on order) included Malaysian International Shipping Corporation
      (approximately 59 Aframax vessels), Aframax International Pool (approximately
      32
      Aframax vessels), Novorossiisk Sea Shipping Co.


15


(approximately
      31 Aframax vessels), British Petroleum (approximately 20 Aframax vessels),
      Minerva (approximately 17 Aframax vessels) and General Maritime Corporation
      (approximately 10 Aframax vessels).





Our
      competition in the Aframax (75,000 to 119,999 dwt) market is also affected
      by
      the availability of other size vessels that compete in our markets. Suezmax
      (120,000 to 199,999 dwt) size vessels and Panamax (50,000 to 74,999 dwt) size
      vessels can compete for many of the same charters for which our Aframax tankers
      compete. Because of their large size, Very Large Crude Carriers (200,000 to
      319,999 dwt) (or *VLCCs* )
      and
      Ultra Large Crude Carriers (320,000+ dwt) (or *ULCCs* )
      rarely
      compete directly with Aframax tankers for specific charters. However, because
      VLCCs and ULCCs comprise a substantial portion of the total capacity of the
      market, movements by such vessels into Suezmax trades and of Suezmax vessels
      into Aframax trades would heighten the already intense competition.





We
      believe that we have competitive advantages in the Aframax tanker market as
      a
      result of the quality, type and dimensions of our vessels and our market share
      in the Indo-Pacific and Atlantic Basins. As of December 31, 2006, our Aframax
      tanker fleet (excluding Aframax-size shuttle tankers and newbuildings) had
      an
      average age of approximately 7 years, compared to an average age for the world
      oil tanker fleet, including Aframax tankers, of approximately 9.2 years and
      for
      the world Aframax tanker fleet of approximately 8.6 years.




We
        have
        chartering staff located in Stavanger, Norway; Tokyo, Japan; London, England;
        Houston, USA; and Singapore. Each office serves our clients headquartered
        in
        that office's region. Fleet operations, vessel positions and charter market
        rates are monitored around the clock. We believe that monitoring such
        information is critical to making informed bids on competitive brokered
        business.
 
 During
        2006, approximately 42% of our net revenues were earned by the vessels in
        the
        spot tanker segment, compared to approximately 50% in 2005 and 61% in 2004.
        Please read Item 5 - Operating and Financial Review and Prospects: Results
        of
        Operations.


**Fixed-Rate
      Tanker Segment**





The
      vessels in our fixed-rate tanker segment primarily consist of Aframax and
      Suezmax tankers that are employed on long-term time charters. We consider
      contracts that have an original term of less than three years in duration to
      be
      short-term. The only difference between the vessels in the spot tanker segment
      and the fixed-rate tanker segment is the duration of the contract under which
      they are employed. Charters of more than three years are not as common as
      short-term charters and voyage charters for conventional tankers.





During
      2006, approximately 12% of our net revenues were **** earned
      by
      the vessels in the fixed-rate tanker segment, compared to approximately 11%
      in
      2005 and 7% in 2004. Please read Item 5 - Operating and Financial Review and
      Prospects: Results of Operations.





**Ship
      Management**





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





Customers
      and vessel rating services have recognized us for safety, environment, quality
      and service. Given the emphasis by customers on quality as a result of stringent
      environmental regulations, and heightened concerns about liability for
      environmental pollution, we believe that our emphasis on quality and safety
      provides us with a favorable competitive profile. We are one of a few companies
      who have fully integrated their health, safety, environment and quality
      management systems. This integration has increased efficiencies in our
      operations and management by reducing redundancies and better aligning our
      strategies and programs in the relevant systems.





We
      have
      achieved certification under the standards reflected in International Standards
      Organization’s (or *ISO* )
      9001
      for Quality Assurance, ISO 14001 for Environment Management Systems, OHSAS
      18001
      for Occupational Health and Safety, and the IMO’s International Management Code
      for the Safe Operation of Ships and Pollution Prevention on a fully integrated
      basis. As part of International Safety Management (ISM) Code compliance, all
      of
      our vessels’ safety management certificates are maintained through ongoing
      internal audits performed by our certified internal auditors and intermediate
      external audits performed by the classification society Det Norske
      Veritas.





In
      our
      various worldwide facilities we carry out the critical ship management functions
      of vessel maintenance, crewing, purchasing, shipyard supervision, insurance
      and
      financial management services for most of our fleet. These functions are
      supported by onboard and onshore systems for maintenance, inventory, purchasing
      and budget management. OSM Ship Management AS (or *OSM* ),
      a
      company which is unrelated to us, provides ship management services for three
      of
      our conventional tankers. OSM is under contract to provide these services to
      us
      until October 2008.





We
      establish key performance indicators to facilitate regular monitoring of our
      operational performance. We set targets on an annual basis to drive continuous
      improvement, and we review performance indicators monthly to determine if
      remedial action is necessary to reach our targets. In 2003, we established
      a
      purchasing alliance with two other shipping companies and named it Teekay
      Bergesen Worldwide. This alliance leverages the purchasing power of the combined
      fleets, mainly in such commodity areas as lube oils, paints and other chemicals.





We
      believe that the generally uniform design of some of our existing and
      newbuilding vessels and the adoption of common equipment standards provides
      operational efficiencies, including with respect to crew training and vessel
      management, equipment operation and repair and spare parts ordering.





**Risk
      of Loss and Insurance**





The
      operation of any ocean-going vessel carries an inherent risk of catastrophic
      marine disasters, death or injury of persons and property losses caused by
      adverse weather conditions, mechanical failures, human error, war, terrorism,
      piracy and other circumstances or events. In addition, the transportation of
      crude oil and LNG is subject to the risk of spills and to business interruptions
      due to political circumstances in foreign countries, hostilities, labor strikes
      and boycotts. The occurrence of any of these events may result in loss of
      revenues or increased costs.





We
      carry
      hull and machinery (marine and war risks) and protection and indemnity insurance
      coverage to protect against most of the accident-related risks involved in
      the
      conduct of our business. Hull and machinery insurance covers loss of or damage
      to a vessel due to marine perils such as collisions, grounding and weather.
      Protection and indemnity insurance indemnifies us against liabilities incurred
      while operating vessels, including


16


injury
      to
      our crew or third parties, cargo loss and pollution. The current available
      amount of our coverage for pollution is $1 billion per vessel per incident.
      We
      also carry insurance policies covering war risks, including piracy and
      terrorism. We do not generally carry insurance on our vessels covering the
      loss
      of revenues resulting from vessel off-hire time based on its cost compared
      to
      our off-hire experience. **** We
      believe that our current insurance coverage is adequate to protect against
      most
      of the accident-related risks involved in the conduct of our business and that
      we maintain appropriate levels of environmental damage and pollution insurance
      coverage. However, we cannot assure that all covered risks are adequately
      insured against, that any particular claim will be paid or that we will be
      able
      to procure adequate insurance coverage at commercially reasonable rates in
      the
      future. In addition, more stringent environmental regulations have resulted
      in
      increased costs for, and may result in the lack of availability of, insurance
      against risks of environmental damage or pollution.





We
      use in
      our operations a thorough risk management program that includes, among other
      things, computer-aided risk analysis tools, maintenance and assessment programs,
      a seafarers competence training program, seafarers workshops and membership
      in
      emergency response organizations.




**Operations
        Outside the United States**
 
 Because
        our operations are primarily conducted outside of the United States, they
        may be
        affected by currency fluctuations and by changing economic, political and
        governmental conditions in the countries where we engage in business or where
        our vessels are registered.


During
      2006, we derived approximately 18% of our total net revenues from our operations
      in the Indo-Pacific Basin, compared to approximately 19% during 2005. Past
      political conflicts in that region, particularly in the Arabian Gulf, have
      included attacks on tankers, mining of waterways and other efforts to disrupt
      shipping in the area. Vessels trading in the region have also been subject
      to,
      in limited instances, acts of piracy. In addition to tankers, targets of
      terrorist attacks could include oil pipelines, LNG facilities and offshore
      oil
      fields. The escalation of existing or the outbreak of future hostilities or
      other political instability in this region or other regions where we operate
      could affect our trade patterns, increase insurance costs, increase
      tanker operational costs and otherwise adversely affect our operations and
      performance. In addition, tariffs, trade embargoes, and other economic sanctions
      by the United States or other countries against countries in the Indo-Pacific
      Basin or elsewhere as a result of terrorist attacks or otherwise may limit
      trading activities with those countries, which could also adversely affect
      our
      operations and performance.





**Customers**





We
      have
      derived, and believe that we will continue to derive, a significant portion
      of
      our revenues from a limited number of customers. Our customers include major
      oil
      companies, major oil traders, large oil consumers and petroleum product
      producers, government agencies, and various other entities that depend upon
      marine transportation. One customer, an international oil company, accounted
      for
      15% ($307.9 million) of our consolidated revenues during 2006 (20% or $392.2
      million - 2005 and 17% or $373.7 million - 2004). No other customer accounted
      for more than 10% of our consolidated revenues during 2006, 2005 or 2004. The
      loss of any significant customer or a substantial decline in the amount of
      services requested by a significant customer could have a material adverse
      effect on our business, financial condition and results of
      operations.




**Our
      Fleet**





As
      at
      December 31, 2006, Teekay’s fleet (excluding vessels managed for third parties)
      consisted of 158 vessels, including chartered-in vessels, newbuildings on order,
      and vessels being converted to offshore units or shuttle tankers.





The
      following table summarizes the Teekay fleet as at December 31,
      2006:


**Number
                of Vessels(1)****Owned**
              **Vessels**
            **Chartered-in**
              **Vessels**
            **Newbuildings**
              **/Conversions**
            **Total****Offshore
                Segment**Shuttle
                Tankers(2)
            26
            12
            2
            40FSO
                Units(3)
            5
            -
            -
            5FPSO
                Units(4)
            4
            -
            1
            5Total
                Offshore Segment
            35
            12
            3
            50**Fixed-Rate
                Tanker Segment**Conventional
                Tankers(5)
            15
            2
            2
            19Total
                Fixed-Rate Tanker Segment
            15
            2
            2
            19**Liquefied
                Gas Segment**LNG
                Carriers(6)
            5
            -
            8
            13LPG
                Carriers
            1
            -
            3
            4Total
                Liquefied Gas Segment
            6
            -
            11
            17**Spot
                Tanker Segment**Suezmax
                Tankers
            -
            4
            10
            14Aframax
                Tankers(7)
            21
            11
            -
            32Large
                Product Tankers
            5
            7
            3
            15Small
                Product Tankers
            -
            11
            -
            11Total
                Spot Tanker Segment
            26
            33
            13
            72**Total**
            **82**
            **47**
            **29**
            **158**


17


(1)
            Excludes
                vessels managed on behalf of third
                parties.


(2)
            Includes
                five shuttle tankers in which our ownership interest is
                50%.


(3)
            Includes
                one unit in which our ownership interest is
                89%.


(4)
            Includes
                four FPSOs owned by Teekay Petrojarl, and one vessel being converted
                to an
                FPSO by a 50/50 joint venture between Teekay and Teekay
                Petrojarl.


(5)
            Includes
                eight Suezmax tankers owned by Teekay
                LNG.


(6)
            Five
                existing LNG vessels and two LNG newbuildings are owned by Teekay
                LNG.
                Teekay LNG has agreed to acquire Teekay’s 70% interest in two additional
                LNG newbuildings and Teekay’s 40% interest in four additional LNG
                newbuildings upon delivery of the
                vessels.


(7)
            Includes
                nine Aframax tankers owned by Teekay Offshore and chartered to
                Teekay.





Our
      vessels are of Australian, Bahamian, Cayman Islands, Liberian, Norwegian,
      Norwegian International Ship and Spanish registry.




Many
        of
        our Aframax vessels and some of our shuttle tankers have been designed and
        constructed as substantially identical sister ships. These vessels can, in
        many
        situations, be interchanged, providing scheduling flexibility and greater
        capacity utilization. In addition, spare parts and technical knowledge can
        be
        applied to all the vessels in the particular series, thereby generating
        operating efficiencies.
 
 As
        of
        December 31, 2006, we had 29 vessels under construction or undergoing conversion
        to shuttle tankers or FPSOs. Please read Item 5 - Operating and Financial
        Review
        and Prospects: Management’s Discussion and Analysis of Financial Condition and
        Results of Operations, and Item 18 - Financial Statements: Notes 17(a), 17(b),
        and 17(c) - Commitments and Contingencies - Vessels Under
        Construction.
 
 Please
        read Item 18 - Financial Statements: Note 9 - Long-Term Debt for information
        with respect to major encumbrances against our vessels.


**Classification,
      Audits and Inspections**





The
      hull
      and machinery of all of our vessels have been “classed” by one of the major
      classification societies: Det Norske Veritas, Lloyd’s Register of Shipping,
      Nippon Kaiji Kyokai or American Bureau of Shipping. In addition, the processing
      facilities of our FPSOs are “classed” by Det Norske Veritias. The classification
      society certifies that the vessel has been built and maintained in accordance
      with the rules of that classification society. Each vessel is inspected by
      a
      classification society surveyor annually, with either the second or third annual
      inspection being a more detailed survey (an *Intermediate
      Survey* )
      and the
      fourth or fifth annual inspection being the most comprehensive survey (a *Special
      Survey* ).
      The
      inspection cycle resumes after each Special Survey. Vessels also may be required
      to be drydocked at each Intermediate and Special Survey for inspection of the
      underwater parts of the vessel in addition to a more detailed inspection of
      hull
      and machinery. Many of our vessels have qualified with their respective
      classification societies for drydocking every four or five years in connection
      with the Special Survey and are no longer subject to drydocking at Intermediate
      Surveys. To qualify, we were required to enhance the resiliency of the
      underwater coatings of each vessel hull to accommodate underwater inspections
      by
      divers.





The
      vessel’s flag state, or the vessel’s classification society if nominated by the
      flag state, also inspect our vessels to ensure they comply with applicable
      rules
      and regulations of the country of registry of the vessel and the international
      conventions of which that country is a signatory. Port state authorities, such
      as the U.S. Coast Guard and the Australian Maritime Safety Authority, also
      inspect our vessels when they visit their ports.





Many
      of
      our customers also regularly inspect our vessels as a condition to chartering,
      and regular inspections are standard practice under long-term charters.





We
      believe that our relatively new, well-maintained and high-quality vessels
      provide us with a competitive advantage in the current environment of increasing
      regulation and customer emphasis on quality of service.





Our
      vessels are also regularly inspected by our seafaring staff, who perform much
      of
      the necessary routine maintenance. Shore-based operational and technical
      specialists also inspect our vessels at least twice a year. Upon completion
      of
      each inspection, action plans are developed to address any items requiring
      improvement. All action plans are monitored until they are completed. The
      objectives of these inspections are to:





·
            ensure
                adherence to our operating
                standards;


·
            maintain
                the structural integrity of the
                vessel;


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


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


·
            ensure
                the vessel’s appearance will support our brand and meet customer
                expectations.





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





We
      have
      obtained approval for our safety management system as being in compliance with
      the ISM Code. Our safety management system has also been certified as being
      compliant with ISO 9001, ISO 14001 and OSHAS 18001 standards. To maintain
      compliance, the system is audited regularly by either the vessels’ flag state
      or, when nominated by the flag state, a classification society. Certification
      is
      valid for five years subject to satisfactorily completing internal and external
      audits.




**Organizational
      Structure**





Our
      organizational structure includes our interests in Teekay Offshore and Teekay
      LNG. These limited partnerships were set up primarily to hold our assets that
      generate long-term fixed-rate cash flows. The strategic rationale for
      implementing this structure was to:





·
            illuminate
                higher value of fixed-rate cash flows to Teekay investors;





·
            realize
                advantages of a lower cost of equity when investing in new projects;
                and


18


·
            enhance
                returns to Teekay through fee-based revenue and ownership of the
                incentive
                distribution rights, which entitle the holder to disproportionate
                distributions of available cash as cash distribution levels to unitholders
                increase.





Teekay
      Offshore is a Marshall Islands limited partnership formed by us in 2006 as
      part
      of our strategy to expand our operations in the offshore oil marine
      transportation, processing and storage sectors. Teekay Offshore owns 26% of
      OPCO, including its 0.01% general partner interest. OPCO owns and operates
      a
      fleet of 36 of our shuttle tankers (including 12 chartered-in vessels), four
      of
      our FSO vessels, and nine of our conventional Aframax tankers. All of OPCO’s
      vessels operate under long-term, fixed-rate contracts. We directly own 74%
      of
      OPCO and 59.8% of Teekay Offshore, including its 2% general partner interest.
      As
      a result, we effectively own 89.5% of OPCO. Teekay Offshore also has rights
      to
      participate in certain FPSO opportunities relating to Petrojarl.





Teekay
      LNG is a Marshall Islands limited partnership formed by us in 2005 as part
      of
      our strategy to expand our operations in the LNG shipping sector. Teekay LNG
      provides LNG and crude oil marine transportation service under long-term,
      fixed-rate contracts with major energy and utility companies through its fleet
      of 13 LNG carriers (including six newbuildings) and eight Suezmax class crude
      oil tankers.




Teekay
        has entered into an omnibus agreement with Teekay LNG, Teekay Offshore and
        others governing, among other things, when Teekay, Teekay LNG and Teekay
        Offshore may compete with each other and certain rights of first offering
        on LNG
        carriers, oil tankers, shuttle tankers, FSO units and FPSO units.
 
 The
        following provides a summarized overview of our organizational structure
        as at
        March 1, 2007. Please read Exhibit 8.1 to this Annual Report for a list of
        our
        significant subsidiaries as at December 31, 2006.





(1)
      Including our 64.5% interest in Teekay Petrojarl





**C.
      Regulations**





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




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


19


**Regulation—International
      Maritime Organization (or** ***IMO*** **).** ****** The
      IMO
      is the United Nations’ agency for maritime safety. IMO regulations relating to
      pollution prevention for oil tankers apply to many jurisdictions in which our
      tanker fleet operates. These regulations provide that:





·
            tankers
                between 25 and 30 years old must be of double-hull construction or
                of a
                mid-deck design with double-side construction, unless they have wing
                tanks
                or double-bottom spaces, not used for the carriage of oil, which
                cover at
                least 30% of the length of the cargo tank section of the hull, or
                are
                capable of hydrostatically balanced loading which ensures at least
                the
                same level of protection against oil spills in the event of collision
                or
                stranding;


·
            tankers
                30 years old or older must be of double-hull construction or mid-deck
                design with double-side construction;
                and


·
            all
                tankers are subject to enhanced inspections.





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





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


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


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




In
      December 2003, the IMO revised its regulations relating to the prevention of
      pollution from oil tankers. These regulations, which became effective in April,
      2005, accelerate the mandatory phase-out of single-hull tankers and impose
      a
      more rigorous inspection regime for older tankers. As a result of these
      regulations, in 2003 we recorded a non-cash write-down of the book value of
      the
      affected vessels. We subsequently sold all the vessels affected by these
      regulations and no longer own any single-hull vessels.




IMO
      regulations also include the International Convention for Safety of Life at
      Sea
      (or *SOLAS* ),
      including amendments to SOLAS implementing the International Security Code
      for
      Ports and Ships (or *ISPS* ),
      the
      ISM Code, the International Convention on Prevention of Pollution from Ships
      (the *MARPOL
      Convention* ),
      the
      International Convention on Civic Liability for Oil Pollution Damage of 1969,
      the International Convention on Load Lines of 1966, and, specifically with
      respect to LNG carriers, the International Code for Construction and Equipment
      of Ships Carrying Liquefied Gases in Bulk (or the *IGC
      Code* ).
      SOLAS
      provides rules for the construction of and equipment required for commercial
      vessels and includes regulations for safe operation. Flag states which have
      ratified the convention and the treaty generally employ the classification
      societies, which have incorporated SOLAS requirements into their class rules,
      to
      undertake surveys to confirm compliance.





SOLAS
      and
      other IMO regulations concerning safety, including those relating to treaties
      on
      training of shipboard personnel, lifesaving appliances, radio equipment and
      the
      global maritime distress and safety system, are applicable to our operations.
      Non-compliance with IMO regulations, including SOLAS, the ISM Code, ISPS and
      the
      IGC Code, may subject us to increased liability or penalties, may lead to
      decreases in available insurance coverage for affected vessels and may result
      in
      the denial of access to, or detention in, some ports. For example, the Coast
      Guard and European Union authorities have indicated that vessels not in
      compliance with ISM Code will be prohibited from trading in U.S. and European
      ports.





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





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





LNG
      carriers are also subject to regulation under the IGC Code. Each LNG carrier
      must obtain a certificate of compliance evidencing that it meets the
      requirements of the IGC Code, including requirements relating to its design
      and
      construction. Each of our LNG carriers currently is in substantial compliance
      with the IGC Code, and each of our LNG newbuilding shipbuilding contracts
      requires compliance prior to delivery.





Annex VI
      to MARPOL, which became effective internationally in May, 2005, sets limits
      on
      sulfur dioxide and nitrogen oxide emissions from ship exhausts and prohibits
      deliberate emissions of ozone depleting substances. Annex VI also imposes a
      global cap on the sulfur content of fuel oil and allows for specialized areas
      to
      be established internationally with more stringent controls on sulfur emissions.
      For vessels over 400 gross tons, Annex VI imposes various survey and
      certification requirements. The United States has not yet ratified
      Annex VI. Vessels operated internationally, however, are subject to the
      requirements of Annex VI in those countries that have implemented its
      provisions. We believe that the cost of our complying with Annex VI will
      not be material.





**Environmental
      Regulations—The United States Oil Pollution Act of 1990 (or** ***OPA
      90*** **).** ****** OPA
      90
      established an extensive regulatory and liability regime for the protection
      and
      cleanup of the environment from oil spills, including discharges of oil cargoes,
      fuel (or *bunkers* )
      or
      lubricants. OPA 90 affects all owners and operators whose vessels trade to
      the
      United States or its territories or possessions or whose vessels operate in
      United States waters, which include the U.S. territorial sea and 200-mile
      exclusive economic zone around the United States.





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





·
            natural
                resources damages and the related assessment costs;


·
            real
                and personal property damages;


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


20


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


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


·
            loss
                of subsistence use of natural resources.




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




Under
      OPA
      90, with limited exceptions, all newly built or converted tankers delivered
      after January 1, 1994 and operating in United States waters must be built with
      double-hulls, and existing vessels that do not comply with the double-hull
      requirement must be phased out over a 20-year period (1995 to 2015) based on
      size, age and hull construction. Vessels with double-sides and double-bottoms
      are granted an additional five years of service life before being phased out.
      Notwithstanding the phase-out period, OPA 90 currently permits existing
      single-hull tankers to operate until the year 2015 if their operations within
      United States waters are limited to discharging at the Louisiana Off-shore
      Oil
      Platform, or off-loading by means of lightering activities within authorized
      lightering zones more than 60 miles offshore. All of our existing tankers are,
      and all of our newbuildings will be, double-hulled.




In
        December 1994, the U.S. Coast Guard (or *Coast
        Guard* )
        implemented regulations requiring evidence of financial responsibility in
        the
        amount of $1,500 per gross ton for tankers, coupling the then existing OPA
        limitation on liability of $1,200 per gross ton with the Comprehensive
        Environmental Response, Compensation, and Liability Act (or *CERCLA* )
        liability limit of $300 per gross ton. The financial responsibility limits
        have not been increased
        to comport with the amended statutory limits of OPA. However, the Coast Guard
        has issued a notice of policy change indicating its intention to change the
        financial responsibility regulations accordingly. Under the regulations,
        such
        evidence of financial responsibility may be demonstrated by insurance, surety
        bond, self-insurance, guaranty or an alternate method subject to agency
        approval. Under OPA 90, an owner or operator of a fleet of vessels is required
        only to demonstrate evidence of financial responsibility in an amount sufficient
        to cover the tanker in the fleet having the greatest maximum limited liability
        under OPA 90 and CERCLA.
 
 The
        Coast
        Guard’s regulations concerning certificates of financial responsibility (or *COFR* )
        provide, in accordance with OPA 90, that claimants may bring suit directly
        against an insurer or guarantor that furnishes COFR. In addition, in the
        event
        that such insurer or guarantor is sued directly, it is prohibited from asserting
        any contractual defense that it may have had against the responsible party
        and
        is limited to asserting those defenses available to the responsible party
        and
        the defense that the incident was caused by the willful misconduct of the
        responsible party. Certain organizations, which had typically provided COFR
        under pre-OPA 90 laws, including the major protection and indemnity
        organizations have declined to furnish evidence of insurance for vessel owners
        and operators if they are subject to direct actions or required to waive
        insurance policy defenses. The Coast Guard has indicated that it intends
        to
        propose a rule that would increase the required amount of such COFRs to $2,200
        per gross ton to reflect the higher limits on liability imposed by OPA 90,
        as described above.


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





OPA
      90
      and CERCLA permit individual states to impose their own liability regimes with
      regard to oil or hazardous substance pollution incidents occurring within their
      boundaries if the state’s regulations are equally or more stringent, and some
      states have enacted legislation providing for unlimited strict liability for
      spills. Several coastal states, including California, Washington and Alaska,
      require state specific COFR and vessel response plans. We intend to comply
      with
      all applicable state regulations in the ports where our vessels
      call.





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





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


·
            describe
                crew training and drills; and


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





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





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





OPA
      90
      and CERCLA do not preclude claimants from seeking damages for the discharge
      of
      oil and hazardous substances under other applicable law, including maritime
      tort
      law. Such claims could include attempts to characterize the transportation
      of
      LNG aboard a vessel as an ultra-hazardous activity under a doctrine that would
      impose strict liability for damages resulting from that activity. The
      application of this doctrine varies by jurisdiction. There can be no assurance
      that a court in a particular jurisdiction will not determine that the carriage
      of oil or LNG aboard a vessel is an ultra-hazardous activity, which would expose
      us to strict liability for damages caused to parties even when we have not
      acted
      negligently.





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


21


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





In
      addition, the IMO, various countries and states, such as Australia, the United
      States and the State of California, and various regulators, such as port
      authorities, the U.S. Coast Guard and the U.S. Environmental Protection Agency,
      have either adopted legislation or regulations, or are separately considering
      the adoption of legislation or regulations, aimed at regulating the
      transmission, distribution, supply and storage of LNG, the discharge of ballast
      water and the discharge of bunkers as potential pollutants, and requiring the
      installation on ocean-going vessels of pollution prevention equipment such
      as
      oily water separators and bilge alarms.




The
        United States Clean Water Act prohibits the discharge of oil or hazardous
        substances in U.S. navigable waters and imposes strict liability in the form
        of
        penalties for unauthorized discharges. The Clean Water Act also imposes
        substantial liability for the costs of removal, remediation and damages and
        complements the remedies available under the more recent OPA 90 and CERCLA
        discussed above. Pursuant to regulations promulgated
        by the U.S. Environmental Protection Agency (or *EPA* )
        in the
        early 1970s, the discharge of sewage and effluent from properly functioning
        marine engines was exempted from the permit requirements of the National
        Pollution Discharge Elimination System. This exemption allowed vessels in
        U.S.
        ports to discharge certain substances, including ballast water, without
        obtaining a permit to do so. However, on March 30, 2005, a U.S. District
        Court for the Northern District of California granted summary judgment to
        certain environmental groups and U.S. states that had challenged the EPA
        regulations, arguing that the EPA exceeded its authority in promulgating
        them.
        On September 18, 2006, the U.S. District Court issued an order invalidating
        the exemption in EPA’s regulations for all discharges incidental to the normal
        operation of a vessel as of September 30, 2008, and directing EPA to
        develop a system for regulating all discharges from vessels by that
        date.
 
 Although
        the EPA may appeal this decision, if the exemption is repealed, we would
        be
        subject to the Clean Water Act permit requirements that could include ballast
        water treatment obligations that could increase the costs of operating in
        the
        United States. For example, this ruling could: require the installation of
        equipment on our vessels to treat ballast water before it is discharged:
        require
        the implementation of other port facility disposal arrangements or procedures
        at
        potentially substantial cost and/or otherwise restrict our vessels traffic
        in
        U.S. waters.
 
 In
        Norway, the Norwegian Pollution Control Authority requires the installation
        of
        volatile organic compound emissions (or *VOC
        equipment)* on most
        shuttle tankers serving the Norwegian continental shelf. Oil companies bear
        the
        cost to install and operate the VOC equipment onboard the shuttle
        tankers.




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





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




**D.
      Taxation of the Company**





*The
      following discussion is a summary of the principal United States, Bahamian,
      Bermudian, Marshall Islands, Norwegian and Spanish tax laws applicable to us.
      The following discussion of tax matters, as well as the conclusions regarding
      certain issues of tax law that are reflected in such discussion, are based
      on
      current law. No assurance can be given that changes in or interpretation of
      existing laws will not occur or will not be retroactive or that anticipated
      future factual matters and circumstances will in fact occur. Our views have
      no
      binding effect or official status of any kind, and no assurance can be given
      that the conclusions discussed below would be sustained if challenged by taxing
      authorities.*




**United
      States Taxation**





The
      following discussion is based upon the provisions of the U.S. Internal Revenue
      Code of 1986, as amended (or the *Code* ),
      existing and proposed U.S. Treasury Department regulations, administrative
      rulings, pronouncements and judicial decisions, all as of the date of this
      Annual Report.





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





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


22


We
      have
      made special U.S. tax elections in respect of some of our vessel-owning or
      vessel-operating subsidiaries that are potentially engaged in activities which
      could give rise to U.S. Source International Transportation Income. Our
      Norwegian, Canadian and Spanish subsidiaries that occasionally transport cargoes
      to and from the United States are eligible to claim exemption from United States
      tax under the United States-Norway or United States-Canada Income Tax
      Treaties. Other subsidiaries that are engaged in activities which could give
      rise to U.S. Source International Transportation Income rely on our ability
      to
      claim exemption under Section 883 of the Code (the *Section
      883 Exemption* ).





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





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





We
      are
      organized under the laws of the Republic of the Marshall Islands. The
      U.S. Treasury Department has recognized the Republic of the Marshall
      Islands as a jurisdiction that grants an Equivalent Exemption. Consequently,
      our
      U.S. Source International Transportation Income (including for this
      purpose, any such income earned by our subsidiaries that have properly elected
      to be treated as partnerships or disregarded as entities separate from us for
      U.S. federal income tax purposes) will be exempt from U.S. federal
      income taxation provided we meet the Ownership Test described in the Section
      883
      Regulations. We
      believe that we should satisfy the Ownership Test because
      our stock is primarily and regularly traded on an established securities market
      in the United States within the meaning of the Section 883 of the Code and
      the
      Treasury Regulations thereunder.
      We can give no assurance that any changes in the ownership of our stock
      subsequent to the date of this report will permit us to continue to qualify
      for
      the Section 883 exemption.





***The
      4.0% Gross Basis Tax.*** If
      the
      Section 883 Exemption does not apply and the net basis tax does not apply,
      we would be subject to a 4.0% U.S. federal income tax on the
      U.S. source portion of our gross U.S. Source International
      Transportation Income, without benefit of deductions. For 2006 and 2005,
      approximately 8.7% and 13.1%, respectively, of our gross shipping revenues
      were
      U.S. Source International Transportation Income and the average U.S. federal
      income tax on such U.S. Source International Transportation Income would have
      been approximately $7.0 million and $10.3 million, respectively, for 2006 and
      2005.





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




U.S. Source
      Domestic Transportation Income generally will be treated as Effectively
      Connected Income. However, we do not anticipate that we any of our income has
      or
      will be U.S. Source Domestic Transportation Income.





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





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





**Marshall
      Islands, Bahamian and Bermudian Taxation**





We
      believe that neither we nor our subsidiaries will be subject to taxation under
      the laws of the Marshall Islands, the Bahamas or Bermuda, or that distributions
      by our subsidiaries to us will be subject to any taxes under the laws of such
      countries.




**Norwegian
        Taxation**
 
 The
        following discussion is based upon the current tax laws of the Kingdom of
        Norway
        and regulations, the Norwegian tax administrative practice and judicial
        decisions thereunder, all as in effect as of the date of this Annual Report
        and
        subject to possible change on a retroactive basis. The following discussion
        is
        for general information purposes only and does not purport to be a comprehensive
        description of all of the Norwegian income tax considerations applicable
        to
        us.
 
 Our
        Norwegian subsidiaries are subject to taxation in Norway on their income
        regardless of where the income is derived. The generally applicable Norwegian
        income tax rate is 28.0%.
 
 ***Taxation
        of Norwegian Subsidiaries Engaged in***  ***Business
        Activities.*** All
        of
        our Norwegian subsidiaries are subject to normal Norwegian taxation. Generally,
        a Norwegian resident company is taxed on its income realized for tax purposes.
        The starting point for calculating taxable income is the company’s income as
        shown on its annual accounts, calculated under generally accepted accounting
        principles and as adjusted for tax purposes. Gross income will include capital
        gains, interest, dividends from certain corporations and foreign exchange
        gains.
 23
 The
        Norwegian companies also are taxed on any gains resulting from the sale of
        depreciable assets. The gain on these assets is taken into income for Norwegian
        tax purposes at a rate of 20.0% per year on a declining balance
        basis.
 
 Norway
        does not allow consolidation of the income of companies in a corporate group
        for
        Norwegian tax purposes. However, a group of companies that is ultimately
        owned
        more than 90.0% by a single company can transfer its Norwegian taxable income
        to
        another Norwegian resident company in the group by making a transfer to the
        other company (this is referred to as making a “group contribution”). The
        ultimate parent in the corporate group can be a foreign company.
 
 Group
        contributions are deductible for the contributing company for tax purposes
        and
        are included in the taxable income of the receiving company in the income
        year
        in which the contribution is made. Group contributions are subject to the
        same
        rules as dividend distributions under the Norwegian Companies Act. In other
        words, group contributions are restricted to the amount that is available
        to
        distribute as dividends for corporate law purposes.
 
 ***Taxation
        of Dividends.*** Generally,
        dividends received by a Norwegian resident company are exempt from Norwegian
        taxation. The exemption does not apply to dividends from companies resident
        outside the European Economic Area if (a) the country of residence is a
        low-tax country or (b) the ownership of shares in the distributing company
        is considered to be a “portfolio investment” ( *i.e.* less
        than 10.0% share ownership or less than two years continuous ownership period).
        Dividends not exempt from Norwegian taxation are subject to the general 28.0%
        income tax rate when received by the Norwegian resident company. We believe
        that
        dividends received by our Norwegian subsidiaries will not be subject to
        Norwegian tax.
 
 ***Correction
        Income Tax.*** Our
        Norwegian subsidiaries may be subject to a tax, called *correction
        income tax,* on
        their
        dividend distributions. Norwegian correction tax is levied if a dividend
        distribution leads to the company’s balance sheet equity at year end being lower
        than the company’s paid-in
        share capital (including share premium), plus a calculated amount equal to
        72.0%
        of the net positive temporary timing differences between the company’s book
        values and tax values.
 
 As
        a
        result, correction tax is effectively levied if dividend distributions result
        in
        the company’s financial statement equity for accounting purposes being reduced
        below its equity calculated for tax purposes ( *i.e.* when
        dividends are paid out of accounting earnings that have not been subject
        to
        taxation in Norway). In addition to dividend distributions, correction tax
        may
        also be levied on the partial liquidation of the share capital of the company
        or
        if the company makes group contributions that are in excess of taxable income
        for the year.
 
 ***Taxation
        of Interest Paid by Norwegian Entities.*** Norway
        does not levy any tax or withholding tax on interest paid by a Norwegian
        resident company to a company that is not resident in Norway (provided that
        the
        interest rate and the debt/equity ratio are based on arms-length principles).
        Therefore, any interest paid by our Norwegian subsidiaries to companies that
        are
        not resident in Norway will not be subject to Norwegian withholding
        tax.
 
 ***Taxation
        on Distributions by Norwegian Entities.*** Norway
        levies a 25.0% withholding tax on non-residents of Norway that receive dividends
        from a Norwegian resident company. However, if the recipient of the dividend
        is
        resident in a country that has an income tax treaty with Norway or that is
        a
        member of the European Economic Area, the Norwegian withholding tax may be
        reduced or eliminated. We believe that distributions by our Norwegian
        subsidiaries will be subject to a reduced amount of Norwegian withholding
        tax or
        not be subject to Norwegian withholding tax.
  We
        don’t
        expect that payment of Norwegian income taxes will have a material effect
        on our
        results.





**Spanish
      Taxation**





Spain
      imposes income taxes on income generated by our majority owned Spanish
      subsidiary’s shipping related activities at a rate of 35%. Two alternative
      Spanish tax regimes provide incentives for Spanish companies engaged in shipping
      activities, the Canary Islands Special Ship Registry (or *CISSR* )
      and the
      Spanish Tonnage Tax Regime (or *TTR* ).
      As at
      December 31, 2006, all but two of our vessels operated by our operating Spanish
      subsidiaries were subject to the TTR.





Under
      the
      TTR, the applicable income tax is based on the weight (measured as net tonnage)
      of the vessel and the number of days during the taxable period that the vessel
      is at the company’s disposal, excluding time required for repairs. The tax base
      ranges from 0.20 Euros per day per 100 tonnes to 0.90 Euros per day per 100
      tonnes, against which the generally applicable tax rate of 35% applies. If
      the
      shipping company also engages in activities other than those subject to the
      TTR
      regime, income from those other activities is subject to tax at the generally
      applicable rate of 35%. If a vessel is acquired and disposed of by a company
      while it is subject to the TTR regime, any gain on the disposition of the vessel
      generally is not subject to Spanish taxation. If the company acquired the vessel
      prior to becoming subject to the TTR regime or if the company acquires a used
      vessel after becoming subject to the TTR regime, the difference between the
      fair
      market value of the vessel at the time it enters into the TTR and the tax value
      of the vessel at that time is added to the taxable income in Spain when the
      vessel is disposed of and generally remains subject to Spanish taxation at
      the
      rate of 35%.





Our
      two
      Spanish subsidiary’s vessels which are registered in the CISSR are allowed
      a credit, equal to 90% of the tax payable on income from the commercial
      operation of the Canary Islands registered ships, against the tax otherwise
      payable. This effectively results in an income tax rate of approximately 3.5%
      on
      income from the operation of these vessels. Vessel sales are subject to the
      full
      35% Spanish tax rate. A 20% reinvestment credit it available if the entire
      gross
      proceeds from the vessel sale are reinvested in a qualifying asset and if the
      asset disposed of has been held for a minimum period of one year.





We
      don’t
      expect Spanish income taxes will have a material effect on our
      results.





**Item
      4A. Unresolved Staff Comments**





Not
      applicable.


24


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





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





**General**





Teekay
      is
      a leading provider of international crude oil and petroleum product
      transportation services. Since 2004, we have also transported liquefied natural
      gas (or *LNG* ).
      Through our acquisition of Petrojarl ASA (or *Petrojarl* )
      during
      2006, we have expanded into the offshore oil production and processing sector.
      As at December 31, 2006, our fleet (excluding vessels managed for third parties)
      consisted of 158 vessels (including 47 vessels time-chartered-in and 26
      newbuildings on order). Our conventional oil tankers provide a total
      cargo-carrying capacity of approximately 14.9 million deadweight tonnes (or *mdwt* ),
      our
      LNG carriers (including newbuildings) have total cargo-carrying capacity of
      approximately 2.0 million cubic meters, and our floating production, storage
      and
      offloading (or *FPSO* )
      units
      have total production capacity of approximately 0.3 million barrels per
      day.





Our
      revenues are derived from:




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


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


·
            Contracts
                of affreightment, where we carry an agreed quantity of cargo for
                a
                customer over a specified trade route within a given period of time;
                and


·
            FPSO
                service contracts, where we produce, process, store and offload cargo
                for
                a customer for a fixed rate per barrel or a fixed daily rate or a
                combination thereof.





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




Voyage
                Charter(1)
            Time
                Charter
            Bareboat
                Charter
            Contract
                of
              Affreightment
            FPSO
                Service
              ContractsTypical
                contract length
            Single
                voyage
            One
                year or more
            One
                year or more
            One
                year or more
            More
                than one yearHire
                rate basis(2)
            Varies
            Daily
            Daily
            Typically
                daily
            VariesVoyage
                expenses(3)
            We
                pay
            Customer
                pays
            Customer
                pays
            We
                pay
            Customer
                paysVessel
                operating expenses(3)
            We
                pay
            We
                pay
            Customer
                pays
            We
                pay
            We
                payOff-hire(4)
            Customer
                does not pay
            Varies
            Customer
                typically pays
            Customer
                typically
              does
                not pay
            Varies


___________________




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


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


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


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





**Segments**





Our
      fleet
      is divided into four main segments, the offshore segment, the fixed-rate tanker
      segment, the liquefied gas segment and the spot tanker segment.





*Offshore
      Segment*





Our
      offshore segment includes our shuttle tanker operations, FPSO units, and
      floating storage and offtake (or *FSO* )
      units.
      We use these vessels to provide transportation, processing and storage services
      to oil companies operating offshore oil field installations, primarily in the
      North Sea. These services are typically provided under long-term fixed-rate
      time
      charter contracts, contracts of affreightment or FPSO service contracts.
      Historically, the utilization of shuttle tankers and FPSO units in the North
      Sea
      is higher in the winter months, as favorable weather conditions in the summer
      months provide opportunities for repairs and maintenance to our vessels and
      the
      offshore oil platforms, which generally reduces oil production.





In
      February 2006, we were awarded 13-year fixed-rate contracts to charter two
      Suezmax shuttle tankers and one Aframax shuttle tanker to Fronape International
      Company, a subsidiary of Petrobras Transporte S.A., the shipping arm of Petroleo
      Brasileiro S.A. (or *Petrobras* ).
      In
      connection with these contracts, we have exercised the purchase option on a
      2000-built Aframax tanker that previously traded as part of our spot tanker
      segment and have acquired a 2006-built Suezmax tanker, both of which will be
      converted to shuttle tankers during the first half of 2007. Please read Item
      18
      - Financial Statements: Note 17 - Commitments and Contingencies. The third
      vessel commenced operation under these contracts in July 2006.





In
      September 2006, we were awarded a two-year contract by Petrobras, to supply
      an
      FPSO for the Siri project in Brazil. Petrobras has options to extend the
      contract up to an additional year, commencing in 2008. Please read Item 18
      -
      Financial Statements: Note 17 - Commitments and Contingencies.





In
      January 2007, we ordered two Aframax shuttle tanker newbuildings which are
      scheduled to deliver during the third quarter of 2010, for a total cost of
      approximately $240 million. We anticipate that these vessels will service either
      new long-term, fixed-rate contracts we may be awarded prior to delivery or
      our
      contracts of affreightment in the North Sea.





*Fixed-Rate
      Tanker Segment*





Our
      fixed-rate tanker segment includes conventional crude oil and product tankers
      on
      long-term, fixed-rate time charters. As at December 31, 2006, we had on order
      for our fixed-rate tanker segment two Aframax newbuilding conventional crude
      oil
      tankers scheduled to be delivered in January and April 2008, respectively.
      Upon
      their deliveries, the vessels will commence 10-year time charters to a 50%-owned
      joint venture that provides lightering services primarily in the Gulf of
      Mexico.


25


*Liquefied
      Gas Segment*





Our
      liquefied gas segment consists of LNG and LPG carriers subject to long-term,
      fixed-rate time charter contracts. Our acquisition of Teekay Shipping Spain,
      S.L. (or *Teekay
      Spain* )
      on
      April 30, 2004 established our entry into the LNG shipping sector. Our liquefied
      gas segment includes seven LNG carriers and one LPG carrier.





In
      addition, as of March 31, 2007, we had six newbuilding LNG carriers on order.
      Two of these carriers, in which we have a 70% interest, will commence service
      under 20-year, fixed-rate time charters to The Tangguh Production Sharing
      Contractors, a consortium led by BP Berau, a subsidiary of BP plc, upon vessel
      deliveries, which are scheduled for late 2008 and early 2009. The remaining
      30%
      interest in the project is held by BLT LNG Tangguh Corporation, a subsidiary
      of
      PT Berlian Tanker Tbk. We will have operational responsibility for the vessels
      in this project. Pursuant to existing agreements, on November 1, 2006, Teekay
      LNG agreed to acquire our ownership interest in these two vessels and related
      charter contracts upon delivery of the first LNG carrier.





The
      remaining four LNG newbuilding carriers, in which we have a 40% interest, will
      commence service under 25-year, fixed-rate time charters (with options to extend
      up to an additional 10 years) to Ras Laffan Liquefied Natural Gas Co. Limited
      (3) (or *RasGas
      3* ),
      a
      joint venture company between Qatar Petroleum and a subsidiary of ExxonMobil
      Corporation, upon vessel deliveries, which are scheduled for the first half
      of
      2008. The remaining 60% interest in the project is held by Qatar Gas Transport
      Company Ltd. We will have operational responsibility for the vessels in this
      project. Under the charters, Qatar Gas Transport Company Ltd. may assume
      operational responsibility beginning 10 years following delivery of the vessels.
      Pursuant to existing agreements, on November 1, 2006, Teekay LNG agreed to
      acquire our ownership interest in these four vessels and related charter
      contracts upon delivery of the first LNG carrier.





In
      December 2006, our subsidiary, Teekay LNG, has agreed to acquire three LPG
      newbuilding carriers from I.M. Skaugen ASA (or *Skaugen* )
      for
      approximately $29.2 million per vessel. Skaugen engages in the marine
      transportation of petrochemical gases and LPG and the lightering of crude oil. The
      vessels are currently under construction and are scheduled to deliver between
      early 2008 and mid-2009. Upon delivery, Teekay LNG will acquire these vessels
      and they will be chartered to Skaugen, for a period of 15 years.





*Spot
      Tanker Segment*





Our
      spot
      tanker segment consists of conventional crude oil tankers and product carriers
      operating on the spot market or subject to time charters or contracts of
      affreightment priced on a spot-market basis or short-term fixed-rate contracts.
      We consider contracts that have an original term of less than three years in
      duration to be short-term. Substantially all of our conventional Aframax, large
      product, medium product and small product tankers are among the vessels included
      in the spot tanker segment. Our spot market operations contribute to the
      volatility of our revenues, cash flow from operations and net income.
      Historically, the tanker industry has been cyclical, experiencing volatility
      in
      profitability and asset values resulting from changes in the supply of, and
      demand for, vessel capacity. In addition, tanker spot markets historically
      have
      exhibited seasonal variations in charter rates. Tanker spot markets are
      typically stronger in the winter months as a result of increased oil consumption
      in the northern hemisphere and unpredictable weather patterns that tend to
      disrupt vessel scheduling. As at December 31, 2006, we had three large product
      tankers scheduled to be delivered between January and May 2007 and ten Suezmax
      tankers scheduled to be delivered between June 2008 and August
      2009.




**Pending
        Acquisition**
 
 On
        April
        17, 2007, Teekay, A/S Dampskibsselskabet TORM (or *TORM* ),
        and
        OMI Corporation (or *OMI* )
        announced that Teekay and TORM had entered into a definitive agreement to
        acquire the outstanding shares of OMI. Please read Item 18 - Financial
        Statements: Note 22(c) - Subsequent Events.




**Acquisition
      of Petrojarl ASA**





During
      2006, we acquired 64.5% of the outstanding shares of Petrojarl ASA, which is
      listed on the Oslo Stock Exchange. Petrojarl is a leading independent operator
      of FPSO units. On December 1, 2006, we renamed Petrojarl Teekay Petrojarl
      ASA. We financed the $536.8 million cash purchase price through a combination
      of
      bank financing and cash balances. Please read Item 4 - Information on the
      Company: Business Acquisitions and Divestitures - Acquisition of Petrojarl
      ASA.
      and Item 18 - Financial Statements: Note 3 - Acquisition of Petrojarl
      ASA.




**Anticipated
        Public Offering by Teekay Tankers**
 
 On
        April
        17, 2007, we announced our intention to create a new publicly-listed entity
        for
        our conventional tanker business (or *Teekay
        Tankers* ).
        It is
        anticipated that Teekay Tankers will initially own a portion of our conventional
        tanker fleet. Furthermore, it is expected that Teekay Tanker’s primary objective
        will be to grow through the acquisition of conventional tanker assets from
        third
        parties and from us, which may include the vessels to be acquired by us from
        our
        planned acquisition of 50 percent of OMI Corporation.
 
 We
        believe that creating Teekay Tankers, as a separate public company, will
        facilitate the growth of our conventional tanker business and further enhance
        our innovative corporate structure, which supports our strategy of creating
        value as an asset manager in the Marine Midstream space.
 
 We
        expect
        to file with the U.S. Securities and Exchange Commission a registration
        statement for the initial public offering of Teekay Tankers during the second
        half of 2007. The securities may not be sold, nor may offers to buy be accepted,
        prior to the time the registration statement becomes effective.




**Public
      Offering by Teekay Offshore Partners L.P.**





On
      December 19, 2006, our subsidiary, Teekay Offshore Partners L.P. (or *Teekay
      Offshore* )
      sold,
      as part of its initial public offering 8.1 million of its common units, which
      represents limited partner interests, at $21.00 per unit for proceeds of $155.3
      million, net of $13.8 million of commissions and other expenses associated
      with
      the offering.


26


Teekay
      Offshore owns 26% of Teekay Offshore Operating L.P. (or *OPCO* ),
      including its 2% general partner interest. OPCO owns and operates a fleet of
      36
      shuttle tankers (including 12 chartered-in vessels), four FSO vessels, and
      nine
      conventional Aframax tankers. We directly own 74% of OPCO and 59.75% of Teekay
      Offshore, including its 2% general partner interest. As a result, we effectively
      own 89.5% of OPCO. Please read Item 18 - Financial Statements: Note 4 - Public
      Offering of Teekay Offshore Partners L.P.





**Public
      Offerings by Teekay LNG Partners L.P.**





On
      May
      10, 2005, Teekay LNG sold as part of an initial public offering, 6.9 million
      of
      its common units at $22.00 per unit for proceeds of $135.7 million, net of
      $16.1
      million of commissions and other expenses associated with the
      offering.





In
      November 2005, Teekay LNG completed a follow-on public offering of 4.6 million
      common units at a price of $27.40 per unit. Proceeds from the follow-on offering
      were $120.0 million, net of $6.0 million of commissions and other expenses
      associated with the offering. We own a 67.8% interest in Teekay LNG, including
      its 2% general partner interest. Please read Item 18 - Financial Statements:
      Note 5 - Public Offerings of Teekay LNG Partners L.P.





**Acquisition
      of Teekay Shipping Spain, S.L.**





On
      April
      30, 2004, we acquired 100% of the issued and outstanding shares of Teekay Spain
      for $298.2 million in cash and the assumption of existing debt and then
      remaining newbuilding commitments. ** Please
      read Item 4 - Information on the Company: Business Acquisitions and Divestitures
      - Acquisition of Teekay Shipping Spain S.L., formerly Naviera F. Tapias S.A.
      and
      Item 18 - Financial Statements: Note 6 - Acquisition of Teekay Shipping Spain
      S.L.




**Important
      Financial and Operational Terms and Concepts**





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





***Revenues.*** Revenues
      primarily include revenues from voyage charters, time charters, contracts of
      affreightment and FPSO service contracts. Revenues are affected by hire rates
      and the number of calendar-ship-days a vessel operates and the daily production
      volume on FPSO units. Revenues are also affected by the mix of business between
      time charters, voyage charters and contracts of affreightment. Hire rates for
      voyage charters are more volatile, as they are typically tied to prevailing
      market rates at the time of a voyage.





***Forward
      Freight Agreements.*** We are
      exposed to freight rate risk for vessels in our spot tanker segment from changes
      in spot market rates for vessels. In certain cases, we use forward freight
      agreements (or *FFAs* )
      to
      manage this risk. FFAs involve contracts to provide a fixed number of
      theoretical voyages at fixed-rates, thus hedging a portion of our exposure
      to
      the spot charter market. These agreements are recorded as assets or liabilities
      and measured at fair value. Changes in the fair value of the FFAs are recognized
      in other comprehensive income (loss) until the hedged item is recognized as
      revenue in income. The ineffective portion of a change in fair value is
      immediately recognized into income through revenues.





***Voyage
      Expenses.*** Voyage
      expenses are all expenses unique to a particular voyage, including any bunker
      fuel expenses, port fees, cargo loading and unloading expenses, canal tolls,
      agency fees and commissions. Voyage expenses are typically paid by the customer
      under time charters and FPSO service contracts and by us under voyage charters
      and contracts of affreightment. When we pay voyage expenses, we typically add
      them to our hire rates at an approximate cost.





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





***Vessel
      Operating Expenses.*** Under
      all types of charters and contracts for our vessels, except for bareboat
      charters, we are responsible for vessel operating expenses, which include
      crewing, repairs and maintenance, insurance, stores, lube oils and communication
      expenses.





***Income
      from Vessel Operations.*** To
      assist
      us in evaluating our operations by segment, we analyze our income from vessel
      operations for each segment, which represents the income we receive from the
      segment after deducting operating expenses, but prior to the deduction of
      interest expense, income taxes, foreign currency and other income and losses.





***Drydocking.*** We must
      periodically drydock each of our vessels for inspection, repairs and maintenance
      and any modifications to comply with industry certification or governmental
      requirements. Generally, we drydock each of our vessels every two and a half
      to
      five years, depending upon the type of vessel and its age. In addition, a
      shipping society classification intermediate survey is performed on our LNG
      carriers between the second and third year of the five-year drydocking period.
      We capitalize a substantial portion of the costs incurred during drydocking
      and
      for the survey and amortize those costs on a straight-line basis from the
      completion of a drydocking or intermediate survey to the estimated completion
      of
      the next drydocking. We expense as incurred costs for routine repairs and
      maintenance performed during drydocking that do not improve or extend the useful
      lives of the assets and annual class survey costs for our FPSO units. The number
      of drydockings undertaken in a given period and the nature of the work performed
      determine the level of drydocking expenditures.





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





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





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





·
            charges
                related to the amortization of the fair value of the time charters,
                contracts of affreightment, customer relationships and intellectual
                property where amounts have been attributed to those items in
                acquisitions; these amounts are amortized over the period which the
                asset
                is expected to contribute to our future cash flows.


27


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





***Revenue
      Days.*** Revenue
      days are the total number of calendar days our vessels were in our possession
      during a period, less the total number of off-hire days during the period
      associated with major repairs, drydockings or special or intermediate surveys.
      Consequently, revenue days represents the total number of days available for
      the
      vessel to earn revenue. Idle days, which are days when the vessel is available
      for the vessel to earn revenue, yet is not employed, are included in revenue
      days. We use revenue days to explain changes in our net revenues between
      periods.





***Calendar-ship-days.*** Calendar-ship-days are equal to the total number of calendar days that our
      vessels were in our possession during a period. As a result, we use
      calendar-ship-days primarily in explaining changes in vessel operating expenses,
      time charter hire expense and depreciation and amortization.





***Restricted
      Cash Deposits.*** Under
      the terms of the tax leases for four of our LNG carriers, we are required to
      have on deposit with financial institutions an amount of cash that, together
      with interest earned on the deposit, will equal the remaining amounts owing
      under the leases, including the obligations to purchase the LNG carriers at
      the
      end of the lease periods, where applicable. During vessel construction however,
      the amount of restricted cash approximates the accumulated vessel construction
      costs. These cash deposits are restricted to being used for capital lease
      payments and have been fully funded with term loans and loans from our joint
      venture partners. Please read Item 18 - Financial Statements: Note 11 - Capital
      Leases and Restricted Cash.




**Tanker
        Market Overview**




During
        2006, crude tanker freight rates remained close to the high levels experienced
        in 2005. High levels of global oil production coupled with increasingly
        longer-haul trade patterns and moderate growth in fleet supply compared to
        previous years underpinned the strength in tanker earnings. In the product
        tanker market, rates for large tankers declined as a result of heavier than
        usual petrochemical plant maintenance schedules and growth in fleet supply.
        However, rates for medium and intermediate sized product tankers remained
        at
        historically high levels as import volumes into key consuming regions rose
        with
        imports generally being sourced from longer haul sources.




World
      gross domestic product growth averaged 5.3% during 2006, which was the highest
      since the 1970s led by growth in emerging economies (Brazil, Russia, India
      and
      China), Africa, the Middle East and the United States. However, high energy
      prices resulted in global oil consumption growing at the slowest pace since
      2002. Overall high volumes of global oil production, oil stock building and
      an
      overall increase in transportation distances offset the moderate growth in
      world
      fleet supply, keeping the world tanker fleet fully utilized and spot freight
      rates at high levels.





Global
      oil demand for 2006 averaged 84.5 million barrels per day (or *mb/d)* ,
      which
      was 0.8 mb/d (or 1.0%) higher than 2005. Oil demand in OECD countries contracted
      as a result of high energy prices, while China accounted for almost half of
      the
      1.2 mb/d growth in oil consumption among non-OECD countries. Overall, global
      oil
      supply rose by 0.8 mb/d (or 1.0%) over 2005, averaging 85.3 mb/d. The growth
      in
      global oil production was led by a 0.6 mb/d increase in non-OPEC, primarily
      from
      the Former Soviet Union and Angola. The size of the world tanker fleet rose
      to
      342.8 mdwt as of December 31, 2006, up 18.6 mdwt (or 5.7%) from the end of
      2005.
      Tanker supply growth was not as high as previous years as a result of lower
      deliveries with some shipyards bringing forward container ship deliveries.
      The
      world tanker orderbook rose to 135 mdwt as at December 31, 2006; the highest
      levels since the 1970’s, as newbuilding orders surged to almost three times 2005
      levels.





The
      overall tanker market fundamentals for 2007 remain positive led by continued
      strength in the global economy .





As
        of
        March 2007, the International Energy Agency estimated global oil demand growth
        of 1.5 mb/d (or 1.8%) for 2007 compared to 2006, led by increased demand
        in
        China and North America. A large drawdown in stocks in the Atlantic basin
        (OECD
        North America and Europe) in early 2007  may
        lead
        to higher import volumes during the summer months which, which coupled with
        a
        forecasted increase in demand for OPEC oil in the latter half of the year,
        would
        support demand for tankers during 2007. Non-OPEC production is expected to
        grow
        by close to 1.0 mb/d during the 2007, with most of the growth coming from
        the
        Former Soviet Union, Africa and Latin America, which would continue to support
        demand for medium-size oil tankers. Sales of tankers for offshore and other
        conversion projects increased significantly early in 2007. When combined
        with
        the mandatory scrapping of single-hulled tankers for 2007, we expect this
        will
        have the effect of dampening overall tanker supply growth.
  The
        trend
        of longer-haul trade patterns has continued as consumers in Asia diversify
        their
        sources of crude imports and refinery capacity in the Atlantic basin remains
        tight.


Overall
      for 2007, tanker supply and demand growth fundamentals appear to be finely
      balanced.





**Results
      of Operations**





In
      accordance with GAAP, we report gross revenues in our income statements and
      include voyage expenses among our operating expenses. However, shipowners base
      economic decisions regarding the deployment of their vessels upon anticipated
      TCE rates, and industry analysts typically measure bulk shipping freight rates
      in terms of TCE rates. This is because under time charter contracts the customer
      usually pays the voyage expenses while under voyage charters and contracts
      of
      affreightment the shipowner usually pays the voyage expenses, which typically
      are added to the hire rate at an approximate cost. Accordingly, the discussion
      of revenue below focuses on net revenues ( *i.e.* revenues
      less voyage expenses) and TCE rates of our four reportable segments where
      applicable. Please  read
      Item
      18 - Financial Statements: Note 2 - Segment Reporting.




The
      following tables compare our operating results by reportable segment for 2006,
      2005 and 2004, and compare our net revenues (which is a non-GAAP financial
      measure) by reportable segment for 2006, 2005 and 2004 to revenues, the most
      directly comparable GAAP financial measure:


28


**2006**Fixed-Rate
            
            Liquefied
            
            SpotOffshore
            
            Tanker
            
            Gas
            
            TankerSegment
            
            Segment
            
            Segment
            
            Segment
            
            Total($000's)
            
            ($000's)
            
            ($000's)
            
            ($000's)
            
            ($000's)Revenues
            
            
            667,847
            
            
            181,605
            
            
            104,489
            
            
            1,059,365
            
            
            2,013,306Voyage
                expenses
            
            
            89,642
            
            
            1,999
            
            
            975
            
            
            429,501
            
            
            522,117Net
                revenues
            
            
            578,205
            
            
            179,606
            
            
            103,514
            
            
            629,864
            
            
            1,491,189Vessel
                operating expenses
            
            
            134,866
            
            
            44,083
            
            
            18,912
            
            
            59,489
            
            
            257,350Time
                charter hire expense
            
            
            170,662
            
            
            16,869
            
            
            -
            
            
            214,991
            
            
            402,522Depreciation
                and amortization
            
            
            105,861
            
            
            32,741
            
            
            33,160
            
            
            52,203
            
            
            223,965General
                and administrative(1)
            
            
            58,048
            
            
            16,000
            
            
            15,685
            
            
            88,182
            
            
            177,915Writedown
                / (gain) on sale of vessels and equipment
            
            
            698
            
            
            -
            
            
            -
            
            
            (2,039
            )
            
            (1,341
            )Restructuring
                charge
            
            
            -
            
            
            -
            
            
            -
            
            
            8,929
            
            
            8,929Income
                from vessel operations
            
            
            108,070
            
            
            69,913
            
            
            35,757
            
            
            208,109
            
            
            421,849


**2005**Fixed-Rate
              
              
              Liquefied
              
              
              SpotOffshore
              
              
              Tanker
              
              
              Gas
              
              
              TankerSegment
              
              
              Segment
              
              
              Segment
              
              
              Segment
              
              
              Total($000's)
              
              
              ($000's)
              
              
              ($000's)
              
              
              ($000's)
              
              
              ($000's)Revenues
              
              
              559,094
              
              
              170,256
              
              
              102,423
              
              
              1,122,845
              
              
              1,954,618Voyage
                  expenses
              
              
              69,137
              
              
              2,919
              
              
              70
              
              
              347,043
              
              
              419,169Net
                  revenues
              
              
              489,957
              
              
              167,337
              
              
              102,353
              
              
              775,802
              
              
              1,535,449Vessel
                  operating expenses
              
              
              87,059
              
              
              39,731
              
              
              17,434
              
              
              62,525
              
              
              206,749Time
                  charter hire expense
              
              
              168,178
              
              
              26,082
              
              
              -
              
              
              273,730
              
              
              467,990Depreciation
                  and amortization
              
              
              89,177
              
              
              29,702
              
              
              31,545
              
              
              55,105
              
              
              205,529General
                  and administrative(1)
              
              
              43,779
              
              
              12,720
              
              
              13,743
              
              
              89,465
              
              
              159,707Writedown
                  / (gain) on sale of vessels and equipment
              
              
              2,820
              
              
              -
              
              
              -
              
              
              (142,004
              )
              
              (139,184
              )Restructuring
                  charge
              
              
              955
              
              
              -
              
              
              -
              
              
              1,927
              
              
              2,882Income
                  from vessel operations
              
              
              97,989
              
              
              59,102
              
              
              39,631
              
              
              435,054
              
              
              631,776


**2004**Fixed-Rate
            
            
            Liquefied
            
            
            SpotOffshore
            
            
            Tanker
            
            
            Gas
            
            
            TankerSegment
            
            
            Segment
            
            
            Segment
            
            
            Segment
            
            
            Total($000's)
            
            
            ($000's)
            
            
            ($000's)
            
            
            ($000's)
            
            
            ($000's)Revenues
            
            
            595,148
            
            
            124,929
            
            
            48,370
            
            
            1,450,791
            
            
            2,219,238Voyage
                expenses
            
            
            71,755
            
            
            5,303
            
            
            221
            
            
            355,116
            
            
            432,395Net
                revenues
            
            
            523,393
            
            
            119,626
            
            
            48,149
            
            
            1,095,675
            
            
            1,786,843Vessel
                operating expenses
            
            
            82,908
            
            
            32,593
            
            
            9,594
            
            
            93,394
            
            
            218,489Time
                charter hire expense
            
            
            176,005
            
            
            18,053
            
            
            -
            
            
            263,122
            
            
            457,180Depreciation
                and amortization
            
            
            100,439
            
            
            27,478
            
            
            14,011
            
            
            95,570
            
            
            237,498General
                and administrative(1)
            
            
            44,948
            
            
            10,835
            
            
            4,588
            
            
            70,371
            
            
            130,742Writedown
                / (gain) on sale of vessels and equipment
            
            
            (3,725
            )
            
            (3,428
            )
            
            -
            
            
            (72,101
            )
            
            (79,254
            )Restructuring
                charge
            
            
            -
            
            
            -
            
            
            -
            
            
            1,002
            
            
            1,002Income
                from vessel operations
            
            
            122,818
            
            
            34,095
            
            
            19,956
            
            
            644,317
            
            
            821,186





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





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





*We
      acquired our 64.5% interest in Petrojarl on October 1, 2006. Consequently,
      our
      2006 financial results reflect Petrojarl’s results of operations from that date.*







***Offshore
      Segment***





The
      following table provides a summary of the changes in calendar-ship-days by
      owned
      and chartered-in vessels for our offshore segment:




**2006**
              (Calendar
                Days)
            
            **2005**
              (Calendar
                Days)
            
            **Percentage
                Change**
              (%)Owned
                Vessels
            
            
            9,510
            
            
            9,580
            
            
            (0.7
            )Chartered-in
                Vessels
            
            
            4,983
            
            
            4,963
            
            
            0.4Total
            
            
            14,493
            
            
            14,543
            
            
            (0.3
            )


29


The
      average fleet size of our offshore segment (including vessels chartered-in)
      was
      primarily unchanged during 2006 compared to 2005. This was primarily the result
      of:





·
            the
                acquisition of Petrojarl, which operates four FPSO units and one
                shuttle
                tanker; and





·
            the
                consolidation of five 50%-owned joint ventures, each of which owns
                one
                shuttle tanker, effective December 1, 2006 upon amendments of the
                operating agreements, which granted us control of these joint ventures
                (the*Consolidation
                of Joint Ventures*);





offset
      by





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





·
            the
                sale of two older shuttle tankers in March 2005 and October 2005
                (the*2005 Shuttle Tanker Dispositions*)*.*





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





*Net
      Revenues.* Net
      revenues increased 18.0% to $578.2 million for 2006, from $490.0 million for
      2005, primarily due to:




·
            an
                increase of $80.7 million relating to the Petrojarl
                acquisition;




·
            an
                increase of $5.4 million from the 2006 transfer of certain of our
                shuttle
                tankers servicing contracts of affreightment to short-term time-charter
                contracts, which had higher average
                rates;





·
              an
                  increase of $4.9 million from time-charter contract renewals during
                  2006
                  at higher daily rates;
                  and


·
            an
                increase of $3.8 million due to the Consolidation of Joint Ventures;




partially
      offset by





·
            a
                decrease of $8.1 million relating to the 2006 and 2005 Shuttle Tanker
                Dispositions; and





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




As
      part
      of the acquisition of Petrojarl, we assumed certain FPSO service contracts
      which
      have terms that are less favourable than terms that could be realized in a
      current market transaction. This contract value liability, which was recognized
      on the date of acquisition, is being amortized to revenue over the remaining
      firm period of the current FPSO contracts, on a weighted basis, based on the
      projected revenue to be earned under the contracts. The amount of amortization
      relating to these contracts included in 2006 revenue was $22.4 million. Please
      read Item 18 - Financial Statements: Note 7 - Goodwill, Intangible Assets and
      In-Process Revenue Contracts.





*Vessel
      Operating Expenses.* Vessel
      operating expenses increased 54.9% to $134.9 million for 2006, from $87.1
      million for 2005, primarily due to:





·
            an
                increase of $38.1 million relating to the Petrojarl
                acquisition;




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


·
            an
                increase of $2.0 million resulting from the depreciation of the U.S.
                Dollar from corresponding 2005 levels relative to other currencies
                in
                which we pay certain vessel operating expenses;





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





·
            an
                increase of $1.2 million relating to the Consolidation of Joint Ventures;





partially
      offset by





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





*Time-Charter
      Hire Expense.* Time-charter hire expense increased slightly to $170.7 million for 2006, from
      $168.2 million for 2005, primarily due to:





·
            a
                0.6% increase in the number of vessels chartered-in; and





·
            a
                slight increase in the average per day time-charter hire expense
                to
                $34,247 for 2006, from $33,886 for
                2005.





*Depreciation
      and Amortization.* Depreciation and amortization expense increased 18.7% to $105.9 million for
      2006, from $89.2 million for 2005, primarily due to:





·
            an
                increase of $22.4 from the Petrojarl acquisition;
                and





·
            an
                increase of $1.2 million from the Consolidation of Joint
                Ventures;


30


partially
      offset by





·
            a
                decrease of $3.6 million relating to the 2006 and 2005 Shuttle Tanker
                Dispositions and the sale and leaseback of one shuttle tanker in
                March
                2005; and





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





Depreciation
      and amortization expense included amortization of drydocking costs of $5.4
      million for 2006, compared to $6.3 million for 2005, and includes amortization
      of intangible assets of $12.9 million for 2006, compared to $14.9 million for
      2005.





*Vessel
      and Equipment Writedowns and Gain on Sale of Vessels.* Vessel
      and equipment writedowns and gain on sale of vessels for 2006 was a net loss
      of
      $0.7 million, which was primarily comprised of:





·
            a
                $5.5 million writedown on a volatile organic compound (or*VOC*)
                plant on one of our shuttle tankers which was redeployed from the
                North
                Sea to Brazil; this VOC plant will be removed and re-installed on
                another
                shuttle tanker in our fleet; and







·
            a
                $2.2 million writedown of the carrying value of certain offshore
                equipment
                that was employed under a short-term contract servicing a marginal
                oil
                field that was prematurely shut down due to lower than expected oil
                production; this writedown occurred due to a reassessment of the
                estimated
                net realizable value of the equipment and follows a $12.2 million
                writedown in 2005 arising from early termination of the contract
                for the
                equipment;





partially
      offset by





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





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





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





·
            a
                $12.2 million writedown of the carrying value of certain offshore
                equipment as described above;





partially
      offset by





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





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





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





***Fixed-Rate
      Tanker Segment***




The
      following table provides a summary of the changes in calendar-ship-days by
      owned
      and chartered-in vessels for our fixed-rate tanker segment:


**2006**
              (Calendar
                Days)
            
            **2005**
              (Calendar
                Days)
            
            **Percentage
                Change**
              (%)Owned
                Vessels
            
            
            5,475
            
            
            4,973
            
            
            10.1Chartered-in
                Vessels
            
            
            728
            
            
            1,194
            
            
            (39.0
            )Total
            
            
            6,203
            
            
            6,167
            
            
            0.6





The
      average fleet size of our fixed-rate tanker segment (including vessels
      chartered-in) increased slightly in 2006 compared to 2005. This increase was
      primarily the result of:





·
            the
                delivery of a Suezmax tanker newbuilding in July 2005 (the*Suezmax
                Delivery*);





·
            the
                inclusion of an Aframax tanker, which previously operated in our
                spot
                tanker segment and, commenced service under a long-term time charter
                during the fourth quarter of 2005 (the*Aframax
                Transfer*);
                and





·
            the
                inclusion of a chartered-in VLCC, previously operating in our spot
                tanker
                segment, that commenced service under a long-term time charter in
                April
                2005 (the*VLCC
                Transfer*);





partially
      offset by





·
            a
                reduction in our chartered-in fleet resulting from the expiry of
                our
                methanol carrier charter
                agreements.





*Net
      Revenues* .
      Net
      revenues increased 7.3% to $179.6 million for 2006, from $167.3 million for
      2005, primarily due to:


31


·
            an
                increase of $8.9 million relating to the Suezmax
                Delivery;





·
            an
                increase of $6.7 million relating to the Aframax Transfer;





·
            an
                increase of $4.9 million relating to the VLCC Transfer;
                and





·
            an
                increase of $4.0 million due to adjustments to the daily charter
                rate
                based on inflation and increases from rising interest rates in accordance
                with the time charter contracts for five Suezmax tankers. (However,
                under
                the terms of our capital leases for our tankers subject to these
                charter
                rate fluctuations, we had a corresponding increase in our lease payments,
                which is reflected as an increase to interest expense. Therefore,
                these
                interest rate adjustments, which will continue, did not affect our
                cash
                flow or net income);





partially
      offset by





·
            a
                decrease of $11.9 million relating to the completion of a contract
                of
                affreightment primarily serviced by the chartered-in methanol
                carriers.





*Vessel
      Operating Expenses.* Vessel
      operating expenses increased 11.0% to $44.1 million for 2006, from $39.7 million
      for 2005, primarily due to:




·
            an
                increase of $1.8 million relating to the Aframax Transfer;





·
            an
                increase of $1.5 million relating to the Suezmax Delivery;
                and





·
            an
                increase of $1.0 million due to increased repairs and maintenance
                activities.





*Time-Charter
      Hire Expense.* Time-charter hire expense decreased 35.3% to $16.9 million for 2006, compared
      to
      $26.1 million for 2005, primarily due to:


·
            a
                decrease of $11.6 million relating to the expiry of our chartered-in
                methanol carrier contracts;




partially
      offset by





·
            an
                increase of $2.3 million related to the VLCC
                transfer.




*Depreciation
      and Amortization.* Depreciation and amortization expense increased 10.2% to $32.7 million for
      2006,
      from $29.7 million for 2005, primarily due:





·
            an
                increase of $1.5 million relating to the delivery of the Suezmax
                tanker
                newbuilding in July 2005; and





·
            an
                increase of $1.3 million from the Aframax
                transfer.





Depreciation
      and amortization expense included amortization of drydocking costs of $2.4
      million for 2006, compared to $2.0 million for 2005, and included amortization
      of contracts of $0.3 million for 2006, compared to $0.4 million for 2005.





***Liquefied
      Gas Segment***





The
      following table provides a summary of the changes in calendar-ship-days for
      our
      liquefied gas segment:


**2006**
              (Calendar
                Days)
            
            **2005**
              (Calendar
                Days)
            
            **Percentage
                Change**
              (%)Owned
                Vessels
            
            
            1,887
            
            
            1,825
            
            
            3.4





We
      operated four LNG carriers and one LPG carrier during 2005. We took delivery
      of
      a fifth LNG carrier, the *Al
      Marrouna,* in
      October 2006. As a result, our total calendar-ship-days increased by
      3.4%.





*Net
      Revenues.* Net
      revenues increased slightly to $103.5 million for 2006, from $102.4 million
      for
      2005, primarily due to:





·
            an
                increase of $2.4 million relating to the delivery of the*Al
                Marrouna*on
                October 31, 2006; and





·
            a
                relative increase of $0.8 million in 2006 from 15.2 days of off-hire
                for
                one of our LNG carriers during February 2005,





partially
      offset by





·
            a
                relative decrease of $2.4 million due to the*Catalunya
                Spirit*being off-hire for 35.5 days during 2006 resulting from a scheduled
                drydock and cargo tank damages discovered while in drydock. The vessel
                resumed normal operations in early July 2006.





We
      have
      reviewed the operating history of our other LNG carriers and we believe that
      the
      conditions that caused the damage to the cargo tanks on the *Catalunya
      Spirit* did not
      occur on our other LNG carriers.





*Vessel
      Operating Expenses.* Vessel
      operating expenses increased 8.5% to $18.9 million for 2006, from $17.4 million
      for 2005, primarily due to:





·
            an
                increase of $1.2 million relating to higher insurance, service and
                other
                operating costs in 2006;




32


·
            an
                increase of $0.5 million from the cost of the repairs completed on
                the*Catalunya
                Spirit*during the second quarter of 2006 in excess of estimated insurance
                recoveries; and




·
            an
                increase of $0.5 million relating to the delivery of the*Al
                Marrouna;*





partially
      offset by





·
            a
                decrease of $0.8 million primarily relating to repair and maintenance
                work
                completed on one of our LNG carriers during February
                2005.





*Depreciation
      and Amortization.* Depreciation and amortization increased 5.1% to $33.2 million in 2006, from
      $31.5 million in 2005, primarily due to:





·
            an
                increase of $1.0 million relating to the amortization of drydock
                expenditures incurred during 2005 and 2006;
                and





·
            an
                increase of $0.7 million relating to the delivery of the*Al
                Marrouna*on
                October 31, 2006.





Depreciation
      and amortization expense included $8.9 million in both 2006 and 2005 of
      amortization of time-charter contracts acquired as part of the Teekay Spain
      acquisition.




***Spot
      Tanker Segment***




TCE
      rates
      for the vessels in our spot tanker segment primarily depend on oil production
      and consumption levels, the number of vessels scrapped in the worldwide tanker
      fleet, the number of newbuildings delivered and charterers' preference for
      modern tankers. As a result of our significant dependence on the spot tanker
      market, any fluctuations in TCE rates will affect our revenues and earnings.
      Our
      average TCE rate for the vessels in our spot tanker segment decreased 14.1%
      to
      $30,600 for 2006, from $32,357 for 2005.





The
      following table outlines the TCE rates earned by the vessels in our spot tanker
      segment for 2006, 2005 and 2004 and include the effect of FFAs, which we enter
      into at times as hedges against a portion of our exposure to spot market rates.


**2006**
            
            **2005**
            
            **2004**Vessel
                Type
            
            Net
              Revenues
              ($000’s)
            
            Revenue
                Days
            
            TCE
                per Revenue Day
              ($)
            
            Net
              Revenues
              ($000’s)
            
            Revenue
                Days
            
            TCE
                per Revenue Day
              ($)
            
            Net
              Revenues
              ($000’s)
            
            Revenue
                Days
            
            TCE
                per Revenue Day
              ($)VLCC
            
            
            (85
            )
            
            -
            
            
            -
            
            
            8,347
            
            
            90
            
            
            92,744
            
            
            67,129
            
            
            876
            
            
            76,631Suezmax(1)
            
            
            56,981
            
            
            1,639
            
            
            34,766
            
            
            68,395
            
            
            1,862
            
            
            36,732
            
            
            122,412
            
            
            2,374
            
            
            51,564Aframax(2)
            
            
            417,660
            
            
            11,675
            
            
            35,774
            
            
            536,390
            
            
            14,587
            
            
            36,769
            
            
            802,914
            
            
            20,377
            
            
            39,403Oil/Bulk/Ore
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,269
            
            
            150
            
            
            21,793Large
                Product(3)
            
            
            96,779
            
            
            3,488
            
            
            27,747
            
            
            103,802
            
            
            3,480
            
            
            29,828
            
            
            50,221
            
            
            1,962
            
            
            25,597Small
                Product
            
            
            58,529
            
            
            3,782
            
            
            15,476
            
            
            58,868
            
            
            3,957
            
            
            14,877
            
            
            49,175
            
            
            3,515
            
            
            13,990Totals
            
            
            629,864
            
            
            20,584
            
            
            30,600
            
            
            775,802
            
            
            23,976
            
            
            32,357
            
            
            1,095,120
            
            
            29,254
            
            
            37,435




(1)
              Results
                  for 2005 and 2004 for our Suezmax tankers include realized losses
                  from
                  FFAs of $3.0 million (or $1,630 per revenue day) and $11.3 million
                  (or
                  $4,757 per revenue day),
                  respectively.





(2)
            Results
                for 2006, 2005 and 2004 for our Aframax tankers include realized
                losses
                from FFAs of $2.6 million (or $220 per revenue day), $1.2 million
                (or $84
                per revenue day), and $10.5 million (or $513 per revenue day),
                respectively.





(3)
            Results
                for 2005 for our large product tankers include realized gains from
                FFAs of
                $0.4 million (or $113 per revenue day). We did not enter into FFAs
                for the
                product tanker fleet prior to 2005.





The
      following table provides a summary of the changes in calendar-ship-days by
      owned
      and chartered-in vessels for our spot tanker segment:


**2006**
              (Calendar
                Days)
            
            **2005**
              (Calendar
                Days)
            
            **Percentage
                Change**
              (%)Owned
                Vessels
            
            
            9,541
            
            
            10,733
            
            
            (11.1
            )Chartered-in
                Vessels
            
            
            11,190
            
            
            13,552
            
            
            (17.4
            )Total
            
            
            20,731
            
            
            24,285
            
            
            (14.6
            )





The
      average fleet size of our spot tanker fleet decreased 14.6% from 24,285 calendar
      days in 2005 to 20,731 calendar days in 2006, primarily due to:




·
            the
                sale of 13 older Aframax tankers and one older Suezmax tanker in
                2005
                (collectively, the*Spot
                Tanker Dispositions*);





·
            the
                net decrease of the number of chartered-in vessels, primarily Aframax
                tankers; and





·
            the
                Aframax Transfer and the VLCC
                Transfer;





partially
      offset by





·
            the
                delivery of one large product tanker in both 2006 and 2005, as well
                as two
                Aframax tankers in 2005 (collectively, the*Spot
                Tanker Deliveries*).


33


*Net
      Revenues.* Net
      revenues decreased 18.8% to $629.9 million for 2006, from $775.8 million for
      2005, primarily due to:





·
            a
                decrease of $97.1 million from the reduction in the number of chartered-in
                vessels and the reduction in our average TCE rates;





·
            a
                decrease of $54.1 million relating to the Spot Tanker Dispositions;
                and





·
            a
                decrease of $17.8 million relating to the VLCC and Aframax Transfers;





partially
      offset by





·
            an
                increase of $23.1 million relating to the Spot Tanker
                Deliveries.




*Vessel
      Operating Expenses.* Vessel
      operating expenses decreased 4.9% to $59.5 million for 2006, from $62.5 million
      for 2005, primarily due to:





·
            a
                decrease of $8.4 million relating to the Spot Tanker Dispositions;
                and





·
            a
                decrease of $1.7 million relating to the Aframax Transfer;




partially
      offset by





·
            an
                increase of $4.5 million relating to the Spot Tanker Deliveries;
                and





·
            an
                increase of $2.6 million due to increased repairs and maintenance
                activities.





*Time-Charter
      Hire Expense.* Time-charter hire expense decreased 21.5% to $215.0 million for 2006, from
      $273.7 million for 2005, primarily due to:





·
            a
                decrease of $56.5 million relating to the net decrease of the number
                of
                chartered-in vessels and a decrease of 4.9% in our average per day
                time-charter hire expense to $19,213 per day for 2006, from $20,198
                per
                day for 2005; and





·
            a
                decrease of $2.2 million relating to the VLCC
                Transfer.





*Depreciation
      and Amortization.* Depreciation and amortization expense decreased 5.3% to $52.2 million for 2006,
      from $55.1 million for 2005, primarily due to:





·
            a
                decrease of $5.2 million relating to the Spot Tanker Dispositions;
                and





·
            a
                decrease of $1.1 million relating to the Aframax
                Transfer;





partially
      offset by





·
            an
                increase of $3.4 million relating to Spot Tanker
                Deliveries.





Drydock
      amortization was $6.5 million during both 2006 and 2005.




*Gain
      on Sale of Vessels.* Gain on
      sale of vessels for 2006 of $2.0 million primarily reflects amortization of
      a
      deferred gain on the sale and leaseback of three Aframax tankers in December
      2003, partially offset by adjustments on vessels sold in 2005. Gain on sale
      of
      vessels for 2005 of $142.0 million included gains on the sale of the Spot Tanker
      Dispositions and the sale of one newbuilding, as well as amortization of a
      deferred gain on the sale and leaseback of the three Aframax tankers.





*Restructuring
      Charges.* We
      incurred restructuring charges of $8.9 million for 2006 and $1.9 million for
      2005 relating to the relocation of certain operational functions from our
      Vancouver, Canada office to locations closer to where our customers are located
      and to where our ships operate. We do not expect to incur any significant
      additional restructuring costs in 2007 associated with this relocation
      project.





***Other
      Operating Results***





*General
      and Administrative Expenses.* General
      and administrative expenses increased 11.4% to $177.9 million for 2006, from
      $159.7 million for 2005, primarily due to:





·
            an
                increase of $12.1 million relating to our acquisition of Petrojarl
                in
                October 2006,





·
            an
                increase of $9.0 million relating to employee stock option compensation,
                described in further detail below;





·
            an
                increase of $7.5 million from the depreciation of the U.S. Dollar
                from
                corresponding 2005 levels relative to other currencies in which we
                pay
                certain general and administrative expenses;
                and





·
            an
                increase of $2.1 million in severance costs;





partially
      offset by




·
              a
                  relative decrease of $12.1 million in 2006 relating to the costs
                  associated with our long-term incentive program for management
                  (please
                  read Item 18 - Financial Statements: Note 17(d) - Commitments and
                  Contingencies - Long-Term Incentive Program);
                  and


34


·
            a
                relative decrease of $3.3 million during 2006 from expenses relating
                to
                the grant of 0.6 million restricted stock units to employees in March
                2005
                (please read Item 18 - Financial Statements: Note 13 - Capital
                Stock).





Effective
      January 1, 2006, we adopted the fair value recognition provisions of the
      Financial Accounting Standards Board Statement No. 123(R), “Share-Based
      Payment,” using the “modified prospective” method. Under this transition method,
      compensation cost is recognized in our financial statements beginning with
      the
      effective date for all share-based payments granted after January 1, 2006 and
      for all awards granted to employees prior to, but not yet vested as of January
      1, 2006. Accordingly, prior period amounts have not been restated. During 2006,
      we recognized $9.0 million of employee stock option compensation expense. As
      of
      December 31, 2006, there was $11.9 million of total unrecognized compensation
      cost related to nonvested outstanding stock options. Recognition of this
      compensation is expected to be $7.1 million (2007), $4.1 million (2008) and
      $0.7
      million (2009). Please read Item 18 - Financial Statements: Note 13 - Capital
      Stock.





*Interest
      Expense.* Interest
      expense increased 29.6% to $171.6 million for 2006, from $132.4 million for
      2005, primarily due to:





·
            an
                increase of $21.4 million from interest-bearing debt of Teekay Nakilat,
                which interest was capitalized prior to the January 2006 sale and
                leaseback of three LNG carriers under
                construction;




·
            an
                increase of $17.2 million resulting from theinterest
                incurred from financing our acquisition of Petrojarl and interest
                incurred
                on debt we assumed from Petrojarl;





·
            an
                increase of $8.7 million resulting from an increase in interest rates
                applicable to our floating-rate
                debt;





partially
      offset by





·
            a
                decrease of $7.6 million fromthe conversion of our 7.25% Premium Equity Participating Security
                Units
                into shares of our common stock in February
                2006;





*Interest
      Income.* Interest
      income increased 65.6% to $56.2 million for 2006, compared to $33.9 million
      for
      2005, primarily due to:





·
            an
                increase of $19.8 million, relating to additional restricted cash
                deposits
                which were primarily funded with the proceeds from the sale and leaseback
                of three LNG carriers during January 2006;
                and





·
            an
                increase of $5.5 million from an increase in interest rate we earned
                on
                our average outstanding cash balances;





partially
      offset by





·
            a
                decrease of $3.7 million resulting from scheduled capital lease repayments
                on two of our LNG carriers which were funded from restricted cash
                deposits.





*Equity
      Income From Joint Ventures.* Equity
      income from joint ventures was $5.9 million for 2006, compared to $11.1 million
      for 2005, primarily due to a decrease in earnings from our 50% share in Skaugen
      Petrotrans, ** which
      provides lightering services primarily in the Gulf of Mexico. Skaugen Petrotrans
      earnings decreases primarily due to higher in-chartering costs during
      2006.





*Foreign
      Exchange Gains (Losses).* Foreign
      exchange losses were $45.4 million in 2006 compared to foreign exchange gains
      of
      $59.8 million in 2005. Most of our foreign currency gains or losses are
      attributable to the revaluation of our Euro-denominated term loans at the end
      of
      each period for
      financial reporting purposes, and substantially all of the gains or losses
      are
      unrealized. Gains reflect a stronger U.S. Dollar against the Euro on the date
      of
      revaluation. Losses reflect a weaker U.S. Dollar against the Euro on the date
      of
      revaluation. As of the date of this report, our Euro-denominated revenues
      generally approximate our Euro-denominated operating expenses and our
      Euro-denominated interest and principal repayments.





*Other
      Loss.* Other
      loss of $6.2 million for 2006 was primarily comprised of income tax expense
      of
      $7.9 million, loss on expiry of options to construct LNG carriers of $6.1
      million, writeoff of capitalized loan costs of $2.8 million, minority interest
      expense of $0.4 million and loss on bond redemption of $0.4 million, partially
      offset by leasing income of $11.4 million from our volatile organic compound
      emissions equipment.





Other
      loss of $33.3 million for 2005 was primarily comprised of minority interest
      expense of $16.6 million, a $13.3 million loss on bond redemption, a $7.8
      million loss from settlement of interest rate swaps and a $7.5 million writeoff
      of capitalized loan costs, partially offset by $10.5 million leasing income
      from
      our volatile organic compound emissions equipment and a $2.3 million income
      tax
      recovery. The loss from settlement of interest rate swaps and the writeoff
      of
      capitalized loan costs are non-recurring items related to debt prepayments
      made
      prior to the initial public offering of Teekay LNG.





The
      minority interest expense for 2006 primarily reflects the minority owners’ share
      of the gain on sale of a 50.5% owned shuttle tanker, results in Petrojarl and
      the foreign exchange losses incurred by Teekay LNG. The minority interest
      expense for 2005 primarily reflects the minority owners’ share of the foreign
      exchange gains incurred by Teekay LNG. Please read Item 18 - Financial
      Statements: Note 15 - Restructuring Charge and Other Loss.





*Net
      Income.* As a
      result of the foregoing factors, net income decreased to $262.2 million for
      2006, from $570.9 million for 2005.





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





*We
      acquired Teekay Spain on April 30, 2004. Consequently, our 2004 financial
      results reflect Teekay Spain’s results of operations commencing May 1, 2004.*





***Offshore
      Segment***


35


The
      following table provides a summary of the changes in calendar-ship-days by
      owned
      and chartered-in vessels for our offshore segment:


**2005**
              (Calendar
                Days)
            
            **2004**
              (Calendar
                Days)
            
            **Percentage
                Change**
              (%)Owned
                Vessels
            
            
            9,580
            
            
            10,296
            
            
            (7.0
            )Chartered-in
                Vessels
            
            
            4,963
            
            
            4,895
            
            
            1.4Total
            
            
            14,543
            
            
            15,191
            
            
            (4.3
            )





The
      average fleet size of our offshore segment (including vessels chartered-in)
      decreased 4.3% in 2005 compared to 2004. This decrease was primarily the result
      of:





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




partially
      offset by





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





·
            the
                commencement of the*Pattani
                Spirit*FSO project in April 2004.





During
      the period from November 2003 to April 2004, the *Pattani
      Spirit* was
      undergoing a conversion from an Aframax-size conventional crude oil tanker
      to an
      FSO unit, consequently it did not earn revenue during this period.





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





*Net
      Revenues.* Net
      revenues decreased 6.4% to $490.0 million for 2005, from $523.4 million for
      2004, primarily due to:




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





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





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





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





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





partially
      offset by





·
            an
                increase of $2.2 million relating to the commencement of the*Pattani
                Spirit*FSO project in April 2004.




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


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





*Vessel
      Operating Expenses.* Vessel
      operating expenses increased 5.0% to $87.1 million for 2005, from $82.9 million
      for 2004. The increase in vessel operating expenses was primarily due
      to:





·
            an
                increase of $5.3 million due to a weaker U.S. Dollar relative to
                the
                Norwegian Kroner during 2005 compared to
                2004.





·
            an
                increase of $2.7 million due to increased repairs and maintenance
                relating
                to the older vessels in our shuttle tanker
                fleet;





·
            an
                increase of $1.4 million relating to the commencement of the*Pattani
                Spirit*FSO project in April 2004;





partially
      offset by





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





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


36


*Time-Charter
      Hire Expense.* Time-charter hire expense decreased 4.4% to $168.2 million for 2005, compared
      to
      $176.0 million for 2004, primarily due to:





·
            a
                5.8% decrease in the average per day time-charter hire expense to
                $33,886
                for 2005, from $35,956 for the same period in
                2004;





partially
      offset by





·
            a
                1.4% increase in the average number of vessels
                chartered-in.





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





*Depreciation
      and Amortization.* Depreciation and amortization expense decreased 11.2% to $89.2 million for
      2005,
      from $100.4 million for 2004. The decrease was primarily due to:





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




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





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





partially
      offset by





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





·
            an
                increase of $1.4 million relating to the*Pattani
                Spirit*FSO project commenced in April
                2004.





Depreciation
      and amortization expense included amortization of drydocking costs of $6.3
      million for 2005, compared to $5.2 million for 2004, and includes amortization
      of contracts of $14.8 million for 2005, compared to $18.4 million for 2004.





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





·
            a
                $12.2 million writedown of the carrying value of certain offshore
                equipment that was employed under a short-term contract servicing
                a
                marginal oil field that was prematurely shut down in June 2005 (we
                have
                re-deployed some of this equipment on another field in October 2005);





partially
      offset by





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





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






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





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





***Fixed-Rate
      Tanker Segment***





The
      following table provides a summary of the changes in calendar-ship-days by
      owned
      and chartered-in vessels for our fixed-rate tanker segment:


**2005**
              (Calendar
                Days)
            
            **2004**
              (Calendar
                Days)
            
            **Percentage
                Change**
              (%)Owned
                Vessels
            
            
            4,973
            
            
            4,146
            
            
            19.9Chartered-in
                Vessels
            
            
            1,194
            
            
            1,010
            
            
            18.2Total
            
            
            6,167
            
            
            5,156
            
            
            19.6





The
      average fleet size of our fixed-rate tanker segment (including vessels
      chartered-in) increased by 19.6% in 2005 compared to 2004. This increase was
      primarily the result of:





·
            the
                inclusion of two Aframax tankers, previously operating in our spot
                tanker
                segment, that became subject to fixed-rate long-term time-charters
                during
                the fourth quarter of 2004;





·
            the
                inclusion of the five Suezmax tankers from our acquisition of Teekay
                Spain
                for a full year in 2005 compared to eight months in 2004;
                and





·
            the
                inclusion of a chartered-in VLCC that commenced service under a long-term
                charter in April 2005.


37
 In
        addition, shortly after we acquired Teekay Spain, we sold two of their seven
        Suezmax tankers. These vessels did not have a material effect on our results
        of
        operations, except for a $3.4 million gain on the sale of these vessels.





*Net
      Revenues.* Net
      revenues increased 39.9% to $167.3 million for 2005, from $119.6 million for
      2004, primarily due to:




·
            an
                increase of $17.9 million relating to the Teekay Spain acquisition;





·
            an
                increase of $15.3 million relating to the addition of two Aframax
                tankers
                to our fixed-rate tanker segment;
                and





·
            an
                increase of $14.1 million relating to the addition of one VLCC to
                our
                fixed-rate tanker segment;





*Vessel
      Operating Expenses.* Vessel
      operating expenses increased 21.9% to $39.7 million for 2005, from $32.6 million
      for 2004. The increase in vessel operating expenses was primarily due
      to:





·
            an
                increase of $2.8 million relating to the addition of two Aframax
                tankers
                to our fixed-rate tanker segment;




·
            an
                increase of $2.5 million relating to the Australian-crewed vessels
                (any
                increases in vessel operating expenses relating to our Australian-crewed
                vessels are generally passed back to our customers through higher
                time-charter rates); and





·
            an
                increase of $1.8 million relating to the Teekay Spain
                acquisition.





*Time-Charter
      Hire Expense.* Time-charter hire expense increased 44.5% to $26.1 million for 2005, from $18.1
      million for 2004, primarily due to the addition of a chartered-in VLCC in April
      2005.





*Depreciation
      and Amortization.* Depreciation and amortization expense increased 8.1% to $29.7 million for 2005,
      from $27.5 million for 2004. The increase was primarily due to:





·
            an
                increase of $3.1 million relating to the Teekay Spain acquisition;
                and





·
            an
                increase of $1.3 million relating to the addition of two Aframax
                tankers
                during 2004 to our fixed-rate tanker
                segment;





partially
      offset by





·
            a
                decrease of $2.2 million relating to the expiration of certain
                time-charter contracts that were acquired during
                2004.





Depreciation
      and amortization expense included amortization of drydocking costs of $2.0
      million for both 2005 and 2004, and includes amortization of contracts of $0.4
      million for 2005, compared to $2.6 million for 2004.





*Gain
      on Sale of Vessels.* There
      were no vessel sales in 2005. We sold two older Suezmax tankers in 2004
      resulting in a gain of $3.4 million.





***Liquefied
      Gas Segment***





The
      following table provides a summary of the changes in calendar-ship-days for
      our
      liquefied gas segment:


**2005**
              (Calendar
                Days)
            
            **2004**
              (Calendar
                Days)
            
            **Percentage
                Change**
              (%)Owned
                Vessels
            
            
            1,825
            
            
            1,026
            
            
            77.9





The
      results of our liquefied gas segment reflect the operations of one LPG carrier
      during 2005 and 2004 and two LNG carriers acquired as part of our acquisition
      of
      Teekay Spain on April 30, 2004. In addition, we had two newbuilding LNG carriers
      delivered to us in July 2004 and December 2004 (collectively, the *LNG
      Deliveries* ).
      We had
      no LNG shipping operations prior to the Teekay Spain acquisition.





*Net
      Revenues.* Net
      revenues increased 112.6% to $102.4 million for 2005, from $48.1 million for
      2004 primarily due to:





·
            an
                increase of $38.6 million from the LNG Deliveries;
                and





·
            an
                increase of $16.6 million from the two existing LNG carriers included
                in
                the Teekay Spain acquisition as of April
                2004;





partially
      offset by





·
            a
                decrease of $0.8 million from 15.2 days of off-hire for one of our
                LNG
                carriers during February 2005.




*Vessel
      Operating Expenses.* Vessel
      operating expenses increased 81.7% to $17.4 million for 2005, from $9.6 million
      for 2004 primarily due to:





·
            an
                increase of $4.7 million from the LNG Deliveries;
                and





·
            an
                increase of $2.9 million from the two existing LNG carriers included
                in
                the Teekay Spain acquisition.





*Depreciation
      and Amortization.* Depreciation and amortization increased 125.1% to $31.5 million in 2005, from
      $14.0 million in 2004 primarily due to:




38


·
            an
                increase of $12.7 million from the LNG Deliveries;
                and





·
            an
                increase of $4.8 million from the two existing LNG carriers included
                in
                the Teekay Spain acquisition.





Depreciation
      and amortization expense included $8.9 million in 2005 and $3.6 million in
      2004
      of amortization of time-charter contracts acquired as part of the Teekay Spain
      acquisition.





***Spot
      Tanker Segment***




TCE
      rates
      for the vessels in our spot tanker segment primarily depend on oil production
      and consumption levels, the number of vessels in the worldwide tanker fleet
      scrapped, the number of newbuildings delivered and charterers' preference for
      modern tankers. As a result of our dependence on the spot tanker market, any
      fluctuations in TCE rates will affect our revenues and earnings. Our average
      TCE
      rate for the vessels in our spot tanker segment decreased 13.6% to $32,357
      for
      2005, from $37,454 for 2004.




The
      following table provides a summary of the changes in calendar-ship-days by
      owned
      and chartered-in vessels for our spot tanker segment:


**2005**
              (Calendar
                Days)
            
            **2004**
              (Calendar
                Days)
            
            **Percentage
                Change**
              (%)Owned
                Vessels
            
            
            10,733
            
            
            16,181
            
            
            (33.7
            )Chartered-in
                Vessels
            
            
            13,552
            
            
            13,460
            
            
            0.7Total
            
            
            24,285
            
            
            29,641
            
            
            (18.1
            )





The
      average fleet size of our spot tanker fleet decreased 18.1% from 29,641 calendar
      days in 2004 to 24,285 calendar days in 2005. This decrease was primarily the
      result of:




·
            the
                sale of 13 older Aframax tankers and one older Suezmax tanker in
                2005;
                and





·
            the
                sale of 10 older Aframax tankers and one VLCC**in
                2004;





partially
      offset by





·
            the
                delivery of four new Aframax tankers in both 2005 and 2004.





As
      at
      December 31, 2005, all our owned and chartered-in vessels in the spot tanker
      segment were double-hulled.




*Net
      Revenues.* Net
      revenues for the spot tanker segment decreased 29.2% to $775.8 million for
      2005,
      from $1,095.7 million for 2004. This decrease was primarily due to the decrease
      in our fleet size as well as the decrease in TCE rates compared to 2004. Voyage
      expenses decreased 2.3% to $347.0 million for 2005, from $355.1 million for
      2004, primarily as a result of the decrease in fleet size, which was primarily
      offset by an increase in average bunker fuel prices. Port expenses also
      increased for 2005 compared to 2004 as a result of increased security concerns,
      particularly in the United States. On a per revenue day basis, voyage expenses
      increased to $14,475 in 2005 compared to $12,139 in 2004.




*Vessel
      Operating Expenses.* Vessel
      operating expenses decreased 33.1% to $62.5 million for 2005, from $93.4 million
      for 2004. The decrease in vessel operating expenses was primarily due to the
      sale of a number of older vessels in 2005 and 2004, partially offset by our
      newbuilding deliveries during these periods.




*Time-Charter
      Hire Expense.* Time-charter hire expense increased 4.0% to $273.7 million for 2005, from $263.1
      million for 2004. This increase was due primarily to a 0.7% increase of
      chartered-in vessels. In addition, our average per ship per day time-charter
      hire expense increased 3.3% to $20,198 in 2005 compared to $19,548 in
      2004.




*Depreciation
      and Amortization.* Depreciation and amortization expense decreased 42.3% to $55.1 million for
      2005,
      from $95.6 million for 2004. The decrease was primarily attributable to the
      previously-mentioned vessel dispositions, partially offset by newbuilding
      deliveries. Depreciation and amortization expense included amortization of
      drydocking costs of $6.5 million for 2005, compared to $16.1 million for 2004.
      The decrease in drydock amortization was primarily due to the
      previously-mentioned sale of older vessels which required more frequent
      drydocks.





*Gain
      on Sale of Vessels.* Gain on
      sale of vessels for 2005 of $142.0 million included gains on the sale of the
      14
      older vessels and one newbuilding, as well as amortization of a deferred gain
      on
      the sale and leaseback of three Aframax tankers that occurred in December 2003.
      The gain on sale of vessels for 2004 of $72.1 million included gains on the
      sale
      of 11 older vessels, as well as the amortization of deferred gain from the
      2003
      sale-leaseback transactions.





*Restructuring
      Charges.* The spot
      tanker segment incurred restructuring charges of $1.9 million in 2005 relating
      to the relocation of certain operational functions from our Vancouver office
      to
      locations closer to where our customers are located and to where our ships
      operate, which we undertook in response to the global nature of our operations.
      Restructuring charges of $1.0 million in 2004 relate to the closure of our
      Oslo,
      Norway office.





***Other
      Operating Results***





*General
      and Administrative Expenses.* General
      and administrative expenses increased 22.2% to $159.7 million for 2005, from
      $130.7 million for 2004, primarily due to:





·
            an
                increase of $21.5 million relating to the adoption of a long-term
                incentive program for management during 2005 (please read Item 18
                -
                Financial Statements: Note 17(d) - Commitments and Contingencies
                -
                Long-Term Incentive Program);





·
            an
                increase of $11.6 million from the grant of 0.6 million restricted
                stock
                units to employees in March 2005 (please read Item 18 - Financial
                Statements: Note 13 - Capital
                Stock);


39


·
            an
                increase of $7.0 million from the weakening of the U.S. Dollar for
                corresponding 2004 levels relative to other currencies in which we
                pay
                certain general and administrative expenses;
                and





·
            an
                increase of $2.2 million relating to our acquisition of Teekay Spain
                in
                April 2004;





partially
      offset by





·
            special
                bonuses of $12.5 million accrued during 2004 in addition to regular
                bonuses under the annual bonus
                plan.





*Interest
      Expense.* Interest
      expense increased 9.0% to $132.4 million for 2005, from $121.5 million for
      2004.
      This increase primarily reflects interest on the additional debt we incurred
      in
      connection of our acquisition of Teekay Spain.




*Interest
      Income.* Interest
      income increased 83.2% to $33.9 million for 2005, compared to $18.5 million
      for
      2004. This increase was primarily due to our acquisition of Teekay Spain during
      April 2004. A majority of our interest income is the result of interest earned
      on restricted cash balances Teekay Spain is required to have on deposit relating
      to capital lease arrangements. Please read “--Important Financial and
      Operational Terms and Concepts - Restricted Cash Deposits” above.




*Equity
      Income From Joint Ventures.* Equity
      income from joint ventures decreased 18.9% to $11.1 million for 2005, from
      $13.7
      million for 2004, primarily due to a decline in earnings from our 50% share
      in
      Skaugen PetroTrans, which provides lightering services primarily in the Gulf
      of
      Mexico and was adversely affected by hurricanes Katrina and Rita.





*Gain
      on Sale of Marketable Securities.* We sold
      no marketable securities in 2005. During 2004 we sold all of our marketable
      securities for proceeds of $135.4 million, which resulted in a gain on sale
      of
      marketable securities of $93.2 million.





*Foreign
      Exchange Gains (Losses).* Foreign
      exchange gains were $59.8 million in 2005 compared to foreign exchange losses
      of
      $42.7 million in 2004, primarily due to the strengthening of the U.S. Dollar
      in
      2005 and weakening of the U.S. Dollar in 2004, relative to other currencies,
      particularly the Euro. Most of our foreign currency gains or losses are
      attributable to the revaluation of our Euro-denominated term loans at the end
      of
      each period for financial reporting purposes, and substantially all of the
      gains
      or losses are unrealized. Gains reflect a stronger U.S. Dollar against the
      Euro
      on the date of revaluation. Losses reflect a weaker U.S. Dollar against the
      Euro
      on the date of revaluation. As of the date of this report, our Euro-denominated
      revenues generally approximate our Euro-denominated operating expenses and
      our
      Euro-denominated interest and principal repayments.





*Other
      Loss.* Other
      loss of $33.3 million for 2005 was primarily comprised of minority interest
      expense of $16.6 million, a $13.3 million loss on bond redemption, a $7.8
      million loss from settlement of interest rate swaps and $7.5 million writeoff
      of
      capitalized loan costs, partially offset by $2.3 million income tax recovery
      and
      $10.5 million leasing income from our volatile organic compound emissions
      equipment. The loss from settlement of interest rate swaps and the writeoff
      of
      capitalized loan costs are non-recurring items related to debt prepayments
      made
      prior to the initial public offering of Teekay LNG. The minority interest
      expense primarily reflects the minority owners’ share of the foreign exchange
      gains incurred by Teekay LNG. Other loss of $25.0 million for 2004 was primarily
      comprised of income taxes of $35.0 million, minority interest expense of $2.3
      million and a $0.8 million loss on bond redemption, partially offset by dividend
      income and $8.4 million leasing income from our volatile organic compound
      emissions equipment.





*Net
      Income.* As a
      result of the foregoing factors, net income decreased to $570.9 million for
      2005, from $757.4 million for 2004.





**Liquidity
      and Capital Resources**




Liquidity
      and Cash Needs





As
      at
      December 31, 2006, our total cash and cash equivalents was $343.9 million,
      compared to $237.0 million at December 31, 2005. Our total liquidity, including
      cash and undrawn long-term borrowings, was $2,159.6 million as at December
      31,
      2006, up from $966.8 million as at December 31, 2005. The increase in liquidity
      was mainly the result of additions of new and amended revolving credit
      facilities, cash generated by our operating activities during 2006 and net
      proceeds from the public offering of common units by our subsidiary Teekay
      Offshore, partially offset by long-term debt repayments, scheduled reductions
      of
      revolving credit facilities, capital expenditures, our acquisition of Petrojarl
      ASA, share repurchases and dividend payments. We believe that our working
      capital is sufficient for our present requirements.





Cash
      Flows





The
      following table summarizes our cash and cash equivalents provided by (used
      for)
      operating, financing and investing activities for the years
      presented:


**2006**
                ($000’s)
              
              **2005**
                ****($000’s)Net
                  operating cash flows
              
              
              545,716
              
              
              609,042Net
                financing cash flows
              
              
              183,638
              
              
              (632,402
              )Net
                  investing cash flows
              
              
              (622,424
              )
              
              (166,693
              )


Operating
      Cash Flows





The
      decrease in net operating cash flow mainly reflects a 6.6% decrease in aggregate
      calendar-ship-days for our fleet to 43,314 in 2006, compared to 46,366 in 2005,
      the reduction in average spot TCE rates and an increase in expenditures for
      drydocking, partially offset by an increase in non-cash working
      capital.


40


Financing
      Cash Flows





Scheduled
      debt repayments were $25.1 million during 2006, compared to $61.2 million during
      2005.  Debt
      prepayments were $1.3 billion during 2006, compared to $2.6 billion during
      2005.
      We used cash generated from operations, proceeds from vessel sales, net proceeds
      from the public offering of common units by our subsidiary Teekay Offshore
      and
      longer-term financings to make these prepayments. Of our debt prepayments in
      2006, $1.0 billion was used to prepay revolving credit facilities and $3.4
      million was used to repay a portion of the 8.875% Senior Notes due July 15,
      2011. Our purchase of Petrojarl was financed primarily with our revolving credit
      facilities. Occasionally we use our revolving credit facilities to temporarily
      finance capital expenditures until longer-term financing is obtained, at which
      time we typically use all or a portion of the proceeds from the longer-term
      financings to prepay outstanding amounts under the facilities. Please read
      Item
      18 - Financial Statements: Note 9 - Long-Term Debt.





During
      2006, three of our subsidiaries, each of which had contracted to have built
      one
      of three LNG carriers, sold their shipbuilding contracts to SeaSpirit Leasing
      Ltd. and entered into 30-year capital leases for these three LNG carriers,
      to
      commence upon completion of vessel construction. SeaSpirit reimbursed us for
      previously paid shipyard installments and other construction costs in the amount
      of $313.0 million. We used the sale proceeds, together with $154.7 million
      of
      proceeds from long-term debt and $14.3 million of other funds, to partially
      fund
      restricted cash deposits for these three vessels that are subject to capital
      leases.




During
      2006, we used $152.3 million of restricted cash deposits to pay for scheduled
      lease payments on two of our LNG carriers, which included its acquisition of
      the *Catalunya
      Spirit* at the
      end of the lease term during December 2006.





As
      at
      December 31, 2006, our total long-term debt was $3.2 billion, compared to $1.9
      billion as at December 31, 2005. As at December 31, 2006, our revolving credit
      facilities provided for borrowings of up to $3.0 billion, of which $1.6 billion
      was undrawn. The amount available under these credit facilities reduces by
      $224.2 million (2007), $232.9 million (2008), $239.8 million (2009), $247.2
      million (2010), $432.5 million (2011) and $1,638.7 million (thereafter). Our
      revolving credit facilities are collateralized by first-priority mortgages
      granted on 55 of our vessels, together with other related collateral, and are
      guaranteed by Teekay or our subsidiaries. Our unsecured 8.875% Senior Notes
      are
      due July 15, 2011. Our outstanding term loans reduce in monthly, quarterly
      or
      semi-annual payments with varying maturities through 2023. Some of the term
      loans also have balloon repayments at maturity and are collateralized by
      first-priority mortgages granted on 24 of our vessels, together with other
      related collateral, and are generally guaranteed by Teekay or our subsidiaries.
      In February 2006, our 7.25% Premium Equity Participating Security Units due
      May
      18, 2006 were settled for shares of our common stock and are no longer
      outstanding. Please read Item 18 - Financial Statements: Note 9 - Long-Term
      Debt.





Among
      other matters, our long-term debt agreements generally provide for the
      maintenance of certain vessel market value-to-loan ratios and minimum
      consolidated financial covenants and prepayment privileges, in some cases with
      penalties. Certain of the loan agreements require that we maintain a minimum
      level of free cash. As at December 31, 2006, this amount was $100.0 million.
      Certain of the loan agreements also require that we maintain a minimum level
      of
      free liquidity and undrawn revolving credit lines with at least six months
      to
      maturity. As at December 31, 2006, this amount was $173.4 million.





We
      conduct our funding and treasury activities within corporate policies designed
      to minimize borrowing costs and maximize investment returns while maintaining
      the safety of the funds and appropriate levels of liquidity for our purposes.
      We
      hold cash and cash equivalents primarily in U.S. Dollars, with some balances
      held in Japanese Yen, Singapore Dollars, Canadian Dollars, Australian Dollars,
      British Pounds, Euros and Norwegian Kroner.





We
      are
      exposed to market risk from foreign currency fluctuations and changes in
      interest rates, spot market rates for vessels and bunker fuel prices. We use
      forward foreign currency contracts, interest rate swaps, forward freight
      agreements and bunker fuel swap contracts to manage currency, interest rate,
      spot tanker rates and bunker fuel price risks, but we do not use these financial
      instruments for trading or speculative purposes. Please read Item 11 -
      Quantitative and Qualitative Disclosures About Market Risk.





Dividends
      declared during 2006 were $63.1 million, or $0.86 per share.




During
      2006, we repurchased 5.8 million shares for $233.3 million, or an average of
      $39.97 per share, pursuant to previously-announced share repurchase programs.
      In
      June 2006, we announced a further increase to the share repurchase programs
      of
      up to $150.0 million. As at December 31, 2006, we had $100.9 million remaining
      under our existing share repurchase authorization. Please read Item 18 -
      Financial Statements: Note 13 - Capital Stock.





On
      December 19, 2006, our subsidiary Teekay Offshore sold as part of its initial
      public offering 8.1 million of its common units at $21.00 per unit for proceeds
      of $155.3 million, net of $13.8 million of commissions and other expenses
      associated with the offering. Please read Item 18 - Financial Statements: Note
      13 - Public Offering of Teekay Offshore Partners L.P.





Investing
      Cash Flows





During
      2006, we:





·
            acquired
                64.5% of the outstanding shares of Petrojarl for $464.8 million,
                net of
                cash acquired. Please read Item 18 - Financial Statements: Note 3
                -
                Acquisition of Petrojarl ASA;





·
            incurred
                capital expenditures for vessels and equipment of $442.5 million,
                primarily for installment payments on our Suezmax tankers, product
                tankers
                and LNG carriers under construction and the exercise of two purchase
                options on one Aframax tanker that was previously subject to a capital
                lease and another Aframax tanker that was previously traded as part
                of our
                spot rate chartered-in fleet;





·
            sold
                the shipbuilding contracts for the three LNG newbuilding carriers
                to
                SeaSpirit for $313.0 million in a sales-leaseback transaction;
                and





·
            sold
                a 1981-built shuttle tanker for proceeds of $8.9 million in July
                2006 and
                received a deposit of $5.0 million on a 1987-built shuttle tanker
                held for
                sale as at December 31, 2006.


41


As
      part
      of our growth strategy, we will continue to consider strategic opportunities,
      including the acquisition of additional vessels and expansion into new markets.
      We may choose to pursue such opportunities through internal growth, joint
      ventures or business acquisitions. We intend to finance any future acquisitions
      through various sources of capital, including internally-generated cash flow,
      existing credit facilities, additional debt borrowings, and the issuance of
      additional equity securities or any combination thereof.




**Commitments
      and Contingencies**





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





(in
                millions of U.S. dollars)
            
            **Total**
            
            **2007**
            
            **2008**
              **and**
              **2009**
            
            **2010**
              **and**
              **2011**
            
            **Beyond**
              **2011****U.S.
                Dollar-Denominated Obligations:**Long-term
                debt(1)
            
            
            2,750.2
            
            
            208.6
            
            
            238.3
            
            
            872.2
            
            
            1,431.1Chartered-in
                vessels (operating leases)
            
            
            1,065.4
            
            
            368.9
            
            
            377.4
            
            
            179.2
            
            
            139.9Commitments
                under capital leases(2)
            
            
            250.3
            
            
            145.1
            
            
            17.1
            
            
            88.1
            
            
            -Commitments
                under capital leases(3)
            
            
            1,123.2
            
            
            22.9
            
            
            48.0
            
            
            48.0
            
            
            1,004.3Newbuilding
                installments(4)
            
            
            1,074.8
            
            
            329.6
            
            
            745.2
            
            
            -
            
            
            -Vessel
                purchases and conversion(5)
            
            
            250.1
            
            
            249.9
            
            
            0.2
            
            
            -
            
            
            -Asset
                retirement obligation
            
            
            38.7
            
            
            -
            
            
            -
            
            
            -
            
            
            38.7Commitment
                for volatile organic compound emissions equipment
            
            
            8.7
            
            
            8.7
            
            
            -
            
            
            -
            
            
            -**Total
                U.S. Dollar-denominated obligations**
            
            
            6,561.4
            
            
            1,333.7
            
            
            1,426.2
            
            
            1,187.5
            
            
            2,614.0**Euro-Denominated
                Obligations:**(6)Long-term
                debt(7)
            
            
            411.3
            
            
            9.7
            
            
            21.5
            
            
            221.6
            
            
            158.5Commitments
                under capital leases(2)
                (8)
            
            
            217.8
            
            
            30.7
            
            
            66.0
            
            
            121.1
            
            
            -**Total
                Euro-denominated obligations**
            
            
            629.1
            
            
            40.4
            
            
            87.5
            
            
            342.7
            
            
            158.5**Total**
            
            
            7,190.5
            
            
            1,374.1
            
            
            1,513.7
            
            
            1,530.2
            
            
            2,772.5


______________________


(1)
            Excludes
                expected interest payments of $165.1 million (2007), $304.7 million
                (2008
                and 2009), $248.5 million (2010 and 2011) and $286.2 million (beyond
                2011). Expected interest payments are based on the existing interest
                rates
                (fixed-rate loans) and LIBOR plus margins that ranged up to 1.05%
                at
                December 31, 2006 (variable-rate loans). The expected interest payments
                do
                not reflect the effect of related interest rate swaps that we have
                used to
                hedge certain of our floating-rate debt.





(2)
            Includes,
                in addition to lease payments, amounts we are required to pay to
                purchase
                certain leased vessels at the end of the lease terms. We are obligated
                to
                purchase five of our existing Suezmax tankers upon the termination
                of the
                related capital leases, which will occur at various times from 2007
                to
                2010. The purchase price will be based on the unamortized portion
                of the
                vessel construction financing costs for the vessels, which we expect
                to
                range from $39.4 million to $41.9 million per vessel. We expect to
                satisfy
                the purchase price by assuming the existing vessel financing. We
                are also
                obligated to purchase one of our existing LNG carriers upon the
                termination of the related capital leases on December 31, 2011. The
                purchase obligation has been fully funded with restricted cash deposits.
                Please read Item 18 - Financial Statements: Note 11 - Capital Leases
                and
                Restricted Cash.




(3)
            Existing
                restricted cash deposits, together with the interest earned on the
                deposits, will equal the remaining amounts we owe under the lease
                arrangements.





(4)
            Represents
                remaining construction costs, including the joint venture partner’s 30%
                interest, as applicable, but excluding capitalized interest and
                miscellaneous construction costs, for two Aframax tankers, three
                product
                tankers, ten Suezmax tankers, three LPG carriers and two LNG carriers.
                Please read Item 1 - Financial Statements: Note 17(a) - Commitments
                and
                Contingencies - Vessels Under Construction and Note 22(a) - Subsequent
                Events.





(5)
            Represents
                remaining purchase obligations and conversion costs, excluding capitalized
                interest and miscellaneous conversion costs, for one Suezmax tanker,
                one
                Aframax tanker and one FPSO unit. Please read Item 18 - Financial
                Statements: Note 17(b) - Commitments and Contingencies - Vessel Purchases
                and Conversion.





(6)
            Euro-denominated
                obligations are presented in U.S. Dollars and have been converted
                using
                the prevailing exchange rate as of December 31,
                2006.




(7)
            Excludes
                expected interest payments of $19.8 million (2007), $38.1 million
                (2008
                and 2009), $31.0 million (2010 and 2011) and $60.9 million (beyond
                2011).
                Expected interest payments are based on EURIBOR plus margins that
                ranged
                up to 1.30% at December 31, 2006, as well as, the prevailing U.S.
                Dollar /
                Euro exchange rate as of December 31, 2006. The expected interest
                payments
                do not reflect the effect of related interest rate swaps that we
                have used
                to hedge certain of our floating-rate
                debt.





(8)
            Existing
                restricted cash deposits, together with the interest earned on the
                deposits, will equal the remaining amounts we owe under the lease
                arrangements, including our obligation to purchase the vessels at
                the end
                of the lease terms.





In
      addition, we have entered into a joint venture agreement with our 60% partner
      to
      construct four LNG carriers. As at December 31, 2006, the remaining commitments,
      excluding capitalized interest and other miscellaneous construction costs,
      on
      these vessels totaled $650.2 million, of which our share is $260.0 million.
      Pursuant to existing agreements, on November 1, 2006, Teekay LNG agreed to
      acquire our ownership interest in these four vessels and related charter
      contracts upon delivery of the first LNG carrier, which is scheduled for 2008.
      Please read Item 18 - Financial Statements: Note 17(c) - Commitments and
      Contingencies - Joint Ventures.





**Off-Balance
      Sheet Arrangements**


42


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




**Critical
      Accounting Estimates**




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




***Revenue
      Recognition***





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





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





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





***Vessel
      Lives and Impairment***





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





*Judgments
      and Uncertainties.* Depreciation is calculated using an estimated useful life of 25 years for
      Aframax, Suezmax, and product tankers, 25 to 30 years for FPSO units and 35
      years for LNG carriers, from the date the vessel was originally delivered from
      the shipyard. In the shipping industry, the use of a 25-year vessel life for
      Aframax, Suezmax, and product tankers has become the prevailing standard. In
      addition, the use of a 25 to 30 year vessel life for FPSO units and a 30 to
      40
      year vessel life for LNG carriers is typical. However, the actual life of a
      vessel may be different, with a shorter life resulting in an increase in the
      quarterly depreciation and potentially resulting in an impairment loss. The
      estimates and assumptions regarding expected cash flows require considerable
      judgment and are based upon existing contracts, historical experience, financial
      forecasts and industry trends and conditions. We are
      not aware of any indicators of impairments nor any regulatory changes or
      environmental liabilities that we anticipate will have a material impact on
      our
      current or future operations.





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





***Drydocking***





*Description* . We
      capitalize a substantial portion of the costs we incur during drydocking and
      for
      the intermediate survey and amortize those costs on a straight-line basis from
      the completion of a drydocking or intermediate survey to the estimated
      completion of the next drydocking. We expense as incurred costs for routine
      repairs and maintenance performed during drydocking that do not improve or
      extend the useful lives of the assets and annual class survey expenses for
      our
      FPSO units.





*Judgments
      and Uncertainties.* Amortization of capitalized drydock expenditures requires us to estimate the
      period of the next drydocking. While we typically drydock each vessel every
      two
      and a half to five years and have a shipping society classification intermediate
      survey performed on our LNG carriers between the second and third year of the
      five-year drydocking period, we may drydock the vessels at an earlier date.





*Effect
      if Actual Results Differ from Assumptions.* If we
      change our estimate of the next drydock date we will adjust our annual
      amortization of drydocking expenditures. Amortization
      expense of capitalized drydock expenditures for 2006 and 2005 was $15.4 million
      and $14.9 million, respectively. As at December 31, 2006 and 2005, our
      capitalized drydock expenditures were $55.2 million and $39.4 million,
      respectively.


43


***Goodwill
      and Intangible Assets***




*Description* .
      We
      allocate the cost of acquired companies to the identifiable tangible and
      intangible assets and liabilities acquired, with the remaining amount being
      classified as goodwill. Certain intangible assets, such as time-charter
      contracts, are being amortized over time. Our future operating performance
      will
      be affected by the amortization of intangible assets and potential impairment
      charges related to goodwill. Accordingly, the allocation of purchase price
      to
      intangible assets and goodwill may significantly affect our future operating
      results. Goodwill and indefinite lived assets are not amortized, but reviewed
      for impairment annually, or more frequently if impairment indicators arise.
      The
      process of evaluating the potential impairment of goodwill and intangible assets
      is highly subjective and requires significant judgment at many points during
      the
      analysis.





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




**Recent
      Accounting Pronouncements**





In
      July
      2006, the Financial Accounting Standards Board (or *FASB* )
      issued
      Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement No. 109" (or *FIN
      48* ).
      This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in financial statements in accordance with FASB Statement No. 109,
      "Accounting for Income Taxes". FIN 48 requires companies to determine whether
      it
      is more-likely-than-not that a tax position taken or expected to be taken in
      a
      tax return will be sustained upon examination, including resolution of any
      related appeals or litigation processes, based on the technical merits of the
      position. If a tax position meets the more-likely-than-not recognition
      threshold, it is measured to determine the amount of benefit to recognize in
      the
      financial statements based on guidance in the interpretation. FIN 48 is
      effective for fiscal years beginning after December 15, 2006. We have not
      determined the effect, if any, that the adoption of FIN 48 will have on our
      consolidated financial position or results of operations.





**Item
      6. Directors, Senior Management and Employees**




**Directors
      and Senior Management**


Our
      directors and executive officers as of the date of this annual report and their
      ages as of December 31, 2006 are listed below:





**Name**
            **Age**
            **Position**C.
                Sean Day
            57
            Director
                and Chair of the BoardBjorn
                Moller
            49
            Director,
                President and Chief Executive OfficerAxel
                Karlshoej
            66
            Director
                and Chair EmeritusJ.
                Rod Clark
            56
            DirectorDr.
                Ian D. Blackburne
            60
            Director


Peter
                S. Janson
            59
            DirectorThomas
                Kuo-Yuen Hsu
            60
            DirectorEileen
                A. Mercier
            59
            DirectorTore
                I. Sandvold
            59
            DirectorKenneth
                Hvid
            38
            President,
                Teekay Navion Shuttle Tankers and Offshore, a division of Teekay
                Shipping
                CorporationArthur
                Bensler
            49
            EVP,
                Secretary and General CounselPeter
                Evensen
            48
            EVP
                and Chief Strategy OfficerDavid
                Glendinning
            52
            President,
                Teekay Gas Services, a division of Teekay Shipping CorporationBruce
                Chan
            34
            SVP,
                Corporate ResourcesVincent
                Lok
            38
            SVP
                and Chief Financial OfficerGraham
                Westgarth
            52
            President,
                Teekay Marine Services, a division of Teekay Shipping CorporationPaul
                Wogan
            44
            President,
                Teekay Tanker Services, a division of Teekay Shipping
                Corporation





Certain
      biographical information about each of these individuals is set forth
      below:





**C.
      Sean Day** has
      served as a Teekay director since 1998 and as our Chair of the Board since
      September 1999. Mr. Day has also served as Chair of Teekay GP L.L.C., a wholly
      owned subsidiary of Teekay and the general partner of Teekay LNG Partners L.P.,
      a publicly traded entity controlled by Teekay, since Teekay GP L.L.C. was formed
      in November 2004. In addition, Mr. Day has also served as Chairman of Teekay
      Offshore GP L.L.C., a wholly owned subsidiary of Teekay and the general partner
      of Teekay Offshore Partners L.P., a publicly traded entity controlled by Teekay,
      since it was formed in August 2006. From 1989 to 1999, he was President and
      Chief Executive Officer of Navios Corporation, a large bulk shipping company
      based in Stamford, Connecticut. Prior to this, Mr. Day held a number of senior
      management positions in the shipping and finance industry. He is currently
      serving as a director of Kirby Corporation and Chairman of Compass Diversified
      Trust.




**Bjorn
      Moller** became
      a
      Teekay director and our President and Chief Executive Officer in April 1998.
      Mr.
      Moller has served as Vice Chair and a Director of Teekay GP L.L.C. since it
      was
      formed in November 2004. As well, he has served as Vice Chair and a Director
      of
      Teekay Offshore GP L.L.C. since it was formed in November 2004. Mr. Moller
      has
      over 25 years' experience in the shipping industry and in December 2006, he
      was
      appointed Chairman of the International Tanker Owners Pollution Federation.
      He
      has served in senior management positions with Teekay for more than 15 years
      and
      has headed our overall operations since January 1997, following his promotion
      to
      the position of Chief Operating Officer. Prior to this, Mr. Moller headed our
      global chartering operations and business development activities.


44


**Axel
      Karlshoej** has
      been
      a Teekay director since 1989 and was Chair of the Teekay Board from June 1994
      to
      September 1999, and has been Chair Emeritus since stepping down as Chair. Mr.
      Karlshoej is President and serves on the compensation committee of Nordic
      Industries, a California general construction firm with which he has served
      for
      the past 30 years. He is the older brother of the late J. Torben Karlshoej,
      Teekay’s founder. Please read Item 7 - Major Shareholders and Related Party
      Transactions.





**J.
      Rod Clark** was
      appointed as a Teekay director in May 2006. Mr. Clark has been President and
      Chief Operating Officer of Baker Hughes Incorporated since February 2004 prior
      to which he was Vice President, Marketing and Technology from 2003 to 2004
      having joined Baker Hughes Incorporated in 2001 as Vice President and President
      of Baker Petrolite Corporation. Mr. Clark was President and Chief Executive
      Officer of Consolidated Equipment Companies, Inc. from 2000 to 2001 and
      President of Sperry-Sun, a Halliburton company, from 1996 to 1999. He has also
      held financial, operational and leadership positions with FMC Corporation,
      Schlumberger Limited and Grace Energy Corporation. Mr. Clark also sits on the
      Board of Incorporate Members of Dallas Theological Seminary and is a Trustee
      of
      the Center for Christian Growth, both in Dallas, Texas.





**Dr.
      Ian D. Blackburne** has
      served as a Teekay director since 2000. Mr. Blackburne has over 25 years'
      experience in petroleum refining and marketing, and in March 2000 he retired
      as
      Managing Director and Chief Executive Officer of Caltex Australia Limited,
      a
      large petroleum refining and marketing conglomerate based in Australia. He
      is
      currently serving as Chairman of CSR Limited and is a director of Suncorp-Metway
      Ltd. and Symbion Health Limited (formerly Mayne Group Limited), Australian
      public companies in the diversified industrial and financial sectors. Dr.
      Blackburne is also the Chairman of the Australian Nuclear Science and Technology
      Organization.





**Peter
      S. Janson** has
      served as a Teekay director since 2005. From 1999 to 2002, Mr. Janson was the
      Chief Executive Officer of Amec Inc. (formerly Agra Inc.), a publicly traded
      engineering and construction company. From 1986 to 1994 he served as the
      President and Chief Executive Officer of Canadian operations for Asea Brown
      Boveri Inc., a company for which he also served as Chief Executive Officer
      for
      U.S. operations from 1996 to 1999. Mr. Janson has also served as a member of
      the
      Business Round Table in the United States, and as a member of the National
      Advisory Board on Science and Technology in Canada. He is also a director of
      Terra Industries Inc., Tembec Inc. and ATS Automan Tooling Systems
      Inc.





**Thomas
      Kuo-Yuen Hsu** has
      served as a Teekay director since 1993. He also has served 30 years with, and
      is
      presently a director of, CNC Industries, an affiliate of the Expedo Group of
      Companies that manages a fleet of seven vessels ranging in size from 30,000
      dwt
      to 70,000 dwt. He has been a Committee Director of the Britannia Steam Ship
      Insurance Association Limited since 1988. Please read Item 7 - Major
      Shareholders and Related Party Transactions.





**Eileen
      A. Mercier** has
      been
      a Teekay director since 2000. She has over 35 years' experience in a wide
      variety of financial and strategic planning positions, including Senior Vice
      President and Chief Financial Officer for Abitibi-Price Inc. from 1990 to 1995.
      She formed her own management consulting company, Finvoy Management Inc. and
      acted as president from 1995 to 2003. She currently serves as Chairman of the
      Ontario Teachers’ Pension Plan, director for ING Bank of Canada, York University
      and the University Health Network, and as a director and audit committee member
      for CGI Group Inc., ING Canada Inc. and Shermag Inc.





**Tore
      I. Sandvold** has
      served as a Teekay director since 2003. He has over 30 years’ experience in the
      oil and energy industry. From 1973 to 1987 he served in the Norwegian Ministry
      of Industry, Oil & Energy in a variety of positions in the area of domestic
      and international energy policy. From 1987 to 1990 he served as the Counselor
      for Energy in the Norwegian Embassy in Washington, D.C. From 1990 to 2001 Mr.
      Sandvold served as Director
      General of the Norwegian Ministry of Oil & Energy, with overall
      responsibility for Norway’s national and international oil and gas policy. From
      2001 to 2002 he served as Chairman of the Board of Petoro, the Norwegian
      state-owned oil company that is the largest oil asset manager on the Norwegian
      continental shelf. From 2002 to the present, Mr. Sandvold, through his company,
      Sandvold Energy AS, has acted as advisor to companies and advisory bodies in
      the
      energy industry. Mr. Sandvold serves on other boards, including those of
      Schlumberger Limited., E. on Ruhrgas Norge AS, Lambert Energy Advisory Ltd.,
      University of Stavanger, Offshore Northern Seas, and the Energy Policy
      Foundation of Norway.





**Kenneth
      Hvid** joined
      Teekay in October 2000 and was responsible for leading our global procurement
      activities until he was promoted in 2004 to Senior Vice President, Teekay Gas
      Services. During this time, Mr. Hvid was involved in leading Teekay through
      its
      entry and growth in the LNG business. He held this position until the beginning
      of 2006, when he was appointed President of our Teekay Navion Shuttle Tankers
      and Offshore division. In this role he is responsible for our global shuttle
      tanker business as well as initiatives in the floating production, storage
      and
      offtake business and related offshore activities. Mr. Hvid has 18 years of
      global shipping experience, 12 of which were spent with A.P. Moller in
      Copenhagen, San Francisco and Hong Kong.





**Arthur
      Bensler** joined
      Teekay in September 1998 as General Counsel. He was promoted to the position
      of
      Vice President in March 2002 and became our Corporate Secretary in May 2003.
      He
      was appointed Senior Vice President in February 2004 and Executive Vice
      President in January 2006. Prior to joining Teekay, Mr. Bensler was a partner
      in
      a large Vancouver, Canada law firm, where he practiced corporate, commercial
      and
      maritime law from 1986 until joining Teekay.





**Peter
      Evensen** joined
      Teekay in May 2003 as Senior Vice President, Treasurer and Chief Financial
      Officer. He was appointed Executive Vice President and Chief Financial Officer
      in February 2004 and was appointed Executive Vice President and Chief Strategy
      Officer in November 2006. Mr. Evensen has served as the Chief Executive Officer
      and Chief Financial Officer of Teekay GP L.L.C. since it was formed in November
      2004 and as Director of Teekay GP L.L.C. since January 2005. Mr. Evensen has
      served as the Chief Executive Officer and Chief Financial Officer of Teekay
      Offshore GP L.L.C. since it was formed in August 2006 and as Director of Teekay
      Offshore GP L.L.C. since December 2006. Mr. Evensen has over 20 years’
experience in banking and shipping finance. Prior to joining Teekay, Mr. Evensen
      was Managing Director and Head of Global Shipping at J.P. Morgan Securities
      Inc.
      and worked in other senior positions for its predecessor firms. His
      international industry experience includes positions in New York, London and
      Oslo.




**David
      Glendinning** joined
      Teekay in January 1987. Since then, he has held a number of senior positions,
      including service as Vice President, Marine and Commercial Operations from
      January 1995 until his promotion to Senior Vice President, Customer Relations
      and Marine Project Development in February 1999. In November 2003 Mr.
      Glendinning was appointed President of our Teekay Gas Services division, which
      is responsible for our initiatives in the LNG business and other areas of gas
      activity. Prior to joining Teekay, Mr. Glendinning, who is a Master Mariner,
      had
      18 years' sea service on oil tankers of various types and sizes.


45


**Bruce
      Chan** joined
      Teekay in September 1995. Since then, in addition to spending a year in Teekay’s
      London office, Mr. Chan has held a number of finance and accounting positions
      with the Company, including Vice President, Strategic Development from February
      2004 until his promotion to the position of Senior Vice President, Corporate
      Resources in September 2005. Prior to joining Teekay, Mr. Chan worked as a
      Chartered Accountant in the Vancouver, Canada office of Ernst &
Young.





**Vincent
      Lok** joined
      Teekay in June 1993. Since then, he has held a number of finance and accounting
      positions, including Controller from 1997 until his promotion to the position
      of
      Vice President, Finance in March 2002. He was appointed Senior Vice President
      and Treasurer in February 2004 and was promoted to Senior Vice President and
      Chief Financial Officer in November 2006. Prior to joining Teekay, Mr. Lok
      worked in the Vancouver, Canada audit practice of Deloitte & Touche.





**Graham
      Westgarth** joined
      Teekay in February 1999 as Vice President, Marine Operations. He was promoted
      to
      the position of Senior Vice President, Marine Operations in December 1999.
      In
      November 2003 Mr. Westgarth was appointed President of our Teekay Marine
      Services division, which is responsible for all of our marine and technical
      operations as well as marketing a range of services and products to third
      parties, such as marine consulting services and computer-based marine training
      software. He has extensive shipping industry experience. Prior to joining
      Teekay, Mr. Westgarth was General Manager of Maersk Company (UK), where he
      joined as Master in 1987. His international industry experience includes 18
      years’ sea service, with five years in a command position.





**Paul
      Wogan** joined
      Teekay in November 2000 as the Managing Director of the London office. He was
      promoted to the position of Vice President, Business Development in March 2002.
      In November 2003 Mr. Wogan was appointed President of our Teekay Tanker Services
      division, which is responsible for the commercial management of our conventional
      crude oil and product tanker transportation services. Prior to joining Teekay,
      Mr. Wogan was with the chartering arm of a major crude oil and product carrier
      fleet controlled by the Ceres Hellenic Group (Livanos), which subsequently
      founded Seachem Tankers Ltd., a chemical tanker company, where he served as
      the
      Chief Executive Officer from 1997 until joining Teekay.





**Compensation
      of Directors and Senior Management**





*Director
      Compensation*





During
      2006, the eight non-employee directors received, in the aggregate, $710,000
      in
      cash fees for their services as directors, plus reimbursement of their
      out-of-pocket expenses. Each non-employee director receives an annual cash
      retainer of $50,000. Members of the Audit Committee, Compensation and Human
      Resources Committee, and Nominating and Governance Committee receive an
      additional annual cash retainer of $8,000, $5,000 and $5,000, respectively.
      The
      Chair of the Board and the Chair of the Audit Committee receive an additional
      annual cash retainer of $228,000 and $16,000, respectively.





In
      addition, each non-employee director received a $70,000 annual retainer to
      be
      paid by way of a grant of restricted stock or stock options under our 2003
      Equity Incentive Plan, at the director’s election. In addition to the $70,000
      annual retainer, the Chair of the Board received a further $319,000 retainer
      in
      the form of a grant of restricted stock and stock options under our 2003 Equity
      Incentive Plan. Certain of the directors elected to receive this annual retainer
      in the form of stock options to purchase an aggregate of 6,900 shares of our
      common stock at an exercise price of $38.94 per share. These options expire
      March 7, 2016, ten years after the date of their grant. These options vest
      as to
      one third of the shares on each of the first three anniversaries of their
      respective grant date. Certain other directors elected to receive this annual
      retainer in the form of 20,090 shares
      of
      restricted stock (18,990 shares of restricted stock on March 7, 2006 and 1,100
      shares of restricted stock on June 1, 2006), which also vest with respect to
      one
      third of the shares on each of the first three anniversaries of their grant
      date.





*Annual
      Executive Compensation*





The
      aggregate compensation earned by Teekay’s nine executive officers listed above
      ( *or
      the Executive Officers)* for 2006
      was $7.1 million. This is comprised of base salary ($3.2 million), annual bonus
      ($3.1 million) and pension and other benefits ($0.8 million). These amounts
      were
      paid primarily in Canadian Dollars, but are reported here in U.S. Dollars using
      an exchange rate of 1.16 Canadian Dollars for each U.S. Dollar, the exchange
      rate on December 31, 2006. Teekay’s annual bonus plan considers both company
      performance, through comparison to established targets and financial performance
      of peer companies, and individual performance.





*Long-Term
      Incentive Program*





Teekay's
      long-term incentive program provides focus on the returns realized by the
      shareholders and acknowledges and retains those executives who can influence our
      long-term performance. The long-term incentive plan provides a balance against
      short-term decisions and encourages a longer time horizon for decisions. This
      program consists of stock option grants and restricted stock units. All grants
      in 2006 have been made under our 2003 Equity Incentive Plan.





During
      2006, we granted stock options to purchase an aggregate of 478,600 shares of
      our
      common stock at an exercise price of $38.94 to the Executive Officers under
      our
      2003 Equity Incentive Plan. These options, which vest equally over three years,
      expire March 7, 2016, ten years after the date of the grant. During 2006, we
      paid $3.9 million to the Executive Officers upon the vesting of restricted
      stock
      units that were awarded to them in March 2005. At December 31, 2006, the
      Executive Officers held 194,486 restricted stock units, of which 97,243 vested
      in March 2007 and $5.0 million was paid to the Executive Officers. The remaining
      97,243 restricted stock units will vest in November 2007. Based on the March
      31,
      2007 share price of $54.11 per share, these remaining restricted stock units
      had
      a notional value of $5.3 million. Upon vesting, the restricted stock units
      will
      be paid to each grantee in the form of cash or shares of Teekay’s common stock,
      (purchased on the open market) at the election of the grantee.





*Vision
      Incentive Plan*




The
      Vision Incentive Plan (or the *VIP* )
      rewards
      exceptional corporate performance and shareholder return over the long term
      and
      the successful implementation of innovative plans to continue the transformation
      of Teekay. This is a discrete plan that expires after 2010 and is not a
      permanent element of our Executive Compensation Program. Under the terms of
      the
      VIP, awards may only be made to VIP participants in 2008 and 2011. The VIP
      will
      result in an award pool for senior management based on two measures: (a)
      economic profit from 2005 to 2010; and (b) the increase in market value added
      from 2001 to 2010. Please read Item 19 - Exhibits: Exhibit 4.6 for further
      information on the VIP.


46


During
      2006, we accrued $6.0 million of Economic Profit contributions which represents
      the addition to the award pool for 2006. As of March 15, 2007, 50.1% of this
      award pool was allocable to the Executive Officers. However, our Board of
      Directors may, at any time prior to the expiration of the VIP, change the
      allocation of the award pool between its participants to reflect a change in
      their relative contribution.





During
      2006, we accrued $3.4 million of Market Value contributions which represents
      a
      notional contribution to the award pool. These notional contributions assume
      the
      following two threshold requirements will be met: (a) shares of our common
      stock
      have an average market value, for the 18 months prior to December 31, 2010,
      that
      is at least 120% of its average book value for the same period and (b) our
      cumulative total shareholder return (or *TSR* )
      for the
      period from 2001 to 2010 must be above the 25th percentile relative to the
      TSR
      of the S&P 500 (as calculated in accordance with U.S. securities
      regulations) during the same period. If both threshold requirements are not
      met,
      there will be no Market Value contributions to the award pool. As of March
      15,
      2007, 63.6% of this award pool was allocable to the Executive Officers. However,
      our Board of Directors may, at any time prior to the expiration of the VIP,
      change the allocation of the award pool between its participants to reflect
      a
      change in their relative contribution.





**Options
      to Purchase Securities from Registrant or Subsidiaries**





As
      at
      December 31, 2006, we had reserved pursuant to our 1995 Stock Option Plan,
      which
      was terminated with respect to new grants effective September 10, 2003, and
      our
      2003 Equity Incentive Plan, which was adopted effective on the same date
      (together, the *Plans* ),
      7,872,661 shares of common stock for issuance upon exercise of options granted
      or to be granted. During 2006, 2005, and 2004 we granted options under the
      Plans
      to acquire up to 1,045,200, 620,700, and 833,840 shares of common stock,
      respectively, to eligible officers, employees and directors. The options under
      the Plans have a 10-year term and vest equally over three years from the grant
      date. The outstanding options under the Plans are exercisable at prices ranging
      from $8.44 to $47.13 per share, with a weighted-average exercise price of $28.78
      per share, and expire between June 13, 2007 and March 7, 2016.





**Board
      Practices**





The
      Board
      of Directors consists of nine members. The Board of Directors is divided into
      three classes, with members of each class elected to hold office for a term
      of
      three years in accordance with the classification indicated below or until
      his
      or her successor is elected and qualifies.





Directors
      Peter S. Janson, Eileen A. Mercier and Tore I. Sandvold have terms expiring
      in
      2007 and have been nominated by the Board of Directors for re-election at the
      2007 Annual Meeting of Shareholders. Directors Thomas Kuo-Yuen Hsu, Axel
      Karlshoej and Bjorn Moller have terms expiring in 2008. Directors J. Rod Clark,
      C. Sean Day and Dr. Ian D. Blackburne have terms expiring in 2009.





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





The
      Board
      has determined that each of the current members of the Board, other than Bjorn
      Moller, our President and Chief Executive Officer, has no material relationship
      with Teekay (either directly or as a partner, shareholder or officer of an
      organization that has a relationship with Teekay), and is independent within
      the
      meaning of our director independence standards, which reflect the NYSE director
      independence standards as currently in effect and as they may be changed from
      time to time. In making this determination the Board considered the
      relationships of Thomas Kuo-Yuen
      Hsu and Axel Karlshoej with our largest shareholder and concluded these
      relationships do not materially affect their independence as current
      directors.




The
      Board
      has the following three committees: Audit Committee, Compensation and Human
      Resources Committee, and Nominating and Governance Committee. The membership
      of
      these committees during 2006 and the function of each of the committees are
      described below. Each of the committees is currently comprised of independent
      members and operates under a written charter adopted by the Board. All of the
      committee charters are available under “Corporate Governance” in the Investor
      Centre of our Web site at www.teekay.com. During 2006, the Board held seven
      meetings. Each director attended all Board meetings, except for one Board
      meeting at which one director was absent. Each committee member attended all
      applicable committee meetings.





Our
      Audit
      Committee is composed entirely of directors who satisfy applicable NYSE and
      SEC
      audit committee independence standards. Our Audit Committee includes Eileen
      A.
      Mercier (Chair), Peter S. Janson and J. Rod Clark. All members of the committee
      are financially literate and the Board has determined that Ms. Mercier qualifies
      as an audit committee financial expert.





The
      Audit
      Committee assists the Board in fulfilling its responsibilities for general
      oversight of:


·
            the
                integrity of our financial statements;


·
            our
                compliance with legal and regulatory requirements;


·
            the
                independent auditors’ qualifications and independence; and


·
            the
                performance of our internal audit function and independent
                auditors.




During
      2006, our Compensation and Human Resources Committee included C. Sean Day
      (Chair), Axel Karlshoej, Ian D. Blackburne and Peter S. Janson.





The
      Compensation and Human Resources Committee:


·
            reviews
                and approves corporate goals and objectives relevant to the Chief
                Executive Officer’s compensation, evaluates the Chief Executive Officer’s
                performance in light of these goals and objectives and determines
                the
                Chief Executive Officer’s compensation;


·
            reviews
                and approves the evaluation process and compensation structure for
                executives, other than the Chief Executive Officer, evaluates their
                performance and sets their compensation based on this evaluation;


·
            reviews
                and makes recommendations to the Board regarding compensation for
                directors;


·
            establishes
                and administers long-term incentive compensation and equity-based
                plans;
                and


·
            oversees
                our other compensation plans, policies and
                programs.


47


During
      2006, our Nominating and Governance Committee included Ian D. Blackburne
      (Chair), Tore I. Sandvold, Eileen A. Mercier and Thomas Kuo-Yuen Hsu.





The
      Nominating and Governance Committee:


·
            identifies
                individuals qualified to become Board members;


·
            selects
                and recommends to the Board director and committee member candidates;


·
            develops
                and recommends to the Board corporate governance principles and policies
                applicable to us, monitors compliance with these principles and policies
                and recommends to the Board appropriate changes; and


·
            oversees
                the evaluation of the Board and
                management.





**Crewing
      and Staff**





As
      at
      December 31, 2006, we employed approximately 4,800 seagoing and 800 shore-based
      personnel, compared to approximately 4,400 seagoing and 700 shore-based
      personnel in 2005, and 4,800 seagoing and 700 shore-based personnel as at
      December 31, 2004. The decreases in seagoing personnel from December 31, 2005
      to
      December 31, 2006 and from December 31, 2004 to December 31, 2005 were primarily
      due to the decrease in the size of our fleet.





We
      regard
      attracting and retaining motivated seagoing personnel as a top priority. Through
      our global manning organization comprised of offices in Glasgow, Scotland,
      Grimstad, Norway, Riga, Latvia, Manila, Philippines, Mumbai, India, Sydney,
      Australia, Madrid, Spain, and Gydnia, Poland, we offer seafarers competitive
      employment packages and comprehensive benefits. We also provide excellent
      opportunities for personal and career development, which relate to our
      philosophy of promoting internally.





During
      fiscal 1996, we entered into a Collective Bargaining Agreement with the
      Philippine Seafarers’ Union, an affiliate of the International Transport
      Workers’ Federation (or *ITF* ),
      and a
      Special Agreement with ITF London that cover substantially all of our junior
      officers and seamen. We are also party to Enterprise Bargaining Agreements
      with
      various Australian maritime unions that covers officers and seamen employed
      through our Australian operations. Our officers and seamen for our
      Spanish-flagged vessels are covered by a collective bargaining agreement with
      Spain’s Union General de Trabajadores and Comisiones Obreras. We believe our
      relationships with these labor unions are good.





We
      see
      our commitment to training as fundamental to the development of the highest
      caliber seafarers for our marine operations. Our cadet training program is
      designed to balance academic learning with hands-on training at sea. We have
      relationships with training institutions in Canada, Croatia, India, Latvia,
      Norway, Philippines, Turkey and the United Kingdom. After receiving formal
      instruction at one of these institutions, the cadets’ training continues on
      board a Teekay vessel. We also have an accredited company specific competence
      management system that is designed to ensure a continuous flow of qualified
      officers who are trained on our vessels and are familiar with our operational
      standards, systems and policies. We believe that high-quality manning and
      training policies will play an increasingly important role in distinguishing
      larger independent tanker companies that have in-house, or affiliate,
      capabilities from smaller companies that must rely on outside ship managers
      and
      crewing agents.




**Share
      Ownership**





The
      following table sets forth certain information regarding beneficial ownership,
      as of March 15, 2007, of our common stock by the directors and Executive
      Officers as a group. The information is not necessarily indicative of beneficial
      ownership for any other purpose. Under SEC rules a person or entity beneficially
      owns any shares that the person or entity has the right to acquire as of May
      14,
      2007 (60 days after March 15, 2006) through the
      exercise of any stock option or other right. Unless otherwise indicated, each
      person or entity has sole voting and investment power (or shares such powers
      with his or her spouse) with respect to the shares set forth in the following
      table. Information for certain holders is based on information delivered to
      us.





**Identity
                of Person or Group**
            **Shares
                Owned**
            **Percent
                of Class**All
                directors and Executive Officers (17 persons)
            1,327,974(1) (3)
            1.8%(2)





(1)
            Includes
                1,183,462 shares of common stock subject to stock options exercisable
                by
                May 14, 2007 under the Plans with a weighted-average exercise price
                of
                $27.64 that expire between May 13, 2008 and March 6, 2016. Excludes
                (a)
                1,229,194 shares of common stock subject to stock options exercisable
                after May 14, 2007 under the Plans with a weighted average exercise
                price
                of $47.81, that expire between March 10, 2015 and March 12, 2017
                (b)
                shares owned by Resolute Investments, Inc. (please read Item 7 -
                Major
                Shareholders and Related Party Transactions) (c) 194,486 restricted
                stock
                units which will be paid to each grantee in the form of cash or shares
                of
                Teekay’s common stock (purchased on the open market), at the election of
                the grantee and (d) 32,790 shares of restricted stock which vest
                after May
                14, 2007.





(2)
            Based
                on a total of 73.5 million outstanding shares of our common stock
                as of
                March 15, 2007. Each director and Executive Officer beneficially
                owns less
                than one percent of the outstanding shares of common
                stock.





(3)
            Each
                director is expected to acquire at least 10,000 shares of Teekay’s common
                stock by the later of May 14, 2008 or the fifth anniversary of the
                date on
                which the director joined the Board. In addition, each Executive
                Officer
                is expected to acquire shares of Teekay’s common stock equivalent in value
                to one to three times their annual base salary by
                2010.





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





**Major
      Shareholders**




The
      following table sets forth information regarding beneficial ownership, as of
      March 15, 2007, of Teekay’s common stock by each person we know to beneficially
      own more than 5% of the common stock. Information for certain holders is based
      on their latest filings with the SEC or information delivered to us. The number
      of shares beneficially owned by each person or entity is determined under SEC
      rules and the information is not necessarily indicative of beneficial ownership
      for any other purpose. Under SEC rules a person or entity beneficially owns
      any
      shares as to which the person or entity has or shares voting or investment
      power. In addition, a person or entity beneficially owns any shares that the
      person or entity has the right to acquire as of May 14, 2007 (60 days after
      March 15, 2007) through the exercise of any stock option or other right. Unless
      otherwise


48


indicated,
      each person or entity has sole voting and investment power (or shares such
      powers with his or her spouse) with respect to the shares set forth in the
      following table.





**Identity
                of Person or Group**
            **Shares
                Owned**
            **Percent
                of Class**(4)Resolute
                Investments, Inc.(1)
            32,631,380
            44.8%FMR
                Corp., Edward C. Johnson3rd(2)
            11,186,875
            15.4%Iridian
                Asset Management, LLC(3)
            8,012,965
            11.0%


**___________________________**





(1)
            Two
                of our directors are directors of the entity that ultimately controls
                Resolute. Please read “--Related Party
                Transactions."





(2)
            Includes
                sole voting power as to 92,000 shares and sole dispositive power
                as to
                11,186,875 shares. This information is based on the Schedule 13G/A
                filed
                by this group with the SEC on February 14, 2007. Based on prior
                information filed with the SEC, FMR Corp.’s beneficial ownership in Teekay
                was 13.9% on March 15, 2005 and 11.4% on March 15,
                2004.





(3)
            Includes
                shared voting power and shared dispositive power as to 8,012,965
                shares.
                This information is based on the Schedule 13G filed by this investor
                with
                the SEC on February 5, 2007. Iridian Asset Management’s beneficial
                ownership was 6.8% on March 15, 2006 and less than 5% on March 15,
                2005.





(4)
            Based
                on a total of 73.5 million outstanding shares of our common stock
                as of
                March 15, 2007.





Based
      on
      prior information filed with the SEC, Neuberger Berman, Inc and Neuberger
      Berman, LLC, as a group’s beneficial ownership in Teekay was less than 5% on
      March 15, 2007, 6.8% on March 15, 2006 and 10.1% on March 15, 2005.





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





**Related
      Party Transactions**





As
      at
      December 31, 2006, Resolute Investments, Inc. (or *Resolute* )
      owned
      44.8% (December 31, 2005 - 45.7% and December 31, 2004 - 39.3%) of our
      outstanding Common Stock. Two of the Company’s directors, Thomas Kuo-Yuen Hsu
      and Axel Karlshoej, are among the Managing Directors of The Kattegat Trust
      Company Limited, which is the trustee of the trust that owns all of Resolute’s
      outstanding equity.





One
      of
      our former directors, Bruce Bell, was Manager Director, Chief Executive Officer
      and Chairman of Oceanic Bank and Trust Limited. Payments made by us to Oceanic
      Bank and Trust Limited in respect of corporate administration fees and shared
      office costs for 2006, 2005 and 2004, totaled approximately $0.5 **** million
      in each of these years.




**Item
      8. Financial Information**





**Consolidated
      Financial Statements and Notes**





Please
      read Item 18 below.





**Legal
      Proceedings**





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





**Dividend
      Policy**





Commencing
      with the quarter ended September 30, 1995, we declared and paid quarterly cash
      dividends in the amount of $0.1075 per share on our common stock. We increased
      our quarterly dividend from $0.1075 to $0.125 per share on our common stock
      in
      the fourth quarter of 2003, from $0.125 to $0.1375 per share during the fourth
      quarter of 2004, from $0.1375 to $0.2075 per share in the fourth quarter of
      2005, from $0.2075 to $0.2375 in the fourth quarter of 2006. Subject to
      financial results and declaration by the Board of Directors, we currently intend
      to continue to declare and pay a regular quarterly dividend in such amount
      per
      share on our common stock. Pursuant to our dividend reinvestment program,
      holders of common stock are permitted to choose, in lieu of receiving cash
      dividends, to reinvest any dividends in additional shares of common stock at
      then prevailing market prices, but without brokerage commissions or service
      charges. On May 17, 2004, we effected a two-for-one stock split relating to
      our
      common stock. All per share data give effect to this stock split
      retroactively.





The
      timing and amount of dividends, if any, will depend, among other things, on
      our
      results of operations, financial condition, cash requirements, restrictions
      in
      financing agreements and other factors deemed relevant by our Board of
      Directors. Because we are a holding company with no material assets other than
      the stock of our subsidiaries, our ability to pay dividends on the common stock
      depends on the earnings and cash flow of our subsidiaries.




**Significant
      Changes**




Please
        read Item 4: Information on the Company: *Anticipated
        Public Offering by Teekay Tankers* and ** Item
        18 -
        Financial Statements: Note 22 - Subsequent Events.


49


**Item
      9. The Offer and Listing**





Our
      common stock is traded on the New York Stock Exchange (or *NYSE* )
      under
      the symbol “TK". The following table sets forth the high and low closing sales
      prices for our common stock on the NYSE for each of the periods
      indicated. (1)


**Years
                Ended**
            
            Dec.
                31,
              2006
            
            Dec.
                31,
              2005
            
            Dec.
                31,
              2004
            
            Dec.
                31,
              2003
            
            Dec.
                31,
              2002High
            
            $
            45.8000
            
            $
            50.0100
            
            $
            54.4500
            
            $
            28.6750
            
            $
            20.8500Low
            
            
            35.6000
            
            
            37.2500
            
            
            27.9500
            
            
            17.8550
            
            
            13.1750**Quarters
                Ended**
            
            
            Dec.
                31,
              2006
            
            
            Sept.
                30,
              2006
            
            
            June
                30,
              2006
            
            
            Mar.
                31,
              2006
            
            
            Dec.
                31,
              2005
            
            
            Sept.
                30, 2005
            
            
            June
                30,
              2005
            
            
            Mar.
                31,
              2005High
            
            $
            45.7700
            
            $
            45.8000
            
            $
            42.0500
            
            $
            40.9000
            
            $
            43.5600
            
            $
            47.3000
            
            $
            46.6500
            
            $
            50.0100Low
            
            
            39.2200
            
            
            39.4000
            
            
            35.6000
            
            
            36.7700
            
            
            37.2500
            
            
            42.7300
            
            
            41.6400
            
            
            40.1200**Months
                Ended**
            
            
            Mar.
                31,
              2007
            
            
            Feb.
                28,
              2007
            
            
            Jan.
                31,
              2007
            
            
            Dec.
                31,
              2006
            
            
            Nov.
                30,
              2006
            
            
            Oct.
                31,
              2006High
            
            $
            54.1100
            
            $
            51.3700
            
            $
            50.2300
            
            $
            45.7700
            
            $
            42.4700
            
            $
            42.2000Low
            
            
            48.9300
            
            
            48.1800
            
            
            42.5200
            
            
            41.6800
            
            
            40.5000
            
            
            39.2200





(1)
            On
                May 17, 2004, we effected a two-for-one stock split relating to our
                common
                stock; applicable per share information above gives effect to this
                stock
                split retroactively.





**Item
      10. Additional Information**





**Memorandum
      and Articles of Association**





Our
      Articles of Incorporation and Bylaws have previously been filed as exhibits
      2.1,
      2.2, and 2.3 to our Annual Report on Form 20-F (File No. 1-12874), filed with
      the SEC on March 30, 2000, and are hereby incorporated by reference into this
      Annual Report.





The
      rights, preferences and restrictions attaching to each class of our capital
      stock are described in the section entitled "Description of Capital Stock"
      of
      our Rule 424(b) prospectus (File No. 1-12874), filed with the SEC on June 10,
      1998, and hereby incorporated by reference into this Annual Report, provided
      that since the date of such prospectus (1) the par value of our capital
      stock has been changed to $0.001 per share, (2) our authorized capital
      stock has been increased to 725,000,000 shares of common stock and 25,000,000
      shares of Preferred Stock, (3) we have been domesticated in the Republic of
      the Marshall Islands and (4) we have adopted a staggered Board of
      Directors, with directors serving three-year terms.




The
      necessary actions required to change the rights of holders of the stock and
      the
      conditions governing the manner in which annual general meetings and special
      meetings of shareholders are convoked are described in our Bylaws filed as
      exhibit 2.3 to our Annual Report on Form 20-F (File No. 1-12874), filed with
      the
      SEC on March 30, 2000, and hereby incorporated by reference into this Annual
      Report.





We
      have
      in place a rights agreement that would have the effect of delaying, deferring
      or
      preventing a change in control of Teekay. The rights agreement has been filed
      as
      part of our Form 8-A (File No. 1-12874), filed with the SEC on September 11,
      2000, and hereby incorporated by reference into this Annual Report.





There
      are
      no limitations on the rights to own securities, including the rights of
      non-resident or foreign shareholders to hold or exercise voting rights on the
      securities imposed by the laws of the Republic of the Marshall Islands or by
      our
      Articles of Incorporation or Bylaws.





**Material
      Contracts**





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





(a)
            Indenture
                dated June 22, 2001 among Teekay Shipping Corporation and The Bank
                of New
                York Trust Company of Florida (formerly U.S. Trust Company of Texas,
                N.A.)
                for U.S. $250,000,000 8.875% Senior Notes due
                2011.





(b)
            First
                Supplemental Indenture dated as of December 6, 2001, among Teekay
                Shipping
                Corporation and The Bank of New York Trust Company of Florida, N.A.
                for
                U.S. $100,000,000 8.875% Senior Notes due 2011.





(c)
            Agreement,
                dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving
                Loan Facility between Norsk Teekay Holdings Ltd., Den Norske Bank
                ASA and
                various other banks.





(d)
            Agreement,
                dated September 1, 2004 for a U.S. $500,000,000 Credit Facility Agreement
                to be made available to Teekay Nordic Holdings Incorporated by Nordea
                Bank
                Finland PLC, New York Branch.





(e)
            Amendment
                dated September 30, 2004 to Agreement, dated June 26, 2003, for a
                U.S.
                $550,000,000 Secured Reducing Revolving Loan Facility between Norsk
                Teekay
                Holdings Ltd., Den Norske Bank ASA and various other banks.




(f)
            Agreement,
                dated May 26, 2005 for a U.S. $550,000,000 Credit Facility Agreement
                to be
                made available to Avalon Spirit LLC et al by Nordea Bank Finland
                PLC and
                others.


50


(g)
            Agreement,
                dated October 2, 2006 for a U.S. $940,000,000 Secured Reducing Revolving
                Loan Facility between Teekay Offshore Operating L.P., Den Norske
                Bank ASA
                and various other banks.





(h)
            Agreement,
                dated August 23, 2006 for a U.S. $330,000,000 Secured Reducing Revolving
                Loan Facility between Teekay LNG Partners L.P., ING Bank N.V. and
                various
                other banks.





(i)
            Annual
                Executive Bonus Plan.





(j) Vision
      Incentive Plan.





(k)
            2003
                Equity Incentive Plan.





(l)
            Amended
                1995 Stock Option Plan.





(m)
            Rights
                agreement, dated as of September 8, 2000, between Teekay Shipping
                Corporation and The Bank of New York, as Rights
                Agent





**Exchange
      Controls and Other Limitations Affecting Security Holders**





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





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





**Taxation**





Teekay
      Shipping Corporation was incorporated in the Republic of Liberia on February
      9,
      1979 and was domesticated in the Republic of The Marshall Islands on December
      20, 1999. Its principal executive headquarters are located in The
      Bahamas.





***Marshall
      Islands Tax Consequences.*** Because
      Teekay and our subsidiaries do not, and do not expect that we or they will,
      conduct business or operations in the Republic of The Marshall Islands, and
      because all documentation related issuances of shares of our common stock was
      executed outside of the Republic of The Marshall Islands, under current Marshall
      Islands law, no taxes or withholdings will be imposed by the Republic of The
      Marshall Islands on distributions made to holders of shares of our common stock,
      so long as such persons do not reside in, maintain offices in, or engage in
      business in the Republic of The Marshall Islands. Furthermore, no stamp, capital
      gains or other taxes will be imposed by the Republic of The Marshall Islands
      on
      the purchase, ownership or disposition by such persons of shares of our common
      stock.





***Bahamian
      Tax Consequences*** **.** Under
      current Bahamian law, no taxes or withholdings will be imposed by the
      Commonwealth of the Bahamas on distributions made in respect of the shares
      of
      our common stock, and no stamp, capital gains or other taxes will be imposed
      by
      the Commonwealth of
      the
      Bahamas on the ownership or disposition of the shares of our common stock,
      as
      there are no personal income or corporation taxes, capital gains taxes or death
      duties in the Commonwealth of the Bahamas.





**Documents
      on Display**





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





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





We
      are
      exposed to market risk from foreign currency fluctuations and changes in
      interest rates, bunker fuel prices and spot market rates for vessels. We use
      foreign currency forward contracts, interest rate swaps, bunker fuel swap
      contracts and forward freight agreements to manage currency, interest rate,
      bunker fuel price and spot market rate risks but do not use these financial
      instruments for trading or speculative purposes.





**Foreign
      Currency Fluctuation Risk**





Our
      primary economic environment is the international shipping market. This market
      utilizes the U.S. Dollar as its functional currency. Consequently, substantial
      majority of our revenues and most of our operating costs are in U.S. Dollars.
      We
      incur certain voyage expenses, vessel operating expenses, drydocking and
      overhead costs in foreign currencies, the most significant of which are Japanese
      Yen, Singapore Dollar, Canadian Dollar, Australian Dollar, British Pound, Euro
      and Norwegian Kroner. During 2006, approximately 34% of
      vessel
      and voyage costs, overhead and drydock expenditures were denominated in these
      currencies. However, we have some ability to shift the purchase of goods and
      services from one country to another and, thus, from one currency to another,
      on
      relatively short notice.


51


We
      enter
      into forward contracts as a hedge against changes in certain foreign exchange
      rates. As at December 31, 2006, we had the following foreign currency forward
      contracts:





**Expected
                Maturity Date**(contract
                amounts in millions of U.S. Dollars)
            2007
            2008
            2009Norwegian
                Kroner:Contract amount
            $208.3
            $129.2
            $9.6Average contractual exchange rate
            6.30
            6.31
            6.21Euro:Contract amount
            $53.3
            -
            -Average contractual exchange rate
            0.76
            -
            -Canadian
                Dollar:Contract amount
            $20.9
            -
            -Average contractual exchange rate
            1.14
            -
            -Australian
                Dollar:Contract amount
            $4.3
            -
            -Average contractual exchange rate
            1.40
            -
            -British
                Pounds:Contract amount
            $32.3
            $15.3
            $2.3Average contractual exchange rate
            0.54
            0.53
            0.53Singapore
                Dollar:Contract amount
            $7.2
            -
            -Average contractual exchange rate
            1.53
            -
            -





To
      the
      extent the hedge is effective, changes in the fair value of the forward contract
      are either offset against the fair value of assets or liabilities through
      income, or recognized in other comprehensive income until the hedged item is
      recognized in income. The ineffective portion of a forward contract's change
      in
      fair value will be immediately recognized in income.





Although
      the majority of our transactions, assets and liabilities are denominated in
      U.S.
      Dollars, certain of our subsidiaries have foreign currency denominated
      liabilities. There is a risk that currency fluctuations will have a negative
      effect on the value of our cash flows. We have not entered into any forward
      contracts to protect against the translation risk of our foreign currency
      denominated liabilities. As at December 31, 2006, we had Euro-denominated term
      loans of 311.6 million Euros ($411.3 million) included in long-term debt,
      Norwegian Kroner-denominated deferred income taxes of approximately 430.4
      million NOK ($68.8 million) and British Pound-denominated tax lease contingency
      of approximately 13.0 million GBP ($25.5 million) included in other long-term
      liabilities. We have not hedged our Euro-denominated term loans as the revenue
      we receive from certain of our time charters is denominated in Euros and is
      used
      to pay the interest and principal payments on these loans.





**Interest
      Rate Risk**





We
      invest
      our cash and marketable securities in financial instruments with maturities
      of
      less than six months within the parameters of our investment policy and
      guidelines.





We
      use
      interest rate swaps to manage the impact of interest rate changes on earnings
      and cash flows. Changes in the fair value of our interest rate swaps are either
      offset against the fair value of assets or liabilities through income, or
      recognized in other comprehensive income until the hedged item is recognized
      in
      income. The ineffective portion of an interest rate swap change in fair value
      is
      immediately recognized in income. Premiums and receipts, if any, are recognized
      as adjustments to interest expense over the lives of the individual contracts.




The
      table
      below provides information about our financial instruments at December 31,
      2006,
      which are sensitive to changes in interest rates, including our debt and capital
      lease obligations and interest rate swaps. For long-term debt and capital lease
      obligations, the table presents principal cash flows and related
      weighted-average interest rates by expected maturity dates. For interest rate
      swaps, the table presents notional amounts and weighted-average interest rates
      by expected contractual maturity dates.





**Expected
                Maturity Date****2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**
            
            **Total**
            
            **Fair
                Value**
              **Asset
                / (Liability)**
            
            **Rate****(1)****(in
                millions of U.S. dollars, except percentages)****Long-Term
                Debt:**Variable
                Rate ($U.S.)(2)
            
            
            190.5
            
            
            83.3
            
            
            111.2
            
            
            160.7
            
            
            395.2
            
            
            1,276.2
            
            
            2,217.1
            
            
            (2,217.1
            )
            
            6.1
            %Variable Rate (Euro)(3)
                (4)
            
            
            9.7
            
            
            10.4
            
            
            11.1
            
            
            12.0
            
            
            209.6
            
            
            158.5
            
            
            411.3
            
            
            (411.3
            )
            
            4.9
            %Fixed-Rate
                Debt
                ($U.S.)
            
            
            18.1
            
            
            19.4
            
            
            24.4
            
            
            28.1
            
            
            288.2
            
            
            154.9
            
            
            533.1
            
            
            (537.8
            )
            
            7.1
            %Average
                Interest Rate
            
            
            4.8
            %
            
            5.3
            %
            
            6.0
            %
            
            6.1
            %
            
            8.9
            %
            
            4.9
            %
            
            7.1
            %**Capital
                Lease Obligations**(5)
                (6)Fixed-Rate
                ($U.S.)(7)
            
            
            130.7
            
            
            3.7
            
            
            3.8
            
            
            84.0
            
            
            -
            
            
            -
            
            
            222.2
            
            
            (222.2
            )
            
            7.4
            %Average
                Interest Rate(8)
            
            
            8.8
            %
            
            5.4
            %
            
            5.4
            %
            
            5.5
            %
            
            -
            
            
            -
            
            
            7.4
            %**Interest
                Rate Swaps:**Contract
                Amount ($U.S.)(6)
                (9)
            
            
            302.1
            
            
            26.2
            
            
            234.4
            
            
            50.4
            
            
            47.4
            
            
            2,639.0
            
            
            3,299.5
            
            
            8.7
            
            
            5.1
            %Average
                Fixed Pay Rate(2)
            
            
            5.4
            %
            
            5.2
            %
            
            4.4
            %
            
            5.2
            %
            
            5.2
            %
            
            5.1
            %
            
            5.1
            %Contract
                Amount (Euro)(4)
                (10)
            
            
            9.7
            
            
            10.4
            
            
            11.1
            
            
            12.0
            
            
            209.6
            
            
            158.5
            
            
            411.3
            
            
            13.1
            
            
            3.8
            %Average
                Fixed Pay Rate(3)
            
            
            3.8
            %
            
            3.8
            %
            
            3.8
            %
            
            3.8
            %
            
            3.8
            %
            
            3.8
            %
            
            3.8
            %


_________





(1)
            Rate
                refers to the weighted-average effective interest rate for our long-term
                debt and capital lease obligations, including the margin we pay on
                our
                floating-rate debt and the average fixed pay rate for our interest
                rate
                swap agreements. The average interest rate for our capital lease
                obligations is the weighted-average interest rate implicit in our
                lease
                obligations at the inception of the leases. The average fixed pay
                rate for
                our interest rate swaps excludes the margin we pay on our floating-rate
                debt, which as of December 31, 2006 ranged from 0.50% to
                1.30%.




(2)
            Interest
                payments on U.S. Dollar-denominated debt and interest rate swaps
                are based
                on LIBOR.


52


(3)
            Interest
                payments on Euro-denominated debt and interest rate swaps are based
                on
                EURIBOR.





(4)
            Euro-denominated
                amounts have been converted to U.S. Dollars using the prevailing
                exchange
                rate as of December 31, 2006.





(5)
            Excludes
                capital lease obligations (present value of minimum lease payments)
                of
                135.2 million Euros ($178.3 million) on one of our existing LNG carriers
                with a weighted-average fixed interest rate of 5.8%. Under the terms
                of
                this fixed-rate lease obligation, we are required to have on deposit,
                subject to a weighted-average fixed interest rate of 5.0%, an amount
                of
                cash that, together with the interest earned thereon, will fully
                fund the
                amount owing under the capital lease obligation, including a vessel
                purchase obligation. As at December 31, 2006, this amount was 139.0
                million Euros ($183.5 million). Consequently, we are not subject
                to
                interest rate risk from these obligations or
                deposits.





(6)
            During
                January 2006, the three subsidiaries of Teekay Nakilat, each of which
                had
                contracted to have built one of the three RasGas II vessels sold
                their
                shipbuilding contracts and entered into 30-year capital leases for
                the
                vessels, which commenced upon delivery of the respective vessels.
                The
                first of the three RasGas II vessels delivered October 31, 2006 with
                the
                remaining two RasGas II vessels delivering in the first quarter of
                2007.
                Under the terms of the leases and upon vessel delivery, Teekay Nakilat
                is
                required to have on deposit, subject to a variable rate of interest,
                an
                amount of cash that, together with interest earned on the deposit,
                will
                equal the remaining amounts owing under the variable-rate leases.
                The
                deposits, which as at December 31, 2006 totaled $481.9 million, and
                the
                lease obligations, which upon delivery are expected to be approximately
                $180 million per vessel, have been swapped for fixed-rate deposits
                and
                fixed-rate obligations. Consequently, Teekay Nakilat is not subject
                to
                interest rate risk from these obligations and deposits and, therefore,
                the
                lease obligations, cash deposits and related interest rate swaps
                have been
                excluded from the table above. As at December 31, 2006, the contract
                amount, fair value and fixed interest rates of these interest rate
                swaps
                related to Teekay Nakilat’s capital lease obligations and restricted cash
                deposits were $457.9 million and $452.0 million, $20.4 million and
                ($26.1)
                million, and 4.9% and 4.8%, respectively.





(7)
            The
                amount of capital lease obligations represents the present value
                of
                minimum lease payments together with our purchase obligation, as
                applicable.





(8)
            The
                average interest rate is the weighted-average interest rate implicit
                in
                the capital lease obligations at the inception of the leases.





(9)
            The
                average variable receive rate for our interest rate swaps is set
                monthly
                at the 1-month LIBOR or EURIBOR, quarterly at the 3-month LIBOR or
                semi-annually at the 6-month LIBOR.





(10)
            Includes
                interest rate swaps of $506.0 million, $151.0 million, $333.5 million
                and
                $200.0 million that have inception dates of 2007, 2008, 2009, and
                2010,
                respectively.





**Commodity
      Price Risk**





From
      time
      to time we use bunker fuel swap contracts as a hedge to protect against the
      change in the cost of forecasted bunker fuel costs for certain vessels being
      time-chartered-out and for vessels servicing certain contracts of affreightment.
      To the extent the hedge is effective, changes in the fair value
      of
      the forward contract are either offset against the fair value of assets or
      liabilities through income, or recognized in other comprehensive income until
      the hedged item is recognized in income. The ineffective portion of a forward
      contract's change in fair value is immediately recognized in income. As at
      December 31, 2006, the Company was committed to contracts totaling 30,500 metric
      tonnes with a weighted-average price of $294.11 per tonne. The fuel swap
      contracts expire between January and December 2007.





**Spot
      Market Rate Risk**





We
      use
      written forward freight agreements as a hedge to protect against the change
      in
      spot market rates earned by some of our vessels. As at December 31, 2006, we
      were committed to forward freight agreements totaling 0.5 million metric tonnes
      with a notional principal amount of $5.4 million, which expire between January
      and December 2007.





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





Not
      applicable.




**PART
      II**





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





None.





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





None.





**Item
      15. Controls and Procedures**





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





During
      2006 there was no change in our internal control over financial reporting that
      has materially affected, or is reasonably likely to materially affect, our
      internal control over financial reporting.


53


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





**Management’s
      Report on Internal Control over Financial Reporting**





The
      management of Teekay Shipping Corporation is responsible for establishing and
      maintaining adequate internal controls over financial reporting.





The
      Company’s internal controls were designed to provide reasonable assurance as to
      the reliability of its financial reporting and the preparation and presentation
      of the consolidated financial statements for external purposes in accordance
      with accounting principles generally accepted in the United States. The
      Company’s internal controls over financial reporting includes those policies and
      procedures that, 1) pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect the transactions and dispositions of
      the
      assets of the Company; 2) provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of the financial statements in
      accordance with generally accepted accounting principles, and that receipts
      and
      expenditures of the Company are being made in accordance with authorizations
      of
      management and the directors of the Company; and 3) provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use or
      disposition of the company’s assets that could have a material effect on the
      financial statements.





The
      Company conducted an evaluation of the effectiveness of its internal control
      over financial reporting based upon the framework in Internal Control -
      Integrated Framework issued by the Committee of Sponsoring Organizations of the
      Treadway Commission. This evaluation included review of the documentation of
      controls, evaluation of the design effectiveness of controls, testing of the
      operating effectiveness of controls and a conclusion on this evaluation. During
      2006, the Company acquired a majority interest in Petrojarl ASA and its
      subsidiaries and began consolidating its operations. Please read Item 18 -
      Financial Statements: Note 3 - Acquisition of Petrojarl ASA. Management has
      excluded this business from its evaluation of the effectiveness of the Company’s
      internal control over financial reporting as of December 31, 2006.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements even when determined to be effective and can
      only provide reasonable assurance with respect to financial statement
      preparation and presentation. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies and procedures may deteriorate. However, based on the
      evaluation, management believes that the Company maintained effective internal
      control over financial reporting as of December 31, 2006.




The
      Company’s independent auditors, Ernst & Young LLP, a registered public
      accounting firm has audited the accompanying consolidated financial statements,
      the Company’s internal control over financial reporting, and management’s
      assessment that it maintained effective internal control over financial
      reporting. Their attestation report on management’s assessment of the
      effectiveness of the Company’s internal control over financial reporting can be
      found on page F-2 of this Form 20-F.





**Item
      16A. Audit Committee Financial Expert**





The
      Board
      has determined that director and Chair of the Audit Committee, Eileen A.
      Mercier, qualifies as an audit committee financial expert and is independent
      under applicable NYSE and SEC standards.





**Item
      16B. Code of Ethics**





We
      have
      adopted Standards for Business Conduct that include a Code of Ethics for all
      employees and directors. This document is available under “Other Information -
      Corporate Governance” in the Investor Center of our web site ( www.teekay.com ).
      We
      also intend to disclose under “Other Information - Corporate Governance” in the
      Investor Center of our web site any waivers to or amendments of our Standards
      of
      Business Conduct or Code of Ethics for the benefit of our directors and
      executive officers.




**Item
      16C. Principal Accountant Fees and Services**





Our
      principal accountant for 2006 and 2005 was Ernst & Young LLP, Chartered
      Accountants. The following table shows the fees Teekay Shipping Corporation
      and
      our subsidiaries paid or accrued for audit and other services provided by Ernst
      & Young LLP for 2006 and 2005.





**Fees**
            
            **2006**
            
            **2005**Audit
                Fees(1)
            
            $
            2,561,300
            
            $
            1,353,550Audit-Related
                Fees(2)
            
            
            101,500
            
            
            128,781Tax
                Fees(3)
            
            
            226,500
            
            
            242,509All
                Other Fees(4)
            
            
            2,200
            
            
            2,167Total
            
            $
            2,891,500
            
            $
            1,727,007




_________
 
 (1)
              Audit
                  fees represent fees for professional
                  services provided in connection with the audit of our consolidated
                  financial statements and review of our quarterly consolidated financial
                  statements and audit services provided in connection with other
                  statutory
                  or regulatory filings for Teekay or our subsidiaries. Audit fees
                  for 2006
                  and 2005 include $334,400 and $293,225, respectively, of fees paid
                  to
                  Ernst & Young LLP by Teekay LNG Partners L.P. (or *Teekay
                  LNG*),
                  a publicly traded entity controlled by Teekay, that were approved
                  by the
                  Audit Committee of the Board of Directors of Teekay LNG. Audit
                  fees for
                  2006 include approximately $575,400 of fees paid to Ernst & Young by
                  our subsidiary, Teekay Offshore Partners L.P. (*Teekay
                  Offshore)*that
                  were approved by the Audit Committee of the Board of Directors
                  of Teekay
                  Offshore.
 54
 (2)
                Audit-related
                    fees consisted primarily of
                    accounting consultations, employee benefit plan audits, services
                    related
                    to business acquisitions, divestitures and other attestation
                    services.
 (3)
                  For
                      2006 and 2005, respectively, tax fees
                      principally included international tax planning fees of $14,700
                      and
                      $2,100, corporate tax compliance fees of $90,200 and $52,600,
                      and personal
                      and expatriate tax services fees of $121,600 and
                      $157,809.
 (4)
                    All
                        other fees principally include subscription
                        fees to an internet database of accounting information.
 The
                Audit
                Committee has the authority to pre-approve permissible audit-related
                and
                non-audit services not prohibited by law to be performed by our independent
                auditors and
 associated
                fees. Engagements for proposed services either may be separately
                pre-approved by
                the Audit Committee or entered into pursuant to detailed pre-approval
                policies
                and
 procedures
                established by the Audit Committee, as long as the Audit Committee
                is informed
                on a timely basis of any engagement entered into on that basis. The
                Audit
                Committee
 separately
                pre-approved all engagements and fees paid to our principal accountant
                in
                2006.




**Item
      16D. Exemptions from the Listing Standards for Audit Committees**





Not
      applicable.





**Item
      16E. Purchases of Equity Securities by the Issuer and Affiliated
      Purchasers**





In
      November 2004, we announced that our Board of Directors had authorized the
      repurchase of up to 3,000,000 shares of our Common Stock in the open market.
      The
      following table shows the monthly stock repurchase activity related to this
      program:


**Month
                of Repurchase**
            **Total
                Number of**
              **Shares
                Purchased**
            **Average
                Price Paid**
              **per
                Share**
            **Total
                Number of**
              **Shares
                Purchased as**
              **Part
                of Publicly**
              **Announced
                Plans or**
              **Program**
            **Maximum
                Number of**
              **Shares
                that May Yet**
              **Be
                Purchased Under**
              **the
                Plans or Program**December
                2004
            1,400,200
            $43.73
            1,400,200
            1,599,800January
                2005
            1,599,800
            42.27
            1,599,800
            03,000,000
            41.82
            3,000,000





During
      2005 and June 2006, we announced that its Board of Directors had authorized
      the
      repurchase of up to $655 million and $150 million respectively, of shares of
      our
      Common Stock in the open market. The following table shows the monthly stock
      repurchase activity related to these programs:


**Month
                of Repurchase**
            **Total
                Number of**
              **Shares
                Purchased**
            **Average
                Price Paid**
              **per
                Share**
            **Total
                Number of**
              **Shares
                Purchased as**
              **Part
                of Publicly**
              **Announced
                Plans or**
              **Program**
            **Maximum
                Dollar**
              **Value
                of Shares that**
              **May
                Yet Be**
              **Purchased
                Under the**
              **Plans
                or Program**April
                2005
            10,000
            $42.15
            10,000
            $
                654,579,000May
                2005
            1,430,400
            42.54
            1,430,400
            593,729,000June
                2005
            2,163,700
            43.72
            2,163,700
            499,132,000July
                2005
            409,300
            44.79
            409,300
            480,800,000August
                2005
            2,034,000
            44.43
            2,034,000
            390,429,000September
                2005
            850,000
            43.37
            850,000
            353,565,000October
                2005
            1,827,300
            39.18
            1,827,300
            281,971,000November
                2005
            1,116,600
            41.48
            1,116,600
            235,654,000December
                2005
            1,242,200
            41.39
            1,242,200
            184,240,000January
                2006
            1,715,000
            39.59
            1,715,000
            116,343,000February
                2006
            1,875,000
            38.43
            1,875,000
            44,287,000March
                2006
            200,000
            39.33
            200,000
            36,421,000June
                2006
            726,400
            40.03
            726,400
            157,338,000July
                2006
            575,000
            41.94
            575,000
            133,221,000August
                2006
            254,500
            44.44
            254,500
            121,911,000November
                2006
            252,700
            41.72
            252,700
            111,368,000December
                2006
            238,000
            43.83
            238,000
            100,937,00016,920,100
            41.90
            16,920,100




**PART
      III**


**Item
      17. Financial Statements**





Not
      applicable.





**Item
      18. Financial Statements**





The
      following financial statements and schedule, together with the related report
      of
      Ernst & Young LLP, Independent Registered Public Accounting Firm thereon,
      are filed as part of this Annual Report:


55


**Page**Report
                of Independent Registered Public Accounting Firm
            F-1Report
                of Independent Registered Public Accounting Firm on Internal Control
                over
                Financial Reporting
            F-2**Consolidated
                Financial Statements**
              
              Consolidated
                Statements of Income
            F-3Consolidated
                Balance Sheets
            F-4Consolidated
                Statements of Cash Flows
            F-5Consolidated
                Statements of Changes in Stockholders’ Equity
            F-6Notes
                to the Consolidated Financial Statements
            F-7





All
      other
      schedules for which provision is made in the applicable accounting regulations
      of the SEC are not required, are inapplicable or have been disclosed in the
      Notes to the Consolidated Financial Statements and therefore have been
      omitted.




**Item
      19. Exhibits**





The
      following exhibits are filed as part of this Annual Report:





1.1
            Amended
                and Restated Articles of Incorporation of Teekay Shipping Corporation.
                (1)1.2
            Articles
                of Amendment of Articles of Incorporation of Teekay Shipping Corporation.
                (1)1.3
            Amended
                and Restated Bylaws of Teekay Shipping Corporation. (1)2.1
            Registration
                Rights Agreement among Teekay Shipping Corporation, Tradewinds Trust
                Co.
                Ltd., as Trustee for the Cirrus Trust, and Worldwide Trust Services
                Ltd.,
                as Trustee for the JTK Trust. (2)2.2
            Specimen
                of Teekay Shipping Corporation Common Stock Certificate.
                (2)2.3
            Indenture
                dated June 22, 2001 among Teekay Shipping Corporation and The Bank
                of New
                York Trust Company of Florida (formerly U.S. Trust Company of Texas,
                N.A.). for U.S. $250,000,000 8.875% Senior Notes due 2011.
                (3)2.4
            First
                Supplemental Indenture dated as of December 6, 2001, among Teekay
                Shipping
                Corporation and The Bank of New York Trust Company of Florida, N.A.
                for
                U.S. $100,000,000 8.875% Senior Notes due 2011. (4)2.5
            Exchange
                and Registration Rights Agreement dated June 22, 2001 among Teekay
                Shipping Corporation and Goldman, Sachs & Co., Morgan Stanley &
                Co. Incorporated, Salomon Smith Barney Inc., Deutsche Banc Alex.
                Brown
                Inc. and Scotia Capital (USA) Inc. (3)2.6
            Exchange
                and Registration Rights Agreement dated December 6, 2001 between
                Teekay
                Shipping Corporation and Goldman, Sachs & Co. (4)2.7
            Specimen
                of Teekay Shipping Corporation’s 8.875% Senior Notes due 2011.
                (3)4.1
            1995
                Stock Option Plan. (2)4.2
            Amendment
                to 1995 Stock Option Plan. (5)4.3
            Amended
                1995 Stock Option Plan. (6)4.4
            2003
                Equity Incentive Plan. (7)4.5
            Annual
                Executive Bonus Plan. (8)4.6
            Vision
                Incentive Plan. (9)4.7
            Form
                of Indemnification Agreement between Teekay and each of its officers
                and
                directors. (2)4.8
            Rights
                agreement, dated as of September 8, 2000, between Teekay Shipping
                Corporation and The Bank of New York, as Rights Agent.
                (10)4.9
            Agreement,
                dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving
                Loan Facility between Norsk Teekay Holdings Ltd., Den Norske Bank
                ASA and
                various other banks.(11)4.10
            Agreement,
                dated September 1, 2004 for a U.S. $500,000,000 Credit Facility Agreement
                to be made available to Teekay Nordic Holdings Incorporated by Nordea
                Bank
                Finland PLC. (8)4.11
            Amendment
                dated September 30, 2004 to Agreement, dated June 26, 2003, for a
                U.S.
                $550,000,000 Secured Reducing Revolving Loan Facility between Norsk
                Teekay
                Holdings Ltd., Den Norske Bank ASA and various other banks.
                (8)4.12
            Agreement
                dated May 26, 2005 for a U.S. $550,000,000 Credit Facility Agreement
                to be
                made available to Avalon Spirit LLC et al by Nordea Bank Finland
                PLC and
                others. (9)4.13
            Agreement
                dated October 2, 2006, for a U.S. $940,000,000 Secured Reducing Revolving
                Loan Facility between Teekay Offshore Operating L.P., Den Norske
                Bank ASA
                and various other banks. (12)4.14
            Agreement
                dated August 23, 2006, for a U.S. $330,000,000 Secured Reducing Revolving
                Loan Facility between Teekay LNG Partners L.P., ING Bank N.V. and
                various
                other banks. (12)4.15
            Amended
                and Restated Omnibus agreement8.1
            List
                of Significant Subsidiaries.12.1
            Rule
                13a-14(a)/15d-14(a) Certification of Teekay’s Chief Executive
                Officer.12.2
            Rule
                13a-14(a)/15d-14(a) Certification of Teekay’s Chief Financial
                Officer.13.1
            Teekay
                Shipping Corporation Certification of Bjorn Moller, Chief Executive
                Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of 2002.13.2
            Teekay
                Shipping Corporation Certification of Vincent Lok, Chief Financial
                Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of 2002.23.1
            Consent
                of Ernst & Young LLP, as independent registered public accounting
                firm.




(1)
              Previously filed as an exhibit to
                the
                Company’s Annual Report on Form 20-F (File No.1-12874), filed with the SEC
                on March 30, 2000, and hereby incorporated by reference to such Annual
                Report.
  (2)
              Previously filed as an exhibit to
                the
                Company’s Registration Statement on Form F-1 (Registration No. 33-7573-4),
                filed with the SEC on July 14, 1995, and hereby incorporated by reference
                to such Registration Statement.
 (3)
                Previously filed as an exhibit to
                  the
                  Company’s Registration Statement on Form F-4 (Registration No. 333-64928),
                  filed with the SEC on July 11, 2001, and hereby incorporated by
                  reference
                  to such Registration Statement.
 56
 (4)
                  Previously filed as an exhibit
                    to the
                    Company’s Registration Statement on Form F-4 (Registration No. 333-76922),
                    filed with the SEC on January 17, 2002, and hereby incorporated
                    by
                    reference to such Registration Statement.
 (5)
                    Previously filed as an exhibit
                      to the
                      Company’s Form 6-K (File No.1-12874), filed with the SEC on May 2,
                      2000,
                      and hereby incorporated by reference to such
                      Report.
 (6)
                      Previously filed as an exhibit
                        to the
                        Company’s Annual Report on Form 20-F (File No.1-12874), filed with
                        the SEC
                        on April 2, 2001, and hereby incorporated by reference to
                        such Annual
                        Report.
 (7)
                        Previously filed as an exhibit
                          to the
                          Company’s Registration Statement on Form S-8 (File No. 333-119564),
                          filed
                          with the SEC on October 6, 2004, and hereby incorporated
                          by reference to
                          such Registration Statement.
 (8)
                          Previously filed as an
                            exhibit to the
                            Company’s Report on Form 20-F (File No. 1-12874), filed with
                            the SEC on
                            April 7, 2005, and hereby incorporated by reference to
                            such
                            Report.
  (9)
                            Previously filed as
                              an exhibit to the
                              Company’s Report on Form 20-F (File No. 1-12874), filed with
                              the SEC on
                              April 10, 2006, and hereby incorporated by reference
                              to such
                              Report.
 (10)
                              Previously filed as
                                an exhibit to the
                                Company’s Form 8-A (File No.1-12874), filed with the SEC
                                on September 11,
                                2000, and hereby incorporated by reference to such
                                Annual
                                Report.
 (11)
                                Previously filed
                                  as an exhibit to the
                                  Company’s Report on Form 6-K (File No. 1-12874), filed
                                  with the SEC on
                                  August 14, 2003, and hereby incorporated by reference
                                  to such
                                  Report.
 (12)
                                  Previously filed
                                    as an exhibit to the
                                    Company’s Report on Form 6-K (File No. 1-12874), filed
                                    with the SEC on
                                    December 21, 2006, and hereby incorporated by
                                    reference to such
                                    Report.


**SIGNATURE**





The
      registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to sign
      this annual report on its behalf.








TEEKAY
      SHIPPING CORPORATION













By:
      /s/ Vincent Lok


Vincent
      Lok


Senior
      Vice President and Chief Financial Officer


(Principal
      Financial and Accounting Officer)








Dated:
      April 19, 2007




57


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors and Stockholders of


**TEEKAY
      SHIPPING CORPORATION**





We
      have
      audited the accompanying consolidated balance sheets of **Teekay
      Shipping Corporation and subsidiaries** as of
      December 31, 2006 and 2005, and the related consolidated statements of income,
      changes in stockholders’ equity and cash flows for each of the three years in
      the period ended December 31, 2006. 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 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. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Teekay Shipping
      Corporation and subsidiaries at December 31, 2006 and 2005, and the consolidated
      results of their operations and their cash flows for each of the three years
      in
      the period ended December 31, 2006, in conformity with U.S. generally accepted
      accounting principles.




As
      discussed in Note 1 to the consolidated financial statements, on January 1,
      2006, the Company adopted the provisions of Statement of Financial Accounting
      Standards No. 123(R), *Share-Based
      Payment.*




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Teekay Shipping
      Corporation's internal control over financial reporting as of December 31,
      2006,
      based on criteria established in Internal Control-Integrated Framework issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission and our
      report dated March 12, 2007 expressed an unqualified opinion
      thereon.













Vancouver,
      Canada,        /s/
      ERNST
& YOUNG LLP


March
      12,
      2007,


except for
      Note 22(c), as to which the date is
      April 17, 2007  Chartered
      Accountants




F-1


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**


**ON
      INTERNAL CONTROL OVER FINANCIAL REPORTING**








To
      the
      Board of Directors and Stockholders of


**TEEKAY
      SHIPPING CORPORATION**





We
      have
      audited management’s assessment, included in the accompanying “Management’s
      Report on Internal Control over Financial Reporting” in Item 15, that Teekay
      Shipping Corporation maintained effective internal control over financial
      reporting as of December 31, 2006, based on criteria established in Internal
      Control—Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission (the COSO criteria). Teekay Shipping Corporation’s
      management is responsible for maintaining effective internal control over
      financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting. Our responsibility is to express an opinion
      on
      management’s assessment and an opinion on the effectiveness of the company’s
      internal control over financial reporting based on our audit.





We
      conducted our audit 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 effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





As
      indicated in the accompanying Management’s Report on Internal Control over
      Financial Reporting, management’s assessment of and conclusion on the
      effectiveness of internal control over financial reporting did not include
      the
      internal controls of Teekay Petrojarl ASA and its subsidiaries, which are
      included in the 2006 consolidated financial statements of Teekay Shipping
      Corporation and constituted 14% and 3% of total and net assets, respectively,
      as
      of December 31, 2006 and 4% and 2% of revenues and net income, respectively,
      for
      the year then ended. Our audit of internal control over financial reporting
      of
      Teekay Shipping Corporation also did not include an evaluation of the internal
      control over financial reporting of Teekay Petrojarl ASA and its
      subsidiaries.





In
      our
      opinion, management’s assessment that Teekay Shipping Corporation maintained
      effective internal control over financial reporting as of December 31, 2006,
      is
      fairly stated, in all material respects, based on the COSO criteria. Also,
      in
      our opinion, Teekay Shipping Corporation maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2006,
      based on the COSO criteria.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Teekay
      Shipping Corporation as of December 31, 2006 and 2005, and the related
      consolidated statements of income, changes in stockholders’ equity and cash
      flows for each of the three years in the period ended December 31, 2006 of
      Teekay Shipping Corporation and our report dated March 12,
      2007, except for Note 22(c), as to which the date is April
      17, 2007 expressed an unqualified opinion thereon.












Vancouver,
        Canada,        /s/
        ERNST
& YOUNG LLP
 March
        12,
        2007          Chartered
        Accountants




F-2


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**(in
      thousands of U.S. dollars, except share and per share
      amounts)**





**Year
                Ended**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2004**
              **$****REVENUES**
            
            
            2,013,306
            
            
            1,954,618
            
            
            2,219,238**OPERATING
                EXPENSES**Voyage
                expenses
            
            
            522,117
            
            
            419,169
            
            
            432,395Vessel
                operating expenses
            
            
            257,350
            
            
            206,749
            
            
            218,489Time-charter
                hire expense
            
            
            402,522
            
            
            467,990
            
            
            457,180Depreciation
                and amortization
            
            
            223,965
            
            
            205,529
            
            
            237,498General
                and administrative
            
            
            177,915
            
            
            159,707
            
            
            130,742Writedown
                / (gain) on sale of vessels and equipment (*note
                19*)
            
            
            (1,341
            )
            
            (139,184
            )
            
            (79,254
            )Restructuring
                charge (*note
                15*)
            
            
            8,929
            
            
            2,882
            
            
            1,002**Total
                operating expenses**
            
            
            1,591,457
            
            
            1,322,842
            
            
            1,398,052**Income
                from vessel operations**
            
            
            421,849
            
            
            631,776
            
            
            821,186**OTHER
                ITEMS**Interest
                expense
            
            
            (171,643
            )
            
            (132,428
            )
            
            (121,518
            )Interest
                income
            
            
            56,224
            
            
            33,943
            
            
            18,528Equity
                income from joint ventures
            
            
            5,940
            
            
            11,141
            
            
            13,730Gain
                on sale of marketable securities
            
            
            1,422
            
            
            -
            
            
            93,175Foreign
                exchange (loss) gain (*note
                9*)
            
            
            (45,382
            )
            
            59,810
            
            
            (42,704
            )Other
                - net (*note
                15*)
            
            
            (6,166
            )
            
            (33,342
            )
            
            (24,957
            )**Total
                other items**
            
            
            (159,605
            )
            
            (60,876
            )
            
            (63,746
            )**Net
                income**
            
            
            262,244
            
            
            570,900
            
            
            757,440**Per
                common share amounts**•
                Basic earnings (*note
                20*)
            
            
            3.58
            
            
            7.30
            
            
            9.14•
                Diluted earnings (*note
                20*)
            
            
            3.49
            
            
            6.83
            
            
            8.63•
                Cash dividends declared
            
            
            0.8600
            
            
            0.6200
            
            
            0.5125**Weighted
                average number of common shares**(*note
                20*)•
                Basic
            
            
            73,180,193
            
            
            78,201,996
            
            
            82,829,336•
                Diluted
            
            
            75,128,724
            
            
            83,547,686
            
            
            87,729,037





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





F-3


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands of U.S. dollars)**


**As
                at**
              **December
                31,**
              **2006**
              **$**
            
            **As
                at**
              **December
                31,**
              **2005**
              **$****ASSETS****Current**
              Cash
                and cash equivalents*(note
                9)*
            
            
            343,914
            
            
            236,984Restricted
                cash - current*(note
                11)*
            
            
            64,243
            
            
            152,286Accounts
                receivable
            
            
            191,963
            
            
            151,732Vessel
                held for sale (*note
                19a*)
            
            
            20,754
            
            
            -Net
                investment in direct financing leases - current
            
            
            21,926
            
            
            20,240Prepaid
                expenses
            
            
            78,495
            
            
            60,134Other
                assets
            
            
            25,845
            
            
            9,041**Total
                current assets**
            
            
            747,140
            
            
            630,417Restricted
                cash - long term*(note
                11)*
            
            
            615,749
            
            
            158,798**Vessels
                and equipment***(note
                9)*
              At
                cost, less accumulated depreciation of $859,014 (2005 -
                $766,696)
            
            
            4,271,387
            
            
            2,536,002Vessels
                under capital leases, at cost, less accumulated depreciation of
                $42,609
              (2005 - $35,574)*(note
                11)*
            
            
            654,022
            
            
            712,120Advances
                on newbuilding contracts*(note
                17)*
            
            
            382,659
            
            
            473,552**Total
                vessels and equipment**
            
            
            5,308,068
            
            
            3,721,674Net
                investment in direct financing leases
            
            
            86,470
            
            
            100,996Investment
                in joint ventures*(note
                17)*
            
            
            124,295
            
            
            145,448Other
                assets
            
            
            304,477
            
            
            113,590Intangible
                assets - net*(note
                7)*
            
            
            280,559
            
            
            252,280Goodwill*(note
                7)*
            
            
            266,718
            
            
            170,897**Total
                assets**
            
            
            7,733,476
            
            
            5,294,100**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current**
              Accounts
                payable
            
            
            69,593
            
            
            40,908Accrued
                liabilities*(note
                8)*
            
            
            241,495
            
            
            125,878Current
                portion of long-term debt*(note
                9)*
            
            
            218,281
            
            
            159,053Current
                obligation under capital leases*(note
                11)*
            
            
            150,762
            
            
            139,001Current
                portion of in-process revenue contracts*(note
                7)*
            
            
            93,938
            
            
            -**Total
                current liabilities**
            
            
            774,069
            
            
            464,840Long-term
                debt*(note
                9)*
            
            
            2,943,265
            
            
            1,719,690Long-term
                obligation under capital leases*(note
                11)*
            
            
            407,375
            
            
            415,234Derivative
                instruments*(note
                16)*
            
            
            52,139
            
            
            33,509Deferred
                income tax (*note
                1*)
            
            
            72,393
            
            
            67,250Asset
                retirement obligation*(note
                1)*
            
            
            21,215
            
            
            -In-process
                revenue contracts*(note
                7)*
            
            
            317,835
            
            
            -Other
                long-term liabilities
            
            
            162,560
            
            
            74,232**Total
                liabilities**
            
            
            4,750,851
            
            
            2,774,755Commitments
                and contingencies*(notes
                6, 9, 10, 11, 16, 17 and 22)***Minority
                interest**
            
            
            454,403
            
            
            282,803**Stockholders'
                equity**
              Capital
                stock*(note
                13)*
            
            
            588,651
            
            
            471,784Additional
                paid-in capital*(note
                13)*
            
            
            8,061
            
            
            -Retained
                earnings
            
            
            1,943,397
            
            
            1,833,588Accumulated
                other comprehensive loss*(note
                16)*
            
            
            (11,887
            )
            
            (68,830
            )**Total
                stockholders' equity**
            
            
            2,528,222
            
            
            2,236,542**Total
                liabilities and stockholders’ equity**
            
            
            7,733,476
            
            
            5,294,100





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


F-4


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands of U.S. dollars)**





**Year
                Ended**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended December 31,**
              **2005**
              **$**
            
            **Year
                Ended December 31,**
              **2004**
              **$**Cash
                and cash equivalents provided by (used for)
              
              **OPERATING
                ACTIVITIES**
              Net
                income
            
            
            262,244
            
            
            570,900
            
            
            757,440Non-cash
                items:Depreciation and amortization
            
            
            223,965
            
            
            205,529
            
            
            237,498Amortization of in-process revenue contracts
            
            
            (22,404
            )
            
            -
            
            
            -Gain on sale of vessels
            
            
            (9,041
            )
            
            (151,427
            )
            
            (79,254
            )Gain on sale of marketable securities
            
            
            (1,422
            )
            
            -
            
            
            (93,175
            )Loss on writedown of vessels and equipment
            
            
            7,700
            
            
            12,243
            
            
            -Loss on repurchase of bonds
            
            
            375
            
            
            13,255
            
            
            769Equity income (net of dividends received: December 31, 2006 -
              $6,585; December 31, 2005 - $9,227; December 31, 2004 - $12,576)
            
            
            645
            
            
            (1,914
            )
            
            (1,154
            )Income taxes
            
            
            7,869
            
            
            (2,340
            )
            
            35,048Employee stock option compensation
            
            
            9,297
            
            
            -
            
            
            -Loss from settlement of interest rate swaps
            
            
            -
            
            
            7,820
            
            
            -Writeoff of capitalized loan costs
            
            
            2,790
            
            
            7,462
            
            
            -Unrealized foreign exchange (gain) loss and other - net
            
            
            44,458
            
            
            (23,174
            )
            
            16,971Change
                in non-cash working capital items related to operating activities
                (*note
                18*)
            
            
            50,360
            
            
            (8,644
            )
            
            (26,550
            )Expenditures
                for drydocking
            
            
            (31,120
            )
            
            (20,668
            )
            
            (32,889
            )**Net
                operating cash flow**
            
            
            545,716
            
            
            609,042
            
            
            814,704**FINANCING
                ACTIVITIES**
              Proceeds
                from long-term debt
            
            
            2,129,649
            
            
            2,472,316
            
            
            1,631,181Capitalized
                loan costs
            
            
            (19,424
            )
            
            (8,495
            )
            
            (9,960
            )Loan
                from joint venture partner
            
            
            4,280
            
            
            33,500
            
            
            -Scheduled
                repayments of long-term debt
            
            
            (25,051
            )
            
            (61,242
            )
            
            (150,314
            )Prepayments
                of long-term debt
            
            
            (1,275,121
            )
            
            (2,629,624
            )
            
            (1,731,223
            )Repayments
                of capital lease obligations
            
            
            (153,395
            )
            
            (78,919
            )
            
            (66,109
            )(Increase)
                decrease in restricted cash
            
            
            (328,035
            )
            
            81,304
            
            
            8,341Settlement
                of interest rate swaps
            
            
            -
            
            
            (143,295
            )
            
            -Net
                proceeds from sale of Teekay Offshore Partners L.P. units (*note
                4*)
            
            
            156,711
            
            
            -
            
            
            -Net
                proceeds from sale of Teekay LNG Partners L.P. units (*note
                5*)
            
            
            -
            
            
            257,986
            
            
            -Investment
                in subsidiaries from minority owners
            
            
            -
            
            
            25,329
            
            
            -Distribution
                from subsidiaries to minority owners
            
            
            (24,931
            )
            
            (14,093
            )
            
            -Issuance
                of Common Stock upon exercise of stock options
            
            
            15,325
            
            
            20,359
            
            
            51,280Repurchase
                of Common Stock (*note
                13*)
            
            
            (233,305
            )
            
            (538,377
            )
            
            (61,237
            )Cash
                dividends paid
            
            
            (63,065
            )
            
            (49,151
            )
            
            (42,362
            )**Net
                financing cash flow**
            
            
            183,638
            
            
            (632,402
            )
            
            (370,403
            )**INVESTING
                ACTIVITIES**
              Expenditures
                for vessels and equipment
            
            
            (442,470
            )
            
            (555,142
            )
            
            (548,587
            )Proceeds
                from sale of vessels and equipment
            
            
            326,901
            
            
            534,007
            
            
            440,556Proceeds
                from sale of marketable securities
            
            
            8,898
            
            
            -
            
            
            135,357Purchase
                of Petrojarl ASA, net of cash acquired of $71,728*(note
                3)*
            
            
            (464,823
            )
            
            -
            
            
            -Purchase
                of Teekay Shipping Spain S.L., net of cash acquired of $11,191
                (*note
                6*)
            
            
            -
            
            
            -
            
            
            (286,993
            )Investment
                in joint ventures
            
            
            (9,868
            )
            
            (82,399
            )
            
            (4,369
            )Loan
                to joint ventures
            
            
            (61,333
            )
            
            (13,000
            )
            
            -Investment
                in direct financing leases
            
            
            (13,420
            )
            
            (23,708
            )
            
            (53,273
            )Repayment
                of direct financing leases
            
            
            19,323
            
            
            12,440
            
            
            9,381Other
            
            
            14,368
            
            
            (38,891
            )
            
            (1,620
            )**Net
                investing cash flow**
            
            
            (622,424
            )
            
            (166,693
            )
            
            (309,548
            )**Increase
                (decrease) in cash and cash equivalents**
            
            
            106,930
            
            
            (190,053
            )
            
            134,753Cash
                and cash equivalents, beginning of the period
            
            
            236,984
            
            
            427,037
            
            
            292,284**Cash
                and cash equivalents, end of the period**
            
            
            343,914
            
            
            236,984
            
            
            427,037





Non-cash
      investing and financing activities ( *note
      18b* )





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





F-5


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**


**(in
      thousands of U.S. dollars)**





**Thousands**
              **of
                Common Shares**
              **#**
            
            **Common**
              **Stock**
              **$**
            
            **Additional**
              **Paid-in
                Capital**
              **$**
            
            **Retained**
              **Earnings**
              **$**
            
            **Accumulated**
              **Other**
              **Compre-**
              **hensive**
              **Income
                (Loss)**
              **$**
            
            **Compre-hensive**
              **Income**
              **$**
            
            **Total**
              **Stockholders'
                Equity**
              **$****Balance
                as at December 31, 2003**
            
            
            81,222
            
            
            492,653
            
            
            -
            
            
            1,095,650
            
            
            63,524
            
            
            
            
            
            1,651,827Net
                income
            
            
            
            
            
            
            
            
            
            
            
            757,440
            
            
            
            
            
            757,440
            
            
            757,440Other
                comprehensive income:Unrealized gain on marketable securities
            
            
            
            
            
            
            
            
            
            
            39,369
            
            
            39,369
            
            
            39,369Reclassification adjustment for gain on
              marketable securities included in net income
            
            
            
            
            
            
            
            
            
            
            (92,539
            )
            
            (92,539
            )
            
            (92,539
            )Unrealized loss on derivative instruments*(note
                16)*
            
            
            
            
            
            
            
            (94,822
            )
            
            (94,822
            )
            
            (94,822
            )Reclassification adjustment for loss on
              derivative instruments*(note
                16)*
            
            
            
            
            
            
            
            
            
            
            28,336
            
            
            28,336
            
            
            28,336Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            637,784Dividends
                declared
            
            
            
            
            
            
            
            
            
            
            
            (42,366
            )
            
            
            
            
            
            
            
            (42,366
            )Reinvested
                dividends
            
            
            1
            
            
            3
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3100%
                Common Stock dividends
            
            
            
            
            
            41
            
            
            
            
            
            (41
            )
            
            
            
            
            
            
            
            -Exercise
                of stock options
            
            
            3,125
            
            
            51,280
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            51,280Issuance
                of Common Stock*(note
                13)*
            
            
            3
            
            
            67
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            67Repurchase
                of Common Stock*(note
                13)*
            
            
            (1,400
            )
            
            (9,106
            )
            
            
            
            
            (52,131
            )
            
            
            
            
            
            
            
            (61,237
            )**Balance
                as at December 31, 2004**
            
            
            82,951
            
            
            534,938
            
            
            -
            
            
            1,758,552
            
            
            (56,132
            )
            
            
            
            
            2,237,358Net
                income
            
            
            
            
            
            
            
            
            
            
            
            570,900
            
            
            
            
            
            570,900
            
            
            570,900Other
                comprehensive income:Unrealized loss on marketable securities
            
            
            
            
            
            
            
            
            
            
            (1,348
            )
            
            (1,348
            )
            
            (1,348
            )Unrealized loss on derivative instruments*(note
                16)*
            
            
            
            
            
            
            
            (25,370
            )
            
            (25,370
            )
            
            (25,370
            )Reclassification adjustment for loss on
              derivative instruments*(note
                16)*
            
            
            
            
            
            
            
            
            
            
            14,020
            
            
            14,020
            
            
            14,020Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            558,202Dividends
                declared
            
            
            
            
            
            
            
            
            
            
            
            (49,155
            )
            
            
            
            
            
            
            
            (49,155
            )Reinvested
                dividends
            
            
            1
            
            
            4
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4Exercise
                of stock options
            
            
            1,098
            
            
            20,359
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            20,359Issuance
                of Common Stock*(note
                13)*
            
            
            9
            
            
            297
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            297Repurchase
                of Common Stock*(note
                13)*
            
            
            (12,683
            )
            
            (83,814
            )
            
            
            
            
            (454,563
            )
            
            
            
            
            
            
            
            (538,377
            )Gain
                on public offerings of Teekay LNG*(note
                5)*
            
            
            
            
            
            
            
            7,854
            
            
            
            
            
            
            
            
            7,854**Balance
                as at December 31, 2005**
            
            
            71,376
            
            
            471,784
            
            
            -
            
            
            1,833,588
            
            
            (68,830
            )
            
            
            
            
            2,236,542Net
                income
            
            
            
            
            
            
            
            
            
            
            
            262,244
            
            
            
            
            
            262,244
            
            
            262,244Other
                comprehensive income:Unrealized gain on marketable securities
            
            
            
            
            
            
            
            
            
            
            8,370
            
            
            8,370
            
            
            8,370Unrealized gain on derivative instruments*(note
                16)*
            
            
            
            
            
            
            
            45,332
            
            
            45,332
            
            
            45,332Reclassification adjustment for gain onmarketable
                securities
            
            
            
            
            
            
            
            
            
            
            (1,422
            )
            
            (1,422
            )
            
            (1,422
            )Reclassification adjustment for loss on
              derivative instruments*(note
                16)*
            
            
            
            
            
            
            
            
            
            
            4,663
            
            
            4,663
            
            
            4,663Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            319,187Dividends
                declared
            
            
            
            
            
            
            
            
            
            
            
            (63,071
            )
            
            
            
            
            
            
            
            (63,071
            )Reinvested
                dividends
            
            
            1
            
            
            6
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6Exercise
                of stock options
            
            
            745
            
            
            16,561
            
            
            (1,236
            )
            
            
            
            
            
            
            
            
            
            
            15,325Issuance
                of Common Stock*(note
                13)*
            
            
            13
            
            
            429
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            429Repurchase
                of Common Stock*(note
                13)*
            
            
            (5,837
            )
            
            (42,132
            )
            
            
            
            
            (191,173
            )
            
            
            
            
            
            
            
            (233,305
            )Settlement
                of the Premium Equity
              Participating Security Units(*notes
                9 and 13)*
            
            
            6,534
            
            
            142,003
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            142,003Employee
                stock option compensation*(note
                13)*
            
            
            
            
            9,297
            
            
            
            
            
            
            
            
            
            
            
            9,297Gain
                on public offering of Teekay Offshore*(note
                4)*
            
            
            
            
            101,809
            
            
            
            
            
            
            
            
            101,809**Balance
                as at December 31, 2006**
            
            
            72,832
            
            
            588,651
            
            
            8,061
            
            
            1,943,397
            
            
            (11,887
            )
            
            
            
            
            2,528,222





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





F-6


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





**1.**  **Summary
      of Significant Accounting Policies**





**Basis
      of presentation**





The
      consolidated financial statements have been prepared in conformity with U.S.
      generally accepted accounting principles. They include the accounts of Teekay
      Shipping Corporation (or *Teekay* ),
      which
      is incorporated under the laws of The Republic of the Marshall Islands, and
      its
      wholly owned or controlled subsidiaries (collectively, the *Company* ).
      Significant intercompany balances and transactions have been eliminated upon
      consolidation.





The
      preparation of financial statements in conformity with U.S generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying notes.
      Actual results could differ from those estimates.





Certain
      of the comparative figures have been reclassified to conform with the
      presentation adopted in the current period.





**Reporting
      currency**





The
      consolidated financial statements are stated in U.S. Dollars because the Company
      operates in international shipping markets, the Company’s primary economic
      environment, which typically utilize the U.S. Dollar as the functional currency.
      Transactions involving other currencies during the year are converted into
      U.S.
      Dollars using the exchange rates in effect at the time of the transactions.
      At
      the balance sheet date, monetary assets and liabilities that are denominated
      in
      currencies other than the U.S. Dollar are translated to reflect the year-end
      exchange rates. Resulting gains or losses are reflected separately in the
      accompanying consolidated statements of income.





**Operating
      revenues and expenses**





The
      Company recognizes revenues from time charters and bareboat charters daily
      over
      the term of the charter as the applicable vessel operates under the charter.
      The
      Company does not recognize revenue during days that the vessel is off-hire.
      All
      revenues from voyage charters are recognized on a percentage of completion
      method. The Company uses a discharge-to-discharge basis in determining
      percentage of completion for all spot voyages and voyages servicing contracts
      of
      affreightment, whereby it recognizes revenue ratably from when product is
      discharged (unloaded) at the end of one voyage to when it is discharged after
      the next voyage. The Company does not begin recognizing revenue until a charter
      has been agreed to by the customer and the Company, even if the vessel has
      discharged its cargo and is sailing to the anticipated load port on its next
      voyage. Shuttle tanker voyages servicing contracts of affreightment with
      offshore oil fields commence with tendering of notice of readiness at a field,
      within the agreed lifting range, and ends with tendering of notice of readiness
      at a field for the next lifting. Revenues from floating production, storage
      and
      offloading service contracts are recognized as service is performed. The
      consolidated balance sheets reflect the deferred portion of revenues and
      expenses, which will be earned in subsequent periods.





Voyage
      expenses are all expenses unique to a particular voyage, including bunker fuel
      expenses, port fees, cargo loading and unloading expenses, canal tolls, agency
      fees and commissions. Vessel operating expenses include crewing, repairs and
      maintenance, insurance, stores, lube oils and communication expenses. Pursuant
      to Emerging Issues Task Force (EITF) 91-9, voyage expenses and vessel operating
      expenses are recognized when incurred. For periods prior to October 1, 2006,
      the
      Company recognized voyage expenses ratably over the length of each voyage.
      The
      impact of recognizing voyage expenses ratably over the length of each voyage
      was
      not materially different on a quarterly and annual basis from recognizing such
      costs as incurred.





**Cash
      and cash equivalents**





The
      Company classifies all highly-liquid investments with a maturity date of three
      months or less when purchased as cash and cash equivalents.





Cash
      interest paid during the years ended December 31, 2006, 2005 and 2004 totaled
      $181.6 million, $148.9 million and $130.1 million, respectively.





**Marketable
      securities**





The
      Company's investments in marketable securities are classified as
      available-for-sale securities and are carried at fair value. Net unrealized
      gains and losses on available-for-sale securities are reported as a component
      of
      accumulated other comprehensive income (loss).





**Vessels
      and equipment**





All
      pre-delivery costs incurred during the construction of newbuildings, including
      interest, supervision and technical costs, are capitalized. The acquisition
      cost
      and all costs incurred to restore used vessels purchased by the Company to
      the
      standard required to properly service the Company's customers are capitalized.





Depreciation
      is calculated on a straight-line basis over a vessel's estimated useful life,
      less an estimated residual value. Depreciation is calculated using an estimated
      useful life of 25 years for crude oil tankers, 25 to 30 years for floating
      production, storage and offloading (or *FPSO* )
      units
      and 35 years for liquefied natural gas (or *LNG* )
      carriers from the date the vessel is delivered from the shipyard, or a shorter
      period if regulations prevent the Company from operating the vessels for 25
      years or 35 years, respectively. Depreciation of vessels and equipment for
      the
      years ended December 31, 2006, 2005 and 2004 aggregated $186.6 million, $166.5
      million and $189.4 million, respectively. Depreciation and amortization includes
      depreciation on all owned vessels and vessels accounted for as capital
      leases.


F-7


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





Interest
      costs capitalized to vessels and equipment for the years ended December 31,
      2006, 2005 and 2004 aggregated $15.9 million, $16.6 million and $9.9 million,
      respectively.





Gains
      on
      vessels sold and leased back under capital leases are deferred and amortized
      over the remaining estimated useful life of the vessel. Losses on vessels sold
      and leased back under capital leases are recognized immediately when the fair
      value of the vessel at the time of sale-leaseback is less than its book value.
      In such case, the Company would recognize a loss in the amount by which book
      value exceeds fair value.





Generally,
      the Company drydocks each vessel every two and a half to five years. In
      addition, a shipping society classification intermediate survey is performed
      on
      the Company’s LNG carriers between the second and third year of the five-year
      drydocking period. The Company capitalizes a substantial portion of the costs
      incurred during drydocking and for the survey and amortizes those costs on
      a
      straight-line basis from the completion of a drydocking or intermediate survey
      to the estimated completion of the next drydocking. The Company expenses costs
      related to routine repairs and maintenance performed during drydocking that
      do
      not improve or extend the useful lives of the assets and for annual class survey
      costs on the Company’s FPSO units. When significant drydocking expenditures
      occur prior to the expiration of the original amortization period, the remaining
      unamortized balance of the original drydocking cost and any unamortized
      intermediate survey costs are expensed in the month of the subsequent
      drydocking. Amortization of drydocking expenditures for the years ended December
      31, 2006, 2005 and 2004 aggregated $15.4 million, $14.9 million and $23.5
      million, respectively.





The
      Company reviews vessels and equipment for impairment whenever events or changes
      in circumstances indicate the carrying amount of an asset may not be
      recoverable. Recoverability of these assets is measured by comparison of their
      carrying amount to future undiscounted cash flows the assets are expected to
      generate over their remaining useful lives. If vessels and equipment are
      considered to be impaired, the impairment to be recognized equals the amount
      by
      which the carrying value of the assets exceeds their fair market value (see
      Note
      19).





**Direct
      financing leases**





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





**Investment
      in joint ventures**





As
      at
      December 31, 2006, the Company had a 40% to 50% participating interest in eight
      joint venture companies (2005 - nine). Prior to December 1, 2006, each of these
      joint venture companies was accounted for using the equity method, whereby
      the
      investment was carried at the Company's original cost plus its proportionate
      share of undistributed earnings. On December 1, 2006, the operating agreements
      for five 50%-owned joint ventures, each of which owns one shuttle tanker, were
      amended. These amendments resulted in the Company obtaining control of these
      joint ventures and, consequently, the Company has consolidated these entities
      effective December 1, 2006.





**Loan
      costs**





Loan
      costs, including fees, commissions and legal expenses, are presented as other
      assets and are capitalized and amortized on a straight-line basis over the
      term
      of the relevant loan. Amortization of loan costs is included in interest
      expense.





**Derivative
      instruments**





The
      Company utilizes derivative financial instruments to reduce risk from foreign
      currency fluctuations, changes in interest rates, changes in spot market rates
      for vessels and changes in bunker fuel prices, but does not use them for trading
      purposes. Statement of Financial Accounting Standards No. 133 (or *SFAS
      No. 133* )
      “Accounting for Derivative Instruments and Hedging Activities,” which was
      amended in June 2000 by SFAS No. 138 and in May 2003 by SFAS No. 149,
      establishes accounting and reporting standards for derivative instruments and
      hedging activities.




Derivative
      instruments are recorded as other assets or other long-term liabilities,
      measured at fair value. Derivatives that are not hedges or are not designated
      as
      hedges are adjusted to fair value through income. If the derivative is a hedge,
      depending upon the nature of the hedge, changes in the fair value of the
      derivatives are either offset against the fair value of assets, liabilities
      or
      firm commitments through income, or recognized in other comprehensive income
      (loss) until the hedged item is recognized in income. The ineffective portion
      of
      a derivative's change in fair value is immediately recognized in income (see
      Note 16).





**Goodwill
      and intangible assets**





Goodwill
      and indefinite lived intangible assets are not amortized, but reviewed for
      impairment annually, or more frequently if impairment indicators arise.
      Intangible assets with finite lives are amortized over their useful lives.





The
      Company’s intangible assets consist primarily of time charter contracts acquired
      as part of the purchase of Teekay Shipping Spain S.L (or *Teekay
      Spain* ),
      Contracts of affreightment acquired as part of the purchase of Navion AS (or *Navion* )
      and
      customer relationships acquired as part of the purchase of Petrojarl ASA (or *Petrojarl* ).
      The
      value ascribed to the time charter contracts and Contracts of affreightment
      are
      being amortized over the life of the associated contract, with the amount
      amortized each year being weighted based on the projected revenue to be earned
      under the contracts. The value ascribed to the customer relationships is being
      amortized on a straight line basis over the expected term of the customer
      relationship.


F-8


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





**Asset
      retirement obligation**





The
      Company has an asset retirement obligation relating to the sub-sea production
      facility associated with the *Petrojarl
      Banff* FPSO
      unit operating in the North Sea. This obligation generally involves restoration
      of the environment surrounding the facility and removal and disposal of all
      production equipment. This obligation is expected to be settled at the end
      of
      the contract, which is anticipated no later than 2014. The asset retirement
      obligation will be covered in part by contractual payments from FPSO contract
      counterparties.





The
      Company records the fair value of an asset retirement obligation as a liability
      in the period when the obligation arises. When the liability is recorded, the
      Company capitalizes the cost by increasing the carrying amount of the related
      equipment. Each period, the liability is increased for the change in its present
      value, and the capitalized cost is depreciated over the useful life of the
      related asset. Changes in the amount or timing of the estimated asset retirement
      obligation are recorded as an adjustment to the related asset. As at December
      31, 2006, the asset retirement obligation and associated receivable from third
      parties were $21.2 million and $6.8 million, respectively.





**Income
      taxes**





The
      legal
      jurisdictions in which Teekay and the majority of its subsidiaries are
      incorporated do not impose income taxes upon shipping-related activities. Among
      others, the Company's Australian ship-owning subsidiaries and its Norwegian
      subsidiaries are subject to income taxes (see Note 15). Deferred income taxes
      are $72.4 million, $67.3 million and $121.4 million at December 31, 2006, 2005
      and 2004, respectively. The Company accounts for such taxes using the liability
      method pursuant to SFAS No. 109, "Accounting for Income Taxes."





**Issuance
      of shares or units by subsidiaries**





The
      Company accounts for gains or losses from the issuance of shares or units by
      its
      subsidiaries as an adjustment to stockholders’ equity.





**Accounting
      for stock-based compensation**





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123(R) “Share-Based Payment”, using the “modified prospective” method.
      Under this transition method, compensation cost is recognized in the 2006
      financial statements for all share-based payments granted after January 1,
      2006
      and for all awards granted to employees prior to, but not yet vested as of
      January 1, 2006. Accordingly, prior period amounts have not been restated.





As
      a
      result of adopting SFAS 123(R), the Company’s net income for the year ended
      December 31, 2006 is $9.3 million lower than if it had continued to account
      for
      share-based compensation under Accounting Principles Board Opinion No. 25 (or
      APB 25), “Accounting for Stock Issued to Employees.” Basic and diluted earnings
      per share for the year ended December 31, 2006 are $0.13 and $0.12 lower,
      respectively, than if the Company had continued to account for share-based
      compensation under APB 25.





Prior
      to
      January 1, 2006, the Company accounted for stock options under the recognition
      and measurement provision using the intrinsic value method, as permitted by
      SFAS
      No. 123 “Accounting for Stock-Based Compensation.” As the exercise price of the
      Company’s employee stock options equals the market price of underlying stock on
      the date of grant, no compensation expense was recognized under APB 25.





The
      following table illustrates the effect on net income and earnings per share
      if
      the Company had applied the fair value recognition provisions of SFAS 123,
      as
      amended by SFAS No. 123(R), to stock-based employee compensation (see Note
      13).





**Year
                Ended**
              **December
                31,**
              **2005**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2004**
              **$**Net
                income - as reported
            
            
            570,900
            
            
            757,440Less:
                Total stock-based compensation expense
            
            
            8,077
            
            
            8,996Net
                income - pro forma
            
            
            562,823
            
            
            748,444Basic
                earnings per common share:As reported
            
            
            7.30
            
            
            9.14Pro forma
            
            
            7.20
            
            
            9.04Diluted
                earnings per common share:As reported
            
            
            6.83
            
            
            8.63Pro forma
            
            
            6.74
            
            
            8.53





For
      the
      purpose of the above pro forma calculations and the compensation cost recognized
      in the 2006 financial statements, the fair value of each option granted was
      estimated on the date of the grant using the Black-Scholes option-pricing model.
      The following weighted-average assumptions were used in computing the fair
      value
      of the options granted: expected volatility of 31% in 2006 and 35% in 2005
      and
      2004; expected life of five years; dividend yield of 2.0% in 2006 and 1.5%
      in
      2005 and 2004; and risk-free interest rate of 4.8% in 2006, 4.1% in 2005 and
      2.7% in 2004.


F-9


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





**Comprehensive
      income**





The
      Company follows SFAS No. 130, "Reporting Comprehensive Income," which
      establishes standards for reporting and displaying comprehensive income and
      its
      components in the consolidated financial statements.





**Recent
      accounting pronouncements**





In
      July
      2006, the Financial Accounting Standards Board (or *FASB* )
      issued
      Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement No. 109" (or *FIN
      48* ).
      This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in financial statements in accordance with FASB Statement No. 109,
      "Accounting for Income Taxes". FIN 48 will require companies to determine
      whether it is more-likely-than-not that a tax position taken or expected to
      be
      taken in a tax return will be sustained upon examination, including resolution
      of any related appeals or litigation processes, based on the technical merits
      of
      the position. If a tax position meets the more-likely-than-not recognition
      threshold, it is measured to determine the amount of benefit to recognize in
      the
      financial statements based on guidance in the interpretation. FIN 48 is
      effective for fiscal years beginning after December 15, 2006. The Company has
      not determined the effect, if any, that the adoption of FIN 48 will have on
      the
      Company’s consolidated financial position or results of operations.





**2.**  **Segment
      Reporting**





The
      Company is primarily engaged in the international marine transportation of
      crude
      oil, clean petroleum products and LNG through the operation of its tankers
      and
      LNG carriers, and in the offshore processing and storage of crude oil. The
      Company’s revenues are earned in international markets.





Statoil
      ASA, an international oil company, accounted for 15% ($307.9 million) of the
      Company’s consolidated revenues during the year ended December 31, 2006. The
      same customer accounted for 20% ($392.2 million) of the Company’s consolidated
      revenues during 2005 and 17% ($373.7 million) during 2004. No other customer
      accounted for over 10% of the Company’s consolidated revenues during any of
      those years.





The
      Company’s acquisition of Petrojarl in 2006 and changes in the Company’s internal
      organization have resulted in the Company revising its reportable segments
      in
      2006. This has resulted in the Company disaggregating its offshore segment
      from
      its fixed-rate tanker segment and reclassifying the Company’s liquefied
      petroleum gas (or *LPG* )
      carriers from its fixed-rate tanker segment to its liquefied gas segment. The
      Company has restated all segment information for previous years.





The
      Company has four reportable segments: its offshore segment, its fixed-rate
      tanker segment, its liquefied gas segment, and its spot tanker segment. The
      Company’s offshore segment consists of shuttle tankers, FPSO units and floating
      storage and offtake (or *FSO* )
      units.
      The Company’s fixed-rate tanker segment consists of conventional crude oil and
      product tankers subject to long-term, fixed-rate time-charter contracts. The
      Company’s liquefied gas segment consists of LNG carriers and LPG carriers. The
      Company’s spot tanker segment consists of conventional crude oil tankers and
      product carriers operating in the spot market or subject to time charters or
      contracts of affreightment priced on a spot-market basis or that constitute
      short-term fixed-rate contracts. The Company considers contracts that have
      an
      original term of less than three years in duration to be short-term. Segment
      results are evaluated based on income from vessel operations. The accounting
      policies applied to the reportable segments are the same as those used in the
      preparation of the Company’s consolidated financial statements.





The
      following tables present results for these segments for the years ended December
      31, 2006, 2005 and 2004.





Year
                ended December 31, 2006
            
            **Offshore
                Segment**
              **$**
            
            **Fixed-Rate**
              **Tanker**
              **Segment**
              **$**
            
            **Liquefied**
              **Gas**
              **Segment**
              **$**
            
            **Spot**
              **Tanker**
              **Segment**
              **$**
            
            **Total**
              **$**Revenues
                - external
            
            
            667,847
            
            
            181,605
            
            
            104,489
            
            
            1,059,365
            
            
            2,013,306Voyage
                expenses
            
            
            89,642
            
            
            1,999
            
            
            975
            
            
            429,501
            
            
            522,117Vessel
                operating expenses
            
            
            134,866
            
            
            44,083
            
            
            18,912
            
            
            59,489
            
            
            257,350Time-charter
                hire expense
            
            
            170,662
            
            
            16,869
            
            
            -
            
            
            214,991
            
            
            402,522Depreciation
                and amortization
            
            
            105,861
            
            
            32,741
            
            
            33,160
            
            
            52,203
            
            
            223,965General
                and administrative(1)
            
            
            58,048
            
            
            16,000
            
            
            15,685
            
            
            88,182
            
            
            177,915Writedown
                / (gain) loss on sale of vesselsand
                equipment
            
            
            698
            
            
            -
            
            
            -
            
            
            (2,039
            )
            
            (1,341
            )Restructuring
                charge
            
            
            -
            
            
            -
            
            
            -
            
            
            8,929
            
            
            8,929Income
                from vessel operations
            
            
            108,070
            
            
            69,913
            
            
            35,757
            
            
            208,109
            
            
            421,849Revenues
                - intersegment
            
            
            5,088
            
            
            -
            
            
            -
            
            
            -
            
            
            5,088Equity
                income
            
            
            5,958
            
            
            831
            
            
            (226
            )
            
            (623
            )
            
            5,940Investments
                in joint ventures atDecember
                31, 2006
            
            
            20
            
            
            5,132
            
            
            86,119
            
            
            33,024
            
            
            124,295Total
                assets at December 31, 2006
            
            
            3,081,177
            
            
            678,033
            
            
            2,104,525
            
            
            1,116,145
            
            
            6,979,880Expenditures
                for vessels and equipment(2)
            
            
            118,455
            
            
            33,938
            
            
            5,092
            
            
            284,985
            
            
            442,470





F-10


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





Year
                ended December 31, 2005
            
            **Offshore
                Segment**
              **$**
            
            **Fixed-Rate**
              **Tanker**
              **Segment**
              **$**
            
            **Liquefied**
              **Gas**
              **Segment**
              **$**
            
            **Spot**
              **Tanker**
              **Segment**
              **$**
            
            **Total**
              **$**Revenues
                - external
            
            
            559,094
            
            
            170,256
            
            
            102,423
            
            
            1,122,845
            
            
            1,954,618Voyage
                expenses
            
            
            69,137
            
            
            2,919
            
            
            70
            
            
            347,043
            
            
            419,169Vessel
                operating expenses
            
            
            87,059
            
            
            39,731
            
            
            17,434
            
            
            62,525
            
            
            206,749Time-charter
                hire expense
            
            
            168,178
            
            
            26,082
            
            
            -
            
            
            273,730
            
            
            467,990Depreciation
                and amortization
            
            
            89,177
            
            
            29,702
            
            
            31,545
            
            
            55,105
            
            
            205,529General
                and administrative(1)
            
            
            43,779
            
            
            12,720
            
            
            13,743
            
            
            89,465
            
            
            159,707Writedown
                / (gain) loss on sale of vesselsand
                equipment
            
            
            2,820
            
            
            -
            
            
            -
            
            
            (142,004
            )
            
            (139,184
            )Restructuring
                charge
            
            
            955
            
            
            -
            
            
            -
            
            
            1,927
            
            
            2,882Income
                from vessel operations
            
            
            97,989
            
            
            59,102
            
            
            39,631
            
            
            435,054
            
            
            631,776Revenues
                - intersegment
            
            
            4,607
            
            
            -
            
            
            -
            
            
            -
            
            
            4,607Equity
                income
            
            
            4,633
            
            
            1,275
            
            
            -
            
            
            5,233
            
            
            11,141Investments
                in joint ventures atDecember
                31, 2005
            
            
            29,138
            
            
            4,769
            
            
            82,399
            
            
            29,142
            
            
            145,448Total
                assets at December 31, 2005
            
            
            1,355,554
            
            
            674,067
            
            
            1,773,790
            
            
            906,028
            
            
            4,709,439Expenditures
                for vessels and equipment(2)
            
            
            13,106
            
            
            47,547
            
            
            320,361
            
            
            174,128
            
            
            555,142








Year
                ended December 31, 2004
            
            **Offshore
                Segment**
              **$**
            
            **Fixed-Rate**
              **Tanker**
              **Segment**
              **$**
            
            **Liquefied**
              **Gas**
              **Segment**
              **$**
            
            **Spot**
              **Tanker**
              **Segment**
              **$**
            
            **Total**
              **$**Revenues
                - external
            
            
            595,148
            
            
            124,929
            
            
            48,370
            
            
            1,450,791
            
            
            2,219,238Voyage
                expenses
            
            
            71,755
            
            
            5,303
            
            
            221
            
            
            355,116
            
            
            432,395Vessel
                operating expenses
            
            
            82,908
            
            
            32,593
            
            
            9,594
            
            
            93,394
            
            
            218,489Time-charter
                hire expense
            
            
            176,005
            
            
            18,053
            
            
            -
            
            
            263,122
            
            
            457,180Depreciation
                and amortization
            
            
            100,439
            
            
            27,478
            
            
            14,011
            
            
            95,570
            
            
            237,498General
                and administrative(1)
            
            
            44,948
            
            
            10,835
            
            
            4,588
            
            
            70,371
            
            
            130,742Writedown
                / (gain) loss on sale of vesselsand
                equipment
            
            
            (3,725
            )
            
            (3,428
            )
            
            -
            
            
            (72,101
            )
            
            (79,254
            )Restructuring
                charge
            
            
            -
            
            
            -
            
            
            -
            
            
            1,002
            
            
            1,002Income
                from vessel operations
            
            
            122,818
            
            
            34,095
            
            
            19,956
            
            
            644,317
            
            
            821,186Revenues
                - intersegment
            
            
            4,607
            
            
            -
            
            
            -
            
            
            -
            
            
            4,607Equity
                income
            
            
            6,351
            
            
            339
            
            
            -
            
            
            7,040
            
            
            13,730Investments
                in joint ventures atDecember
                31, 2004
            
            
            26,431
            
            
            4,172
            
            
            -
            
            
            29,034
            
            
            59,637Total
                assets at December 31, 2004
            
            
            1,458,867
            
            
            600,684
            
            
            1,538,331
            
            
            1,119,302
            
            
            4,717,184Expenditures
                for vessels and equipment(2)
            
            
            136,780
            
            
            54,305
            
            
            142,930
            
            
            214,572
            
            
            548,587





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


(2)
            Excludes
                vessels purchased as part of the Company’s acquisition of Petrojarl in
                October 2006 and of Teekay Spain in April
                2004.





A
      reconciliation of total segment assets to amounts presented in the consolidated
      balance sheets is as follows:





**December
                31,**
              **2006**
              **$**
            
            **December
                31,**
              **2005**
              **$**Total
                assets of all segments
            
            
            6,979,880
            
            
            4,709,439Cash
                and restricted cash
            
            
            352,607
            
            
            244,510Accounts
                receivable and other assets
            
            
            400,989
            
            
            340,151Consolidated total assets
            
            
            7,733,476
            
            
            5,294,100





**3.**  **Acquisition
      of Petrojarl ASA**





During
      the third quarter of 2006, the Company acquired 43% of the outstanding shares
      of
      Petrojarl ASA, which is listed on the Oslo Stock Exchange. Petrojarl is a
      leading independent operator of FPSO units. As required by Norwegian law, after
      acquiring 40% of Petrojarl's outstanding shares, on September 18, 2006, the
      Company launched a mandatory bid for Petrojarl's remaining shares at a price
      of
      Norwegian Kroner 70 per share. The mandatory bid expired on October 18, 2006.
      Shares acquired from the mandatory bid and other shares acquired on the open
      market during the fourth quarter of 2006 increased the Company’s ownership
      interest in Petrojarl to 64.5% by December 31, 2006. On December 1, 2006,
      Petrojarl was renamed Teekay Petrojarl ASA. The total purchase price of $536.8
      million was paid in cash and was financed through a combination of bank
      financing and cash balances.





F-11


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





Petrojarl,
      based in Trondheim, Norway, has a fleet of four owned FPSO units operating
      under
      long-term service contracts in the North Sea. To service these contracts,
      Petrojarl also charters two shuttle tankers and one FSO unit. The combination
      of
      Petrojarl’s offshore engineering expertise and reputation as a quality operator
      of FPSO units, and Teekay’s global marine operations and extensive customer
      network, positions the Company to competitively pursue new FPSO projects. This
      has contributed to the recognition of goodwill.





The
      acquisition of Petrojarl has been accounted for using the purchase method of
      accounting, based upon estimates of fair value. Certain of these estimates
      of
      fair value are preliminary and are subject to further adjustment. Petrojarl’s
      operating results are reflected in these financial statements commencing October
      1, 2006, the designated effective date of acquisition. The Company’s interest in
      Petrojarl for the third quarter of 2006 has been included in equity income.





The
      following table summarizes the preliminary fair values of the assets acquired
      and liabilities assumed by the Company at October 1, 2006.


**At
                October 1, 2006**
              **$****ASSETS**Cash,
                cash equivalents and short-term restricted cash
            
            
            73,238Other
                current assets
            
            
            48,760Vessels
                and equipment
            
            
            1,249,253Other
                assets - long-term
            
            
            21,486Intangible
                assets subject to amortization: Customer relationships (weighted-average
                useful life of 15.3 years)
            
            
            49,870Goodwill
                (offshore segment)
            
            
            95,465**Total
                assets acquired**
            
            
            1,538,072**LIABILITIES**Current
                liabilities
            
            
            60,125Long-term
                debt
            
            
            325,000Asset
                retirement obligation
            
            
            20,831In-process
                revenue contracts
            
            
            434,177Other
                long-term liabilities
            
            
            56,822**Total
                liabilities assumed**
            
            
            896,955**Minority
                interest**
            
            
            104,337**Net
                assets acquired (cash consideration)**
            
            
            536,780





The
      following table shows comparative summarized consolidated pro forma financial
      information for the Company for the years ended December 31, 2006 and 2005,
      giving effect to the acquisition of 64.5% of the outstanding shares in Petrojarl
      as if it had taken place on January 1 of each of the periods
      presented:


**Pro
                Forma**
            
            **Pro
                Forma****Year
                Ended**
            
            **Year
                Ended****December
                31, 2006**
            
            **December
                31, 2005****(unaudited)**
            
            **(unaudited)**$
            
            $Revenues
            
            
            2,284,067
            
            
            2,324,911Net
                income
            
            
            270,356
            
            
            573,300Earnings
                per share-
                Basic
            
            
            3.69
            
            
            7.33-
                Diluted
            
            
            3.60
            
            
            6.86





**4.**  **Public
      Offering of Teekay Offshore Partners L.P.**





On
      December 19, 2006, the Company’s subsidiary Teekay Offshore Partners L.P. (or *Teekay
      Offshore* ),
      completed its initial public offering (or *IPO* )
      of 8.1
      million common units at a price of $21.00 per unit. As a result, the Company
      recorded a $101.8 million increase to stockholders’ equity which represents the
      Company’s gain from the issuance of units in the IPO.





The
      proceeds received from the public offering and the use of those proceeds are
      summarized as follows :


**Proceeds
                received:**
            
            **IPO**
              **$**Sale of 8,050,000 common units at $21.00 per unit
            
            
            169,050**Use
                of proceeds from sale of common units:**Underwriting and structuring fees.
            
            
            11,088Professional fees and other offering expenses to third parties
            
            
            2,700Repayment of note payable to Teekay Shipping Corporation.
            
            
            155,262169,050


F-12


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





Teekay
      Offshore is a Marshall Islands limited partnership formed by the Company as
      part
      of its strategy to expand its operations in the offshore oil marine
      transportation, processing and storage sectors. Immediately after the IPO,
      Teekay Offshore owned 26% of Teekay Offshore Operating L.P. (or *OPCO* ),
      including its 2% general partner interest. OPCO owns and operates a fleet of
      36
      shuttle tankers (including 12 chartered-in vessels), four FSO vessels, and
      nine
      conventional Aframax tankers. All of OPCO’s vessels operate under long-term,
      fixed-rate contracts. Teekay directly owns the remaining 74% of OPCO and 59.75%
      of Teekay Offshore, including its 2% general partner interest. As a result,
      the
      Company effectively owns 89.5% of OPCO. Teekay Offshore also has rights to
      participate in certain FPSO opportunities involving Petrojarl.





In
      connection with the public offering in May 2005 of Teekay LNG Partners L.P.
      (or *Teekay
      LNG* ),
      Teekay
      entered into an omnibus agreement with Teekay LNG, Teekay LNG’s general partner
      and others governing, among other things, when the Teekay and Teekay LNG may
      compete with each other and certain rights of first offer on LNG carriers and
      Suezmax tankers. In December 2006, the omnibus agreement was amended in
      connection with the IPO to govern, among other things, when Teekay, Teekay
      LNG
      and Teekay Offshore may compete with each other and certain rights of first
      offer on LNG carriers, oil tankers, shuttle tankers, FSO units and FPSO
      units.





**5.**  **Public
      Offerings of Teekay LNG Partners L.P.**





On
      May
      10, 2005, the Company’s subsidiary Teekay LNG completed its initial public
      offering (or the *Offering* )
      of 6.9
      million common units at a price of $22.00 per unit. During November 2005, Teekay
      LNG issued an additional 4.6 million common units at a price of $27.40 per
      unit
      (or the *Follow-on
      Offering* ).
      As a
      result of these transactions, the Company recorded a $7.9 million increase
      to
      stockholders’ equity which represents the Company’s gain from the issuance of
      units for the Offering and Follow-on Offering.





The
      proceeds received from the public offerings and the use of those proceeds are
      summarized as follows:





**Proceeds
                received:**
            
            **Offering**
              **$**
            
            **Follow-On
                Offering**
              **$**
            
            **Total**
              **$**Sale of 6,900,000 common units at $22.00 per unit
            
            
            151,800
            
            
            -
            
            
            151,800Sale of 4,600,000 common units at $27.40 per unit
            
            
            -
            
            
            126,040
            
            
            126,040151,800
            
            
            126,040
            
            
            277,840**Use
                of proceeds from sale of common units:**Underwriting and structuring fees.
            
            
            10,473
            
            
            5,042
            
            
            15,515Professional fees and other offering expenses to third parties
            
            
            5,616
            
            
            959
            
            
            6,575Repayment of loans from Teekay Shipping Corporation
            
            
            129,400
            
            
            -
            
            
            129,400Purchase of three Suezmax tankers from Teekay ShippingCorporation.
            
            
            -
            
            
            120,039
            
            
            120,039Working capital
            
            
            6,311
            
            
            -
            
            
            6,311151,800
            
            
            126,040
            
            
            277,840





Teekay
      LNG is a Marshall Islands limited partnership formed by the Company as part
      of
      its strategy to expand its operations in the LNG shipping sector. Teekay LNG
      provides LNG and crude oil marine transportation service under long-term,
      fixed-rate contracts with major energy and utility companies through its fleet
      of LNG carriers and Suezmax class crude oil tankers.





Concurrently
      with Teekay LNG’s Follow-On Offering, the Company sold to Teekay LNG three
      double-hulled Suezmax tankers and related long-term, fixed-rate time charters
      for an aggregate price of $180 million. Teekay LNG financed the acquisition
      with
      the net proceeds of the public offering, together with borrowings under one
      of
      its revolving credit facilities and cash balances.




**6.**  **Acquisition
      of Teekay Shipping Spain S.L.**





On
      April
      30, 2004, the Company acquired all of the outstanding shares of Naviera F.
      Tapias S.A. and its subsidiaries and renamed it Teekay Shipping Spain, S.L..
      Teekay Spain engages in the marine transportation of crude oil and LNG. The
      Company acquired Teekay Spain for $298.2 million in cash, plus the assumption
      of
      debt and remaining newbuilding commitments. The recognition of goodwill was
      supported by managements’ belief that the acquisition of the Teekay Spain
      business would provide the Company with a strategic platform from which to
      expand its presence in the LNG shipping sector and immediate access to reputable
      LNG operations. The Company anticipated this will benefit it when bidding on
      future LNG projects. In the transaction, Teekay also entered into an agreement
      with an entity controlled by the former controlling shareholder of Teekay Spain
      to establish a 50/50 joint venture that will pursue new business in the oil
      and
      gas shipping sectors that relate only to the Spanish market or are led by
      Spanish entities or entities controlled by a Spanish company. Teekay Spain’s
      results of operations have been consolidated with the Company’s results
      commencing May 1, 2004.





As
      at
      December 31, 2006, Teekay Spain’s LNG fleet consisted of four LNG vessels.
      Teekay Spain’s vessels are contracted under long-term, fixed-rate time charters
      to major Spanish energy companies. As at December 31, 2006, Teekay Spain’s
      conventional crude oil tanker fleet consisted of five Suezmax tankers. All
      five
      Suezmax tankers are contracted under long-term, fixed-rate time charters with
      a
      major Spanish oil company.




F-13


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





The
      following table summarizes the fair value of the assets acquired and liabilities
      assumed by the Company at April 30, 2004, the date of the Teekay Spain
      acquisition.




**At
                April 30, 2004**
              **$****ASSETS**Cash,
                cash equivalents and short-term restricted cash
            
            
            85,092Other
                current assets
            
            
            7,415Vessels
                and equipment
            
            
            821,939Restricted
                cash - long term
            
            
            311,664Other
                assets - long-term
            
            
            15,355Intangible
                assets subject to amortization: Time-charter contracts (weighted-average
                useful life of 19.2 years)
            
            
            183,052Goodwill
                ($3.6 million allocated to fixed-rate tanker segment and $35.7 million
                allocated to liquefied gas segment)
            
            
            39,279**Total
                assets acquired**
            
            
            1,463,796**LIABILITIES**Current
                liabilities
            
            
            98,428Long-term
                debt
            
            
            668,733Obligations
                under capital leases
            
            
            311,011Other
                long-term liabilities
            
            
            87,439**Total
                liabilities assumed**
            
            
            1,165,611**Net
                assets acquired (cash consideration)**
            
            
            298,185





The
      following table shows comparative summarized consolidated pro forma financial
      information for the Company for the year ended December 31, 2004, giving effect
      to the acquisition of 100% of the outstanding shares in Teekay Spain as if
      it
      had taken place on January 1, 2004:




**Pro
                Forma****Year
                Ended****December
                31, 2004****(unaudited)****$**Revenues
            
            
            2,259,956Net
                income(1)
            
            
            769,240Earnings
                per share-
                Basic
            
            
            9.29-
                Diluted
            
            
            8.77





(1)
      The
      results of Teekay Spain for the four months ended April 30, 2004 included a
      foreign exchange gain of $18.0 million. Substantially all of the foreign
      exchange gain was unrealized.






**7.**
              **Goodwill,
                  Intangible Assets and In-Process Revenue
                  Contracts**




***Goodwill***





The
      changes in the carrying amount of goodwill for the year ended December 31,
      2006
      for the Company’s reporting segments are as follows:





**Offshore
                Segment**
              **$**
            
            **Fixed-Rate
                Tanker Segment**
              **$**
            
            **Liquefied**
              **Gas**
              **Segment**
              **$**
            
            **Spot
                Tanker Segment**
              **$**
            
            **Other**
              **$**
            
            **Total**
              **$**Balance
                as of December 31, 2005
            
            
            130,548
            
            
            3,648
            
            
            35,631
            
            
            -
            
            
            1,070
            
            
            170,897Goodwill
                acquired
            
            
            95,821
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            95,821Goodwill
                impairment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                as of December 31, 2006
            
            
            226,369
            
            
            3,648
            
            
            35,631
            
            
            -
            
            
            1,070
            
            
            266,718















***Intangible
      Assets***





As
      at
      December 31, 2006, the Company’s intangible assets consisted of:





**Weighted-Average
                Amortization Period**
              **(years)**
            
            **Gross
                Carrying**
              **Amount**
              **$**
            
            **Accumulated**
              **Amortization**
              **$**
            
            **Net
                Carrying**
              **Amount**
              **$**Contracts
                of affreightment
            
            
            10.2
            
            
            124,250
            
            
            (57,825
            )
            
            66,425Time-charter
                contracts
            
            
            19.2
            
            
            182,552
            
            
            (22,488
            )
            
            160,064Customer
                relationships
            
            
            15.3
            
            
            49,870
            
            
            (835
            )
            
            49,035Intellectual
                property
            
            
            7.0
            
            
            9,588
            
            
            (4,553
            )
            
            5,03515.3
            
            
            366,260
            
            
            (85,071
            )
            
            280,559








F-14


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





As
      at
      December 31, 2005, the Company’s intangible assets consisted
      of:


**Weighted-Average
                Amortization eriod**
              **(years)**
            
            **Gross
                Carrying Amount**
              **$**
            
            **Accumulated
                Amortization**
              **$**
            
            **Net
                Carrying Amount**
              **$**Contracts
                of affreightment
            
            
            10.2
            
            
            124,250
            
            
            (45,748
            )
            
            78,502Time-charter
                contracts
            
            
            19.2
            
            
            182,552
            
            
            (13,358
            )
            
            169,194Intellectual
                property
            
            
            7.0
            
            
            7,701
            
            
            (3,117
            )
            
            4,58415.4
            
            
            314,503
            
            
            (62,223
            )
            
            252,280





Aggregate
      amortization expense of intangible assets for the year ended December 31, 2006
      was $23.5 million ($25.2 million - 2005, $25.7 million - 2004). Amortization
      of
      intangible assets for the five fiscal years subsequent to 2006 is expected
      to be
      $25.1 million (2007), $24.1 million (2008), $23.1 million (2009), $20.9 million
      (2010), and $19.5 million (2011).





***In-Process
      Revenue Contracts***





As
      part
      of the Petrojarl acquisition, the Company assumed certain FPSO service contracts
      which have terms that were less favourable than the terms that could be realized
      in a current market transaction. The Company has estimated the fair value of
      these FPSO contracts and recognized a liability of approximately $434.2 million
      on the Petrojarl acquisition date. The Company is amortizing this liability
      over
      the remaining firm period of the contracts, on a weighted basis, based on the
      projected revenue to be earned under the contracts. The valuation of these
      FPSO
      contracts is preliminary and thus is subject to further adjustment.





Amortization
      of in-process revenue contracts for the year ended December 31, 2006 was $22.4
      million. Assuming that finalization of the contract valuations does not result
      in an adjustment to the value, amortization for the five fiscal years subsequent
      to December 31, 2006 is expected to be $93.9 million (2007), $93.7 million
      (2008), $72.7 million (2009), $71.0 million (2010) and $37.1 million
      (2011).




8.  **Accrued
      Liabilities**


**December
                31, 2006**
              **$**
            
            **December
                31, 2005**
              **$**Voyage
                and vessel expenses
            
            
            120,329
            
            
            62,018Interest
            
            
            37,135
            
            
            13,703Payroll
                and benefits
            
            
            84,031
            
            
            50,157241,495
            
            
            125,878


**9.**  **Long-Term
      Debt**


**December
                31, 2006**
              **$**
            
            **December
                31, 2005**
              **$**Revolving
                Credit Facilities
            
            
            1,448,000
            
            
            769,000Premium
                Equity Participating Security Units (7.25%) due May 18, 2006
            
            
            -
            
            
            143,750Senior
                Notes (8.875%) due July 15, 2011
            
            
            262,324
            
            
            265,559USD-denominated
                Term Loans due through 2021
            
            
            1,004,759
            
            
            289,582Euro-denominated
                Term Loans due through 2023
            
            
            411,319
            
            
            377,352USD-denominated
                Unsecured Demand Loan
            
            
            35,144
            
            
            33,5003,161,546
            
            
            1,878,743Less
                current portion
            
            
            218,281
            
            
            159,0532,943,265
            
            
            1,719,690





As
      of
      December 31, 2006, the Company had eight long-term revolving credit facilities
      (or the *Revolvers* )
      available, which, as at such date, provided for borrowings of up to $3,015.3
      million, of which $1,567.3 million was undrawn. Interest payments are based
      on
      LIBOR plus margins depending on the financial leverage of the Company; at
      December 31, 2006, the margins ranged between 0.50% and 1.00% (2005 - 0.60%
      and
      1.20%) and the three-month LIBOR was 5.36%. The total amount available under
      the
      Revolvers reduces by $224.2 million (2007), $232.9 million (2008), $239.8
      million (2009), $247.2 million (2010), $432.5 million (2011) and $1,638.7
      million (thereafter). All of the Revolvers are collateralized by first-priority
      mortgages granted on 55 of the Company’s vessels, together with other related
      collateral, and include a guarantee from Teekay or its subsidiaries for all
      outstanding amounts.





On
      February 16, 2006, Teekay issued 6,534,300 shares of its Common Stock upon
      settlement of the purchase contracts associated with its 7.25% Premium Equity
      Participating Security Units (or *Equity
      Units* ).
      The
      Equity Units were issued in February 2003 and each consisted of a share purchase
      contract and a $25 principal amount subordinated note due May 18, 2006. On
      February 16, 2006, Teekay repurchased the notes for net proceeds equal to 100%
      of their aggregate principal amount. The net proceeds were applied to satisfy
      the obligations of the holders of the Equity Units to purchase Teekay Common
      Stock under the related purchase contracts. The notes were subsequently
      cancelled and are no longer outstanding. The Equity Units are no longer
      outstanding.





The
      8.875% Senior Notes due July 15, 2011 (or the *8.875%
      Notes* )
      rank
      equally in right of payment with all of Teekay’s existing and future senior
      unsecured debt and senior to Teekay’s existing and future subordinated debt.
      During the year ended December 31, 2006, the Company repurchased a principal
      amount of $3.0 million of the 8.875% Notes (see also Note 15). The 8.875% Notes
      are not guaranteed by any of Teekay’s subsidiaries and effectively rank behind
      all existing and future secured debt of Teekay and other liabilities, secured
      and unsecured, of its subsidiaries.


F-15


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





The
      Company has eleven U.S. Dollar-denominated term loans outstanding, which, as
      at
      December 31, 2006, totaled $1,004.8 million. Certain of the term loans with
      a
      total outstanding principal balance of $235.5 million, as at December 31, 2006,
      bear interest at a weighted-average fixed rate of 4.89%. Interest payments
      on
      the remaining term loans are based on LIBOR plus a margin. At December 31,
      2006,
      the margins ranged between 0.45% and 1.05% and the three-month LIBOR was 5.36%.
      The term loans reduce in quarterly or semi-annual payments commencing three
      or
      six months after delivery of each newbuilding vessel, and nine of them also
      have
      balloon repayments due at maturity. The term loans are collateralized by
      first-preferred mortgages on 24 of the Company’s vessels, together with certain
      other collateral. In addition, all but $111.7 million of the outstanding term
      loans are guaranteed by Teekay or its subsidiaries.





The
      Company has two Euro-denominated term loans outstanding, which, as at December
      31, 2006 totaled 311.6 million Euros ($411.3 million). The Company used the
      loans in financing capital leases for two vessels. The Company repays the loans
      with funds generated by two Euro-denominated long-term time-charter contracts.
      Interest payments on the loans are based on EURIBOR plus a margin. At December
      31, 2006, the margins ranged between 1.10% and 1.30% and the one-month EURIBOR
      was 3.63%. The Euro-denominated term loans reduce in monthly payments with
      varying maturities through 2023 and are collateralized by first-preferred
      mortgages on two of the Company’s vessels, together with certain other
      collateral, and are guaranteed by a subsidiary of Teekay.





Both
      Euro-denominated term loans are revalued at the end of each period using the
      then prevailing Euro/U.S. Dollar exchange rate. Due substantially to this
      revaluation, the Company recognized a foreign exchange loss of $45.4 million
      during the year ended December 31, 2006 ($59.8 million gain - 2005, $42.7
      million loss - 2004).





The
      weighted-average effective interest rate on the Company’s long-term debt as at
      December 31, 2006 was 6.1% (December 31, 2005 - 5.5%). This rate does not
      reflect the effect of our interest rate swaps (see Note 16).





Certain
      loan agreements require that a minimum level of free cash be maintained. As
      at
      December 31, 2006, this amount was $100.0 million. Certain of the loan
      agreements also require that the Company maintain a minimum level of free
      liquidity and undrawn revolving credit lines with at least six months to
      maturity. As at December 31, 2006, this amount was $173.4 million.





The
      aggregate annual long-term debt principal repayments required to be made
      subsequent to December 31, 2006 are $218.3 million (2007), $113.1 million
      (2008), $146.7 million (2009), $200.8 million (2010), $893.0 million (2011)
      and
      $1,589.6 million (thereafter).





The
      Company has one U.S. Dollar-denominated demand loan outstanding owing to a
      joint
      venture partner, which, as at December 31, 2006, totaled $35.1 million,
      including accrued interest. Interest payments on this loan are based on a fixed
      interest rate of 4.84%, commencing February 2008. The loan is repayable on
      demand no earlier than February 27, 2027.





**10.**
            **Operating
                Leases**





**Charters-out**





Time
      charters and bareboat charters of the Company’s vessels to third parties are
      accounted for as operating leases. As at December 31, 2006, minimum scheduled
      future revenues to be received by the Company on time charters and bareboat
      charters then in place were approximately $6,955.4 million, comprised of $608.3
      million (2007), $543.1 million (2008), $500.9 million (2009), $478.8 million
      (2010), $461.3 million (2011) and $4,363.0 million (thereafter).





The
      minimum scheduled future revenues should not be construed to reflect total
      charter hire revenues for any of the years.





**Charters-in**





As
      at
      December 31, 2006, minimum commitments owing by the Company under vessel
      operating leases by which the Company charters-in vessels were approximately
      $1,065.4 million, comprised of $368.9 million (2007), $240.5 million (2008)
      $136.9 million (2009), $105.4 million (2010), $73.8 million (2011) and $139.9
      million (thereafter).





**11.**
            **Capital
                Leases and Restricted Cash**





***Capital
      Leases***





*Suezmax
      Tankers.* As
      at
      December 31, 2006, the Company was party to capital leases on five Suezmax
      tankers. Under the terms of the lease arrangements, which include the Company’s
      contractual right to full operation of the vessels pursuant to bareboat
      charters, the Company is required to purchase these vessels after the end of
      their respective lease terms for a fixed price. At the inception of the leases,
      the weighted-average annual interest rate implicit in these capital leases
      was
      7.4%. These capital leases are variable-rate capital leases; however, any change
      in the Company’s lease payments resulting from changes in interest rates is
      offset by a corresponding change in the charter hire payments the Company
      receives under the vessels’ time charter contracts. As at December 31, 2006, the
      remaining commitments under these capital leases, including the purchase
      obligations, approximated $250.3 million, including imputed interest of $28.1
      million, repayable as follows:




F-16


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





**Year**
            
            **Commitment**2007
            
            $145.1
                million2008
            
            8.6
                million2009
            
            8.5
                million2010
            
            88.1
                million





*Teekay
      Nakilat LNG Carriers* *.*  During
      January 2006, the three subsidiaries of the Company, each of which had
      contracted to have built one LNG carrier, sold their shipbuilding contracts
      to
      SeaSpirit Leasing Limited (or *SeaSpirit* )
      for
      aggregate proceeds of $313.0 million, which approximated the accumulated
      construction costs incurred to that date. The proceeds from the sale were used
      to partially fund restricted cash deposits. As
      at
      December 31, 2006, the Company was a party to 30-year
      capital lease arrangements for the RasGas II vessels, to commence upon the
      delivery of the respective vessels, one of which delivered on October 31, 2006
      and the other two of which delivered in the first quarter of 2007. All amounts
      below relating to the RasGas II vessel capital leases include the joint venture
      partner’s 30% share.





Under
      the
      terms of the RasGas II capital lease arrangements, the lessor claims tax
      depreciation on the capital expenditures it incurred to acquire these vessels.
      As is typical in these leasing arrangements, tax and change of law risks are
      assumed by the lessee. The rentals payable under the lease arrangements are
      predicated on the basis of certain tax and financial assumptions at the
      commencement of the leases. If an assumption proves to be incorrect, the lessor
      is entitled to increase the rentals so as to maintain its agreed after-tax
      margin. However, the terms of the lease arrangements enable the Company to
      terminate the lease arrangements on a voluntary basis at any time. In the event
      of a termination of the lease arrangements, the Company would be obliged to
      pay
      termination sums to the lessor sufficient to repay the lessor’s investment in
      the vessels and to compensate it for the tax-effect of the terminations,
      including recapture of any tax depreciation.





At
      the
      inception of these leases, the weighted-average interest rate implicit in these
      leases was 5.2%. As at December 31, 2006, the commitments under these capital
      leases approximated $1,123.2 million, including imputed interest of
      $651.4 million, repayable as follows:





**Year**
            
            **Commitment**2007
            
            $22.9
                million2008
            
            24.0
                million2009
            
            24.0
                million2010
            
            24.0
                million2011
            
            24.0
                millionThereafter
            
            1,004.3
                million





*Spanish-Flagged
      LNG Carriers* *.*  As
      at
      December 31, 2006, the Company was a party to a capital lease on one LNG
      carrier, which is structured as a “Spanish tax lease”. Under the terms of the
      Spanish tax lease, the Company will purchase the vessel at the end of its lease
      term in 2011. The purchase obligation has been fully funded with restricted
      cash
      deposits described below. As at December 31, 2006 and 2005, the weighted-average
      interest rate implicit in the Spanish tax lease was 5.8%. As at December 31,
      2006, the commitments under this capital lease, including the purchase
      obligation, approximated 165.0 million Euros ($217.8 million), including imputed
      interest of 29.9 million Euros ($39.5 million), repayable as
      follows:





**Year**
            
            **Commitment**2007
            
            23.3
                million Euros ($30.7 million)2008
            
            24.4
                million Euros ($32.2 million)2009
            
            25.6
                million Euros ($33.8 million)2010
            
            26.9
                million Euros ($35.5 million)2011
            
            64.8
                million Euros ($85.6 million)





*FPSO
      Units* *.*  As
      at
      December 31, 2006, Petrojarl was a party, as a lessee, to capital leases on
      its
      FPSO unit *Petrojarl
      Foinaven* and the
      topside production equipment for its FPSO unit *Petrojarl
      Banff* .
      However, Petrojarl has legally defeased its future charter obligations for
      the
      assets by making up-front, lump sum payments to unrelated banks (or *Payment
      Banks* ),
      which
      then assumed Petrojarl’s liability for making the periodic payments due under
      the long-term charters (or *Defeased
      Rental Payments* )
      and
      termination payments under the leases.





The
      Defeased Rental Payments for the *Petrojarl
      Foinaven* are
      based on assumed Sterling LIBOR of 9% per annum (or the *Assumed
      Interest*  *Rate* ).
      If
      actual interest rates are greater than the Assumed Interest Rate, Petrojarl
      receives rental rebates; if actual interest rates are less than the Assumed
      Interest Rates, Petrojarl is required to pay rentals in excess of the Defeased
      Rental Payments. Because interest rates currently are below the Assumed Interest
      Rate, the Company has recorded a liability equal to the fair value of the future
      additional required rental payments, which will be amortized into earnings
      using
      the effective interest rate method. As at December 31, 2006, the unamortized
      liability was $19.0 million.





As
      is
      typical for these types of leasing arrangements, Petrojarl has indemnified
      the
      lessors for the tax consequence resulting from changes in tax laws or
      interpretation of such laws or adverse rulings by authorities and for variations
      in actual interest rates from those assumed in the leases. The United Kingdom’s
      Inland Revenue has challenged the accelerated rate at which tax depreciation
      is
      deductible by the lessor for the *Petrojarl
      Foinaven* .
      The
      Company believes that GBP 19.5 million (or approximately $36.5 million)
      represents a worst case scenario for this liability for this indemnification,
      and that GBP 13 million (or $25.5 million) is the most likely outcome, which
      it
      has accrued as of December 31, 2006.




F-17


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





***Restricted
      Cash***





Under
      the
      terms of the tax leases for the four LNG carriers, the Company is required
      to
      have on deposit with financial institutions an amount of cash that, together
      with interest earned on the deposit, will equal the remaining amounts owing
      under the leases, including the obligations to purchase the LNG carriers at
      the
      end of the lease periods, where applicable. During vessel construction however,
      the amount of restricted cash approximates the accumulated vessel construction
      costs. These cash deposits are restricted to being used for capital lease
      payments and have been fully funded with term loans a loan from the Company’s
      joint venture partners (see Note 9). The interest rates earned on the deposits
      approximate the interest rate implicit in the leases.





As
      at
      December 31, 2006, the amount on deposit for the RasGas II vessels was $481.9
      million. The Company has placed an additional $79.6 million on deposit during
      the first two months of 2007. The Company used existing long-term financing
      arrangements to fund these remaining restricted cash deposits. As at December
      31, 2006, the weighted-average interest rate earned on the deposits was 5.4%.





As
      at
      December 31, 2006 and 2005, the amount on deposit for the Spanish-Flagged LNG
      Carrier was 139.0 million Euros ($183.5 million) and 249.0 million
      Euros ($295.0 million), respectively. As at December 31, 2006 and 2005, the
      weighted-average interest rates earned on these deposits were 5.0% and
      5.2%, respectively.





The
      Company also maintains restricted cash deposits relating to certain term loans
      and other obligations. As at December 31, 2006 and 2005, these deposits totaled
      $14.5 million and $16.1 million, respectively.





**12.**
            **Fair
                Value of Financial
                Instruments**





**Long-term
      debt** - The
      fair values of the Company’s fixed-rate long-term debt are either based on
      quoted market prices or estimated using discounted cash flow analyses, based
      on
      rates currently available for debt with similar terms and remaining
      maturities.





**Derivative
      instruments** - The
      fair value of the Company’s derivative instruments is the estimated amount that
      the Company would receive or pay to terminate the agreements at the reporting
      date, taking into account current interest rates, foreign exchange rates, bunker
      fuel prices, spot market rates for vessels, and the current credit worthiness
      of
      the swap counterparties.





The
      estimated fair value of the Company’s financial instruments is as
      follows:


**December
                31, 2006**
            
            **December
                31, 2005****Carrying**
              **Amount**
              **$**
            
            
            **Fair**
              **Value**
              **$**
            
            
            **Carrying**
              **Amount**
              **$**
            
            
            **Fair**
              **Value**
              **$**Cash
                and cash equivalents, marketable securities,and
                restricted cash
            
            
            1,057,023
            
            
            1,057,023
            
            
            581,163
            
            
            581,163Long-term
                debt
            
            
            (3,161,546
            )
            
            (3,166,344
            )
            
            (1,878,743
            )
            
            (1,911,938
            )Derivative
                instruments (note 16)Interest rate swap agreements
            
            
            16,144
            
            
            16,144
            
            
            (33,509
            )
            
            (33,509
            )Interest rate swaptions
            
            
            (1,252
            )
            
            (1,252
            )
            
            -
            
            
            -Foreign currency contracts
            
            
            8,065
            
            
            8,065
            
            
            (1,241
            )
            
            (1,241
            )Bunker fuel swap contracts
            
            
            (840
            )
            
            (840
            )
            
            -
            
            
            -Freight forward agreements
            
            
            268
            
            
            268
            
            
            (163
            )
            
            (163
            )




The
      Company transacts its derivative instruments through investment-grade rated
      financial institutions and requires no collateral from these
      institutions.





**13.**  **Capital
      Stock**





The
      authorized capital stock of Teekay at December 31, 2006 was 25,000,000 shares
      of
      Preferred Stock, with a par value of $1 per share, and 725,000,000 shares of
      Common Stock, with a par value of $0.001 per share. During February 2006, the
      Company issued 6.5 million shares of its Common Stock upon settlement of the
      purchase contracts associated with its Equity Units (see Note 9), issued 0.7
      million shares upon exercise of stock options, and repurchased 5.8 million
      shares for a total cost of $233.3 million. As at December 31, 2006, Teekay
      had
      72,831,923 shares of Common Stock and no shares of Preferred Stock issued and
      outstanding. On May 17, 2004, Teekay effected a two-for-one stock split relating
      to its Common Stock. All earnings per share and share capital amounts disclosed
      in these consolidated financial statements give effect to this stock split
      retroactively.





During
      2005 and June 2006, Teekay announced that its Board of Directors had authorized
      the repurchase of up to $655 million and $150 million, respectively, of shares
      of its Common Stock in the open market. As at December 31, 2006, Teekay had
      repurchased 16,920,100 shares of Common Stock subsequent to such authorizations
      at an average price of $41.61 per share, for a total cost of $704.1 million.
      The
      total remaining share repurchase authorization at December 31, 2006 was
      approximately $100.9 million.




F-18
 **TEEKAY
        SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





As
      at
      December 31, 2006, the Company had reserved pursuant to its 1995 Stock Option
      Plan and 2003 Equity Incentive Plan (collectively referred to as the *Plans* )
      7,872,661 shares of Common Stock for issuance upon exercise of options or equity
      awards granted or to be granted. During the years ended December 31, 2006,
      2005
      and 2004, the Company granted options under the Plans to acquire up to
      1,045,200, 620,700, and 833,840 shares of Common Stock, respectively, to certain
      eligible officers, employees and directors of the Company. The options under
      the
      Plans have a 10-year term and vest equally over three years from the grant
      date.





A
      summary
      of the Company’s stock option activity and related information for the years
      ended December 31, 2006, 2005 and 2004, is as follows:


**December
                31, 2006**
            
            **December
                31, 2005**
            
            **December
                31, 2004****Options**
              **(000’s)**
              **#**
            
            **Weighted-Average**
              **Exercise**
              **Price**
              **$**
            
            **Options**
              **(000’s)**
              **#**
            
            **Weighted-Average**
              **Exercise**
              **Price**
              **$**
            
            **Options**
              **(000’s)**
              **#**
            
            **Weighted-Average**
              **Exercise**
              **Price**
              **$**Outstanding-beginning
                of year
            
            
            4,160
            
            
            24.81
            
            
            4,721
            
            
            20.47
            
            
            7,254
            
            
            17.18Granted
            
            
            1,045
            
            
            38.94
            
            
            621
            
            
            46.69
            
            
            834
            
            
            33.67Exercised
            
            
            (745
            )
            
            20.55
            
            
            (1,098
            )
            
            18.54
            
            
            (3,125
            )
            
            16.41Forfeited
            
            
            (55
            )
            
            33.34
            
            
            (84
            )
            
            24.44
            
            
            (242
            )
            
            19.39Outstanding-end
                of year
            
            
            4,405
            
            
            28.78
            
            
            4,160
            
            
            24.81
            
            
            4,721
            
            
            20.47Exercisable
                - end of year
            
            
            2,751
            
            
            22.02
            
            
            2,386
            
            
            18.55
            
            
            1,980
            
            
            15.82Weighted-average
                fair value of options granted during
              the year (per option)
            
            
            
            
            
            11.30
            
            
            
            
            
            15.49
            
            
            
            
            
            9.60





As
      at
      December 31, 2006, the intrinsic value of the outstanding stock options and
      exercisable stock options was $67.3 million and $60.1 million, respectively.





A
      summary
      of the Company’s nonvested stock option activity and related information for the
      years ended December 31, 2006, 2005 and 2004 is as follows :


**December
                31, 2006**
            
            **December
                31, 2005**
            
            **December
                31, 2004****Options**
              **(000’s)**
              **#**
            
            **Weighted-Average**
              **Grant
                Date**
              **Fair
                Value**
              **$**
            
            **Options**
              **(000’s)**
              **#**
            
            **Weighted-Average**
              **Grant
                Date**
              **Fair
                Value**
              **$**
            
            **Options**
              **(000’s)**
              **#**
            
            **Weighted-Average**
              **Grant
                Date**
              **Fair
                Value**
              **$**Nonvested-beginning
                of year
            
            
            1,774
            
            
            9.75
            
            
            2,741
            
            
            6.00
            
            
            3,926
            
            
            4.57Granted
            
            
            1,045
            
            
            11.30
            
            
            621
            
            
            15.49
            
            
            834
            
            
            9.60Vested
            
            
            (1,131
            )
            
            7.75
            
            
            (1,523
            )
            
            5.43
            
            
            (1,802
            )
            
            4.70Forfeited
            
            
            (34
            )
            
            12.10
            
            
            (65
            )
            
            6.78
            
            
            (217
            )
            
            4.59Nonvested-end
                of year
            
            
            1,654
            
            
            12.05
            
            
            1,774
            
            
            9.75
            
            
            2,741
            
            
            6.00





As
      of
      December 31, 2006, there was $11.9 million of total unrecognized compensation
      cost related to nonvested stock options granted under the Plans. Recognition
      of
      this compensation is expected to be $7.1 million (2007), $4.1 million (2008)
      and
      $0.7 million (2009).





Further
      details regarding the Company’s outstanding and exercisable stock options at
      December 31, 2006 are as follows:


**Outstanding
                Options**
            
            **Exercisable
                Options****Range
                of Exercise Prices**
            
            **Options**
              **(000’s)**
              **#**
            
            **Weighted-
                Average**
              **Remaining
                Life**
              **(years)**
            
            **Weighted-**
              **Average
                Exercise Price**
              **$**
            
            **Options**
              **(000’s)**
              **#**
            
            **Weighted-**
              **Average
                Exercise Price**
              **$**$
                8.44 - $ 9.99
            
            
            282
            
            
            2.6
            
            
            8.46
            
            
            282
            
            
            8.46$10.00
                - $14.99
            
            
            279
            
            
            2.7
            
            
            12.25
            
            
            279
            
            
            12.25$15.00
                - $19.99
            
            
            1,232
            
            
            5.8
            
            
            19.54
            
            
            1,232
            
            
            19.54$20.00
                - $24.99
            
            
            324
            
            
            4.3
            
            
            20.57
            
            
            324
            
            
            20.57$30.00
                - $34.99
            
            
            662
            
            
            7.2
            
            
            33.64
            
            
            417
            
            
            33.64$35.00
                - $39.99
            
            
            1,033
            
            
            9.2
            
            
            38.94
            
            
            14
            
            
            38.94$40.00
                - $44.99
            
            
            3
            
            
            8.4
            
            
            42.33
            
            
            1
            
            
            42.33$45.00
                - $47.13
            
            
            590
            
            
            8.2
            
            
            46.80
            
            
            202
            
            
            46.804,405
            
            
            6.6
            
            
            28.78
            
            
            2,751
            
            
            22.02


F-19


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





As
      at
      December 31, 2006, the Company had 387,046 remaining restricted stock units
      outstanding that were awarded in March 2005 as incentive-based compensation.
      Each restricted stock unit is equal in value to one share of the Company’s
      Common Stock and reinvested dividends from the date of the grant to the vesting
      of the restricted stock unit. Based on the December 31, 2006 share price of
      $43.62 per share, these restricted stock units had a notional value of $16.9
      million and will vest in equal amounts on March 31, 2007 and November 30, 2007.
      Upon vesting, 74,967 of the restricted stock units will be paid to the grantees
      in the form of cash, and 312,079 of the restricted stock units will be paid
      to
      the grantees in the form of cash or shares of Teekay’s Common Stock, at the
      election of the grantee. Shares of Teekay's Common Stock issued as payment
      of
      the restricted stock units will be purchased in the open market by the Company.
      On March 31, 2006, 211,267 restricted stock units with a market value of $8.3
      million vested and that amount was paid to grantees in cash. During the year
      ended December 31, 2006, the Company recorded an expense of $8.9 million (2005
      -
      $12.8 million), related to the vested and unvested restricted stock units,
      which
      is primarily included in general and administrative expenses.





During
      2006, the Company granted 20,090 (2005 - 13,640 and 2004 - 14,260) shares of
      restricted stock awards with a fair value of $0.8 million, based on the quoted
      market price, to certain of the Company’s directors. The stock will be released
      from a forfeiture provision equally over three years from the date of the award.





**14.**  **Related
      Party Transactions**




As
      at
      December 31, 2006, Resolute Investments, Inc. (or *Resolute* )
      owned
      44.8% of the Company’s outstanding Common Stock. Two of the Company’s directors,
      Thomas Kuo-Yuen Hsu and Axel Karlshoej, are among the Managing Directors of
      The
      Kattegat Trust Company Limited, which is the trustee of the trust that owns
      all
      of Resolute’s outstanding equity.





Payments
      made by the Company to Resolute or companies related through common ownership
      in
      respect of legal and administration fees and shared office costs for the years
      ended December 31, 2006, 2005 and 2004 were $0.5 million in each of the years.





**15.**  **Restructuring
      Charge and Other Loss**




**Year
                Ended**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2004**
              **$**Minority
                interest expense
            
            
            (441
            )
            
            (16,628
            )
            
            (2,268
            )Loss
                on bond repurchase
            
            
            (375
            )
            
            (13,255
            )
            
            (769
            )Loss
                from settlement of interest rate swaps
            
            
            -
            
            
            (7,820
            )
            
            -Writeoff
                of capitalized loan costs
            
            
            (2,790
            )
            
            (7,462
            )
            
            -Income
                tax (expense) recovery
            
            
            (7,869
            )
            
            2,340
            
            
            (35,048
            )Loss
                on expiry of options to construct LNG carriers
            
            
            (6,102
            )
            
            -
            
            
            -Volatile
                organic compound emission plant lease income
            
            
            11,445
            
            
            10,484
            
            
            8,448Miscellaneous
                (expense) income
            
            
            (34
            )
            
            (1,001
            )
            
            4,680Other
                - net
            
            
            (6,166
            )
            
            (33,342
            )
            
            (24,957
            )





During
      the year ended December 31, 2006, the Company incurred $8.9 million of
      restructuring costs to complete the relocation of certain operational functions
      that commenced in 2005. During the year ended December 31, 2005, the Company
      incurred $2.9 million of restructuring costs primarily relating to the
      relocation of certain operational functions and the closure of the Company’s
      office in Sandefjord, Norway. During the year ended December 31, 2004, the
      Company incurred $1.0 million of restructuring and severance costs associated
      with the closure of the Company’s office in Oslo, Norway. The Company does not
      expect to incur any significant additional restructuring costs in 2007
      associated with the relocation of operational functions.





**16.**  **Derivative
      Instruments and Hedging Activities**





The
      Company uses derivatives only for hedging purposes. The following summarizes
      the
      Company's risk strategies with respect to market risk from foreign currency
      fluctuations, changes in interest rates, spot market rates for vessels and
      bunker fuel prices.





The
      Company hedges portions of its forecasted expenditures denominated in foreign
      currencies with foreign exchange forward contracts. As at December 31, 2006,
      the
      Company was committed to foreign exchange contracts for the forward purchase
      of
      approximately Norwegian Kroner 2,187.9 million, Canadian Dollars 23.9 million,
      Euros 40.5 million, Australian Dollars 6.0 million, British Pounds 26.7 million
      and Singapore Dollars 11.0 million for U.S. Dollars at an average rate of
      Norwegian Kroner 6.30 per U.S. Dollar, Canadian Dollars 1.14 per U.S. Dollar,
      Euro 0.76 per U.S. Dollar, Australian Dollars 1.40 per U.S. Dollar, British
      Pound 0.53 per U.S. Dollar and Singapore Dollars 1.53 per US Dollar,
      respectively. The foreign exchange forward contracts mature as follows: $326.3
      million in 2007; $144.5 million in 2008; and $11.9 million in 2009. In addition,
      certain of the Company’s forward contracts will obligate the Company to enter
      into forward purchase contracts for approximately Norwegian Kroner 90.0 million
      at a rate of 6.34 Norwegian Kroner per U.S. Dollar at the election of the
      counterparty during 2008.




F-20


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





As
      at
      December 31, 2006, the Company was committed to the following interest rate
      swap
      agreements related to its LIBOR-based debt, restricted cash deposits and
      EURIBOR-based debt, whereby certain of the Company's floating-rate debt and
      restricted cash deposits were swapped with fixed-rate obligations or fixed-rate
      deposits:


**Interest**
              **Rate**
              **Index**
            
            **Principal**
              **Amount**
              **$**
            
            **Fair
                Value / Carrying**
              **Amount
                of Liability**
              **$**
            
            **Weighted-Average
                Remaining**
              **Term**
              **(years)**
            
            **Fixed**
              **Interest**
              **Rate**
              **(%)**(1)**LIBOR-Based
                Debt:**U.S. Dollar-denominated interest rate swaps(2)
            
            
            LIBOR
            
            
            457,864
            
            
            20,437
            
            
            30.1
            
            
            4.9U.S. Dollar-denominated interest rate swaps
            
            
            LIBOR
            
            
            2,109,000
            
            
            18,406
            
            
            9.6
            
            
            5.0U.S. Dollar-denominated interest rate swaps(3)
            
            
            LIBOR
            
            
            1,190,536
            
            
            (9,705
            )
            
            11.7
            
            
            5.2**LIBOR-Based
                Restricted Cash Deposit:**U.S. Dollar-denominated interest rate swaps(2)
            
            
            LIBOR
            
            
            452,036
            
            
            (26,059
            )
            
            30.1
            
            
            4.8**EURIBOR-Based
                Debt:**Euro-denominated interest rate swaps(4)
            
            
            EURIBOR
            
            
            411,318
            
            
            13,064
            
            
            17.5
            
            
            3.8





_____________________________________________________________________________




(1)
            Excludes
                the margins the Company pays on its variable-rate debt, which at
                of
                December 31, 2006 ranged from 0.5% to
                1.3%





(2)
            Principal
                amount reduces quarterly upon delivery of each LNG
                newbuilding.





(3)
            Inception
                dates of swaps are 2007 ($506.0 million), 2008 ($151.0 million),
                2009
                ($333.5 million) and 2010 ($200.0
                million).





(4)
            Principal
                amount reduces monthly to 70.1 million Euros ($92.5 million) by the
                maturity dates of the swap
                agreements.





During
      May 2006, the Company sold two swaptions for $2.4 million which will be
      amortized into earnings over the term of the swaptions. These options, if
      exercised, will obligate the Company to enter into interest rate swap agreements
      whereby certain of the Company’s floating-rate debt will be swapped with
      fixed-rate obligations. The terms of these swaptions are as
      follows:


**Interest**
              **Rate**
              **Index**
            
            
            **Principal**
              **Amount**(1)
              **$**
            
            
            **Start**
              **Date**
            
            
            **Remaining
                Term**
              **(years**)****
            
            
            **Fixed
                Interest Rate**
              **(**%)****LIBOR
            
            
            150,000
            
            
            August
                31, 2009
            
            
            12.0
            
            
            4.3LIBOR
            
            
            125,000
            
            
            May
                15, 2007
            
            
            12.0
            
            
            4.0




(1)
            Principal
                amount reduces $5.0 million semi-annually ($150.0 million) and $2.6
                million quarterly ($125.0 million).





The
      Company hedges certain of its revenues through the use of forward freight
      agreements. Forward freight agreements involve contracts to provide a fixed
      number of theoretical voyages at fixed-rates, thus hedging a portion of the
      Company’s exposure to the spot charter market. As at December 31, 2006, the
      Company was committed to forward freight agreements totaling 0.5 million metric
      tonnes with a notional principal amount of $5.4 million. The forward freight
      agreements expire between January and December 2007.





The
      Company hedges a portion of its bunker fuel expenditures with bunker fuel swap
      contracts. As at December 31, 2006, the Company was committed to contracts
      totaling 30,500 metric tonnes with a weighted-average price of $294.11 per
      tonne. The bunker fuel swap contracts expire between January and December
      2007.





The
      Company is exposed to credit loss in the event of non-performance by the
      counterparties to the foreign exchange forward contracts, interest rate swap
      agreements, forward freight agreements and bunker fuel swap contracts; however,
      the Company does not anticipate non-performance by any of the
      counterparties.





During
      the year ended December 31, 2006, the Company recognized a net gain of $0.2
      million (2005 net loss - $1.4 million) relating to the ineffective portion
      of
      its interest rate swap agreements and foreign currency forward contracts. The
      ineffective portion of these derivative instruments is presented as interest
      expense and other income (loss), respectively.





As
      at
      December 31, 2006, the Company estimated, based on then current foreign exchange
      rates, interest rates and spot market rates for vessels, that it would
      reclassify approximately $6.9 million of net gain on derivative instruments
      from
      accumulated other comprehensive loss to earnings during the next 12 months
      due
      to actual voyage, vessel operating, drydocking and general and administrative
      expenditures and the payment of interest expense associated with the
      floating-rate debt.





As
      at
      December 31, 2006 and 2005, the Company’s accumulated other comprehensive loss
      consisted of the following components:


**December
                31, 2006**
              **$**
            
            **December
                31, 2005**
              **$**Unrealized
                loss on derivative instruments
            
            
            (17,487
            )
            
            (67,482
            )Unrealized
                gain (loss) on marketable securities
            
            
            5,600
            
            
            (1,348
            )(11,887
            )
            
            (68,830
            )


F-21


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





**17.
      Commitments and Contingencies**





**a)
      Vessels Under Construction**





As
      at
      December 31, 2006, the Company was committed to the construction of two Aframax
      tankers, ten Suezmax tankers, three product tankers and three LPG carriers
      scheduled for delivery between January 2007 and August 2009, at a total cost
      of
      approximately $1.0 billion, excluding capitalized interest. As at December
      31,
      2006, payments made towards these commitments totaled $259.6 million, excluding
      $17.2 million of capitalized interest and other miscellaneous construction
      costs. Long-term financing arrangements existed for $681.1 million of the unpaid
      cost of these vessels. The Company intends to finance the remaining amount
      of
      $99.1 million through incremental debt or surplus cash balances, or a
      combination thereof. As at December 31, 2006, the remaining payments required
      to
      be made under these newbuilding contracts were $146.2 million in 2007, $378.6
      million in 2008 and $255.4 million in 2009.





As
      at
      December 31, 2006, the Company was committed to the construction of two LNG
      carriers scheduled for delivery in November 2008 and January 2009. The Company
      has entered into these transactions with a joint venture partner who has taken
      a
      30% interest in the vessels and related long-term, fixed-rate time charter
      contracts. All amounts below include the joint venture partner’s 30% share. The
      total cost of these LNG carriers is approximately $376.9 million, excluding
      capitalized interest. As at December 31, 2006, payments made towards these
      commitments totaled $82.3 million, excluding $8.6 million of capitalized
      interest and other miscellaneous construction costs and long-term financing
      arrangements existed for the remaining $294.6 million unpaid cost of these
      LNG
      carriers. As at December 31, 2006, the remaining payments required to be made
      under these contracts were $183.4 million in 2007, $75.1 million in 2008 and
      $36.1 million in 2009. Upon delivery, these two LNG carriers will be subject
      to
      20-year, fixed-rate time charters to The Tangguh Production Sharing Contractors,
      a consortium led by BP Berau, a subsidiary of BP plc. Pursuant to existing
      agreements, on November 1, 2006, Teekay LNG agreed to acquire the Company’s
      ownership interest in these two vessels and related charter contracts upon
      delivery of the first LNG carrier.





**b)
      Vessel Purchases and Conversions**




In
      February 2006, the Company announced that it had been awarded 13-year fixed-rate
      contracts to charter two Suezmax shuttle tankers and one Aframax shuttle tanker
      to Fronape International Company, a subsidiary of Petrobras Transporte S.A.,
      the
      shipping arm of Petroleo Brasileiro S.A. (or *Petrobras* ).
      In
      connection with these contracts, the Company has exercised the purchase option
      on a 2000-built Aframax tanker that previously traded as part of the Company’s
      spot rate chartered-in fleet and has acquired a 2006-built Suezmax tanker,
      both
      of which will be converted to shuttle tankers during the first half of 2007.
      The
      purchase price for these two vessels, including conversion costs, is
      approximately $176.3 million. As of December 31, 2006, the Company had paid
      $50.1 million of such amount, and long-term financing arrangements existed
      for
      $70.0 million of the unpaid cost of these vessels. The Company intends to
      finance the remaining unpaid amount of $56.2 million through incremental debt
      or
      surplus cash balances, or a combination thereof. Pursuant to existing
      agreements, the Company is obligated to offer these two vessels to Teekay
      Offshore within one year of each vessel’s delivery. The third vessel is a
      2003-built Suezmax shuttle tanker in Teekay Offshore’s shuttle tanker fleet that
      commenced operation under its contracts in July 2006.





In
      September 2006, the Company was awarded a two-year contract by Petrobras,
      beginning 2008, to supply an FPSO for the Siri project in Brazil. Petrobras
      has
      options to extend the contract up to an additional year. The conversion costs
      are estimated to be $142.7 million. As of December 31, 2006, the Company had
      paid $18.8 million of such amount and long-term financing arrangements existed
      for $121.0 million of the unpaid cost. The Company intends to finance the
      remaining unpaid amount of $2.9 million through incremental debt or surplus
      cash
      balances, or a combination thereof.





**c)
      Joint Ventures**





In
      August
      2005, the Company announced that it had been awarded long-term fixed-rate
      contracts to charter four LNG carriers to Ras Laffan Liquefied Natural Gas
      Co.
      Limited (3) (or *RasGas
      3* ),
      a
      joint venture company between a subsidiary of ExxonMobil Corporation and Qatar
      Petroleum. The vessels will be chartered to RasGas 3 at fixed rates, with
      inflation adjustments, for a period of 25 years (with options to extend up
      to an
      additional 10 years), scheduled to commence in the first half of 2008. The
      Company is entering into these transactions with its joint venture partner,
      Qatar Petroleum, which has taken a 60% interest in the vessels and time
      charters. In connection with this award, the joint venture has entered into
      agreements with Samsung Heavy Industries Co. Ltd. to construct four 217,000
      cubic meter LNG carriers at a total cost of approximately $1.0 billion (of
      which
      the Company’s 40% portion is $400.7 million), excluding capitalized interest. As
      at December 31, 2006, payments made towards these commitments by the joint
      venture company totaled $351.5 million, excluding capitalized interest and
      other
      miscellaneous construction costs (of which the Company’s 40% contribution was
      $140.6 million). Long-term financing arrangements existed for all of the
      remaining $650.2 million unpaid cost of these LNG carriers. As at December
      31,
      2006, the remaining payments required to be made under these newbuilding
      contracts (including the joint venture partners’ 60% share) were $449.9 million
      in 2007 and $200.3 million in 2008. Pursuant to existing agreements, on November
      1, 2006, Teekay LNG agreed to acquire the Company’s ownership interest in these
      four vessels and related charter contracts upon delivery of the first LNG
      carrier.





Under
      the
      terms of a joint venture agreement with an entity controlled by the former
      controlling shareholder of Teekay Spain, the Company agreed to make capital
      contributions to the joint venture company of $50.0 million in share premium.
      If
      the Company has not contributed the $50.0 million equity prior to April 30,
      2007, it will be required to pay the other partner up to $25.0 million
      calculated by a pre-determined formula based on the occurrence of certain future
      events.





F-22


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





**d)
      Long-Term Incentive Program**





In
      2005,
      the Company adopted the Vision Incentive Plan (or the *VIP* )
      to
      reward exceptional corporate performance and shareholder returns. This plan
      will
      result in an award pool for senior management based on the following two
      measures: (a) economic profit from 2005 to 2010 (or the *Economic
      Profit* );
      and
      (b) market value added from 2001 to 2010 (or the *MVA* ).
      The
      Plan terminates on December 31, 2010. Under the Plan, the Economic Profit is
      the
      difference between the Company’s annual return on invested capital and its
      weighted-average cost of capital multiplied by its average invested capital
      employed during the year, and MVA is the amount by which the average market
      value of the Company for the preceding 18 months exceeds the average book value
      of the Company for the same period.





In
      2008,
      if the VIP’s award pool has a cumulative positive balance based on the Economic
      Profit contributions for the preceding three years, an interim distribution
      may
      be made to participants in an amount not greater than half of the award pool.
      In
      2011, the balance of the VIP award pool will be distributed to the participants.
      Fifty percent of any distribution from the award pool, in each of 2008 and
      2011,
      must be paid in a form that is equity-based, with vesting on half of this
      percentage deferred for one year and vesting on the remaining half of this
      percentage deferred for two years.





The
      Economic Profit contributions added to the award pool each quarter are accrued
      when incurred. The estimated MVA contributions are accrued on a straight-line
      basis from the date of plan approval, which was March 9, 2005, until December
      31, 2010. Any subsequent increases or decreases to the MVA contribution are
      accrued on a straight-line basis until December 31, 2010. During the year ended
      December 31, 2006, the Company accrued $9.4 million (2005 - $21.5 million)
      of
      VIP contributions, which are included in general and administrative
      expenses.





**e)
      Other**





The
      Company has been awarded a contract by a consortium of major oil companies
      to
      construct and install on seven of its shuttle tankers volatile organic compound
      emissions plants, which reduce emissions during cargo operations. These plants
      will be leased to the consortium of major oil companies. The construction and
      installation of these plants are expected to be completed by the first half
      of
      2007 at a total cost of approximately $104.6 million. As at December 31, 2006,
      the Company had made payments towards these commitments of approximately $95.9
      million and the remaining payments required to be made towards these commitments
      were $8.7 million.





The
      Company enters into indemnification agreements with certain officers and
      directors. In addition, the Company enters into other indemnification agreements
      in the ordinary course of business. The maximum potential amount of future
      payments required under these indemnification agreements is unlimited. However,
      the Company maintains what it believes is appropriate liability insurance that
      reduces its exposure and enables the Company to recover future amounts paid
      up
      to the maximum amount of the insurance coverage, less any deductible amounts
      pursuant to the terms of the respective policies, the amounts of which are
      not
      considered material.





**18.
      Supplemental Cash Flow Information**





a)
            The
                changes in non-cash working capital items related to operating activities
                for the years ended December 31, 2006, 2005 and 2004 are as
                follows:


**Year
                Ended**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2004**
              **$**Accounts
                receivable
            
            
            (15,417
            )
            
            58,357
            
            
            (60,494
            )Prepaid
                expenses and other assets
            
            
            (21,909
            )
            
            (23,052
            )
            
            (1,189
            )Accounts
                payable
            
            
            19,262
            
            
            (17,690
            )
            
            11,484Accrued
                and other liabilities
            
            
            68,424
            
            
            (26,259
            )
            
            23,64950,360
            
            
            (8,644
            )
            
            (26,550
            )





b)
            On
                October 31, 2006, the first of the Company’s three RasGas II vessels
                delivered and commenced operations under a capital lease. The present
                value of the minimum lease payments for this vessel was $157.6 million.
                This transaction was treated as a non-cash transaction in the Company’s
                consolidated statement of cash
                flows.





**19.
      Vessel Sales and Writedowns on Vessels and Equipment**





**a)
      Vessel Sales**





During
      December 2006, the Company entered into an agreement to sell a 1987-built
      shuttle tanker. The Company expects to record a gain of approximately $10
      million relating to the sale upon delivery in the second quarter of 2007. The
      vessel, which is a part of the offshore segment, is presented on the December
      31, 2006 balance sheet as vessel held for sale.





During
      2006, the Company sold a 1981-built, 50.5%-owned shuttle tanker, and recorded
      a
      gain of $6.4 million and a minority interest expense of $3.2 million relating
      to
      the sale. In addition, the Company sold shipbuilding contracts for three LNG
      carriers to SeaSpirit and was reimbursed for previously paid shipyard
      installments and other construction costs in the amount of $313.0 million (see
      Note 11).




F-23


**TEEKAY
      SHIPPING CORPORATION AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, other than share or per
      share data)**





During
      2005, the Company sold 13 Aframax tankers built between 1988 and 1991, two
      shuttle tankers built in 1981 and 1986, one Suezmax tanker built in 1990 and
      one
      newbuilding Suezmax tanker that was sold concurrently upon its delivery in
      March
      2005. The results for the year ended December 31, 2005 include a gain on sale
      from these vessels totaling $148.7 million. In addition, the Company sold and
      leased back, under an operating lease, a 1991-built shuttle tanker. The sale
      generated a $2.8 million gain, which has been deferred and is being amortized
      over the 6.5 year term of the lease.





During
      2004, the Company sold 10 Aframax tankers built between 1988 and 1993, two
      Suezmax tankers built in 1989 and 1991, one 1993-built Very Large Crude Carrier,
      and one 1982-built shuttle tanker. The results for the year ended December
      31,
      2004 include a gain on sale from these vessels totaling $76.9
      million.





**b)
      Equipment Writedowns**





The
      results for the years ended December 31, 2006 and 2005 include $2.2 million
      and
      $12.3 million, respectively, of writedowns of certain offshore equipment due
      to
      a lower estimated net realizable value arising from the early termination of
      a
      contract in June 2005. In addition, during the year ended December 31, 2006,
      the
      Company recorded a writedown of $5.5 million on a volatile organic compound
      (or *VOC* )
      plant
      on one of the Company’s shuttle tankers which was redeployed from the North Sea
      to Brazil. This VOC plant will be removed and re-installed on another shuttle
      tanker in the Company’s fleet.





**20.
      Earnings Per Share**


**Year
                Ended**
              **December
                31, 2006**
              **$**
            
            **Year
                Ended**
              **December
                31, 2005**
              **$**
            
            **Year
                Ended December 31, 2004**
              **$**Net
                income available for common stockholders
            
            
            262,244
            
            
            570,900
            
            
            757,440Weighted
                average number of common shares
            
            
            73,180,193
            
            
            78,201,996
            
            
            82,829,336Dilutive
                effect of employee stock options and restricted stock
                awards
            
            
            1,589,914
            
            
            2,110,373
            
            
            2,189,053Dilutive
                effect of Equity Units
            
            
            358,617
            
            
            3,235,317
            
            
            2,710,648Common
                stock and common stock equivalents
            
            
            75,128,724
            
            
            83,547,686
            
            
            87,729,037Earnings
                per common share:-
                Basic
            
            
            3.58
            
            
            7.30
            
            
            9.14-
                Diluted
            
            
            3.49
            
            
            6.83
            
            
            8.63







For
      the
      years ended December 31, 2006 and 2005, the anti-dilutive effect of 1.1 million
      and 0.6 million shares attributable to outstanding stock options and the Equity
      Units were excluded from the calculation of diluted earnings per share. For
      the
      year ended December 31, 2004, no outstanding stock options or Equity Units
      were
      anti-dilutive.




**21.
      Valuation and Qualifying Accounts**




**Balance
                at beginning of year**
              **$**
            
            **Balance
                at end**
              **of
                year**
              **$**Allowance
                for bad debts:Year
                ended December 31, 2005
            
            
            891
            
            
            1,706Year
                ended December 31, 2006
            
            
            1,706
            
            
            1,765Restructuring
                cost accrual:Year
                ended December 31, 2005:
            
            
            -
            
            
            1,171Year
                ended December 31, 2006:
            
            
            1,171
            
            
            2,147








**22.
      Subsequent Events**





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


b)
              In
                  January 2007, Teekay sold a 2000-built LPG carrier to Teekay LNG
                  and the
                  related long-term, fixed-rate time charter for a purchase price
                  of
                  approximately $18 million. This vessel is chartered to the Norwegian
                  state-owned oil company, Statoil ASA, and has a remaining contract
                  term of
                  nine years.


c)
            On
                April
                17, 2007, the Company, A/S Dampskibsselskabet TORM (or*TORM*),
                and OMI Corporation (or*OMI*)
                announced that the Company and TORM had entered into a definitive
                agreement to acquire the outstanding shares of OMI. The agreement
                was
                unanimously approved by OMI’s Board of Directors. OMI is a major
                international owner and operator of tankers. OMI’s fleet aggregates
                approximately 3.5 million deadweight tons and comprises 13 Suezmax
                tankers
                (7 of which it owns and 6 of which are chartered-in) and 32 product
                carriers (of which it owns 28 and charters-in 4). In addition, OMI
                has 2
                product carriers under construction, which will be delivered in
                2009.


F-24
 
 **TEEKAY
            SHIPPING CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**
 **(all
            tabular amounts stated in thousands of U.S. dollars, other than share
            or per
            share data)**
 Under
                    the agreement, OMI shareholders will receive $29.25 in cash for
                    each share
                    of OMI common stock they hold. The Company and TORM will equally
                    split the
                    total cost of the transaction of approximately $2.2 billion,
                    including
                    assumed net debt and other transaction costs. The
                    Companywill fund the acquisition with a combination of cash on hand,
                    existing
                    revolving credit facilities and a new $700 million credit
                    facility.
                  
                  Under
                    the agreement, the Company and TORM are required to commence
                    a tender
                    offer to the OMI shareholders on or before April 27, 2007. The
                    tender
                    offer will be subject to acceptance from OMI shareholders representing
                    over 50 percent of OMI's outstanding shares as well as receipt
                    of standard
                    regulatory approvals. If the tender is successful, the transaction
                    is
                    expected to close during the second quarter of 2007.
                  
                  Upon
                    closing, the Company and TORM have agreed to divide the assets
                    of OMI
                    equally between the companies. The Company will acquire OMI's
                    Suezmax
                    operations and eight product tankers, and TORM will acquire the
                    remaining
                    product tankers, 26 in total.


F-25


**EXHIBIT
        8.1**


**List
      of Significant Subsidiaries**







The
      following is a list of the Company’s significant subsidiaries as at March 15,
      2007.







**Name
                of Significant Subsidiary**
            **State
                or**
              **Jurisdiction
                of****Incorporation**
            **Proportion
                of**
              **Ownership**
              **Interest**NAVION
                OFFSHORE LOADING AS
            NORWAY
            100%NAVION
                SHIPPING LTD
            MARSHALL
                ISLANDS
            100%NORSK
                TEEKAY AS
            NORWAY
            100%TEEKAY
                PETROJARL ASA
            NORWAY
            64.5%SINGLE
                SHIP COMPANIES
            AUSTRALIA
            100%SINGLE
                SHIP COMPANIES
            SPAIN
            100%SINGLE
                SHIP LIMITED LIABILITY COMPANIES
            MARSHALL
                ISLANDS
            100%TEEKAY
                CHARTERING LIMITED
            MARSHALL
                ISLANDS
            100%TEEKAY
                LIGHTERING SERVICES LLC
            MARSHALL
                ISLANDS
            100%TEEKAY
                LNG PARTNERS LP
            MARSHALL
                ISLANDS
            68%TEEKAY
                MARINE SERVICES AS
            NORWAY
            100%TEEKAY
                NAVION OFFSHORE LOADING PTE LTD
            SINGAPORE
            100%TEEKAY
                NORDIC HOLDINGS INC
            MARSHALL
                ISLANDS
            100%TEEKAY
                NORWAY AS
            NORWAY
            100%TEEKAY
                OFFSHORE OPERATING LP
            MARSHALL
                ISLANDS
            90%TEEKAY
                OFFSHORE PARTNERS LP
            MARSHALL
                ISLANDS
            60%NORSK
                TEEKAY HOLDINGS LTD
            MARSHALL
                ISLANDS
            100%TEEKAY
                SHIPPING (CANADA) LTD
            CANADA
            100%TEEKAY
                SHIPPING LIMITED
            BAHAMAS
            100%TEEKAY
                SHIPPING SPAIN SL
            SPAIN
            100%TPO
                INVESTMENTS INC
            MARSHALL
                ISLANDS
            100%TPO
                INVESTMENTS AS
            NORWAY
            100%UGLAND
                NORDIC SHIPPING AS
            NORWAY
            100%










**EXHIBIT
      12.1**


**CERTIFICATION**





I,
      Bjorn
      Moller, President and Chief Executive Officer of the company, certify
      that:


1.
              I
                    have reviewed this report on Form 20-F of Teekay Shipping
                    Corporation;
 2.
                Based
                    on my knowledge, this report does not contain any untrue statement
                    of a
                    material fact or omit to state a material fact necessary to make
                    the
                    statements made, in light of the circumstances under which such
                    statements
                    were made, not misleading with respect to the period covered
                    by this
                    report;
 3.
                  Based
                      on my knowledge, the financial statements, and other financial
                      information
                      included in this report, fairly present in all material respects
                      the
                      financial condition, results of operations and cash flows of
                      the
                      registrant as of, and for, the periods presented in this report;
 4.
                    The
                        company’s other certifying officer and I are responsible for establishing
                        and maintaining disclosure controls and procedures (as defined
                        in Exchange
                        Act Rules 13a-15(e) and 15d-15(e)) for the company and
                        have:


a)
            Designed
                such disclosure controls and procedures, or caused such disclosure
                controls and procedures to be designed under our supervision, to
                ensure
                that material information relating to the company, including its
                consolidated subsidiaries, is made known to us by others within those
                entities, particularly during the period in which this report is
                being
                prepared;





b)
            Designed
                such internal control over financial reporting, or caused such internal
                control over financial reporting to be designed under our supervision,
                to
                provide reasonable assurance regarding the reliability of financial
                reporting and the preparation of financial statements for external
                purposes in accordance with generally accepted accounting principles.





c)
            Evaluated
                the effectiveness of the company’s disclosure controls and procedures and
                presented in this report our conclusions about the effectiveness
                of the
                disclosure controls and procedures, as of the end of the period covered
                by
                this report based on such evaluation;
                and





d)
            Disclosed
                in this report any change in the company’s internal control over financial
                reporting that occurred during the period covered by the report that
                has
                materially affected, or is reasonably likely to materially affect,
                the
                company’s internal control over financial reporting;
                and





5.
            The
                company’s other certifying officer and I have disclosed, based on our most
                recent evaluation of internal control over financial reporting, to
                the
                company’s auditors and the audit committee of the company's board of
                directors (or persons performing the equivalent
                functions):


a)
              All
                  significant deficiencies and material weaknesses in the design
                  or
                  operation of internal control over financial reporting which are
                  reasonably likely to adversely affect the company’s ability to record,
                  process, summarize and report financial information;
                  and
 b)
                Any
                    fraud, whether or not material, that involves management or other
                    employees who have a significant role in the company’s internal control
                    over financial reporting.





Date: April
      19, 2007      By: /s/
      Bjorn Moller


Bjorn
      Moller


President
      and Chief Executive Officer










**EXHIBIT
      12.2**


**CERTIFICATION**





I,
      Vincent Lok, Senior Vice President and Chief Financial Officer of the company,
      certify that:




1.
              I
                    have reviewed this report on Form 20-F of Teekay Shipping
                    Corporation;
  2.
                  Based
                      on my knowledge, this report does not contain any untrue statement
                      of a
                      material fact or omit to state a material fact necessary to
                      make the
                      statements made, in light of the circumstances under which
                      such statements
                      were made, not misleading with respect to the period covered
                      by this
                      report;
  3.
                      Based
                          on my knowledge, the financial statements, and other financial
                          information
                          included in this report, fairly present in all material
                          respects the
                          financial condition, results of operations and cash flows
                          of the
                          registrant as of, and for, the periods presented in this report;
  4.
                          The
                              company’s other certifying officer and I are responsible for
                              establishing
                              and maintaining disclosure controls and procedures
                              (as defined in Exchange
                              Act Rules 13a-15(e) and 15d-15(e)) for the company
                              and
                              have:
 a)
              Designed
                    such disclosure controls and procedures, or caused such disclosure
                    controls and procedures to be designed under our supervision,
                    to ensure
                    that material information relating to the company, including
                    its
                    consolidated subsidiaries, is made known to us by others within
                    those
                    entities, particularly during the period in which this report
                    is being
                    prepared;
 b)
                  Designed
                        such internal control over financial reporting, or caused
                        such internal
                        control over financial reporting to be designed under our
                        supervision, to
                        provide reasonable assurance regarding the reliability of
                        financial
                        reporting and the preparation of financial statements for
                        external
                        purposes in accordance with generally accepted accounting
                        principles.
 c)
                      Evaluated
                            the effectiveness of the company’s disclosure controls and procedures and
                            presented in this report our conclusions about the effectiveness
                            of the
                            disclosure controls and procedures, as of the end of
                            the period covered by
                            this report based on such evaluation;
                            and
 d)
                          Disclosed
                                in this report any change in the company’s internal control over financial
                                reporting that occurred during the period covered
                                by the report that has
                                materially affected, or is reasonably likely to materially
                                affect, the
                                company’s internal control over financial reporting;
                                and
 5.
                  The
                        company’s other certifying officer and I have disclosed, based on
                        our most
                        recent evaluation of internal control over financial reporting,
                        to the
                        company’s auditors and the audit committee of the company’s board of
                        directors (or persons performing the equivalent
                        functions):
 a)
                      All
                            significant deficiencies and material weaknesses in the
                            design or
                            operation of internal control over financial reporting
                            which are
                            reasonably likely to adversely affect the company’s ability to record,
                            process, summarize and report financial information;
                            and
 b)
                            Any
                                  fraud, whether or not material, that involves management
                                  or other
                                  employees who have a significant role in the company’s internal control
                                  over financial reporting.
 Date: April
                        19, 2007      By: /s/
                        Vincent Lok
 Vincent
                        Lok
 Senior
                        Vice President and Chief Financial
                        Officer









**EXHIBIT
      13.1**





**CERTIFICATION
      PURSUANT TO**


**18
      U.S.C. SECTION 1350,**


**AS
      ADOPTED PURSUANT TO SECTION 906**


**OF
      THE SARBANES-OXLEY ACT OF 2002**





In
      connection with the annual report of Teekay Shipping Corporation (the
      " ***Company*** ")
      on
      Form 20-F for the year ended December 31, 2006 as filed with the Securities
      and Exchange Commission on the date hereof (the " ***Form
      20-F*** "),
      I
      Bjorn Moller, Chief Executive Officer of the Company, certify, pursuant to
      18
      U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002,
      that:





(1)
      The
      Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of
      the
      Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and





(2)
      The
      information contained in the Form 20-F fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.





Dated: April
      19, 2007








By: /s/
      Bjorn Moller


Bjorn
      Moller


President
      and Chief Executive Officer








**EXHIBIT
      13.2**





**CERTIFICATION
      PURSUANT TO**


**18
      U.S.C. SECTION 1350,**


**AS
      ADOPTED PURSUANT TO SECTION 906**


**OF
      THE SARBANES-OXLEY ACT OF 2002**





In
      connection with the annual report of Teekay Shipping Corporation (the
      " ***Company*** ")
      on
      Form 20-F for the year ended December 31, 2006 as filed with the Securities
      and Exchange Commission on the date hereof (the " ***Form
      20-F*** "),
      I
      Vincent Lok, Chief Financial Officer of the Company, certify, pursuant to 18
      U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002,
      that:





(1)
      The
      Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of
      the
      Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and





(2)
      The
      information contained in the Form 20-F fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.





Dated: April
      19, 2007








By: /s/
      Vincent Lok


Vincent
      Lok


Senior
      Vice President and Chief Financial Officer








**EXHIBIT
      23.1**





**CONSENT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**














We
      consent to the incorporation by reference in the Registration Statement (Form
      S-8 No. 333-42434) pertaining to the Amended 1995 Stock Option Plan of Teekay
      Shipping Corporation (“Teekay”), in the Registration Statement (Form S-8 No.
      333-119564) pertaining to the 2003 Equity Incentive Plan and the Amended 1995
      Stock Option Plan of Teekay, in the Registration Statement (Form F-3 No.
      333-102594) and related Prospectus of Teekay for the registration of up to
      $500,000,000 of its common stock, preferred stock, warrants, stock purchase
      contracts, stock purchase units or debt securities and in the Registration
      Statement (Form F-3 No. 33-97746) and related Prospectus of Teekay for the
      registration of 2,000,000 shares of Teekay common stock under its Dividend
      Reinvestment Plan of our report dated March 12, 2007, except for Note
      22(c), as to which the date is April 17, 2007, with respect to the
      consolidated financial statements of Teekay, Teekay management’s assessment of
      the effectiveness of internal control over financial reporting, and the
      effectiveness of internal control over financial reporting of Teekay, included
      in the Annual Report (Form 20-F) for the year ended December 31,
      2006.








Vancouver,
      Canada,        /s/
      Ernst
& Young LLP


April
      19,
      2007                          
      Chartered Accountants