The Company 2. Letter from the CEO 3. Key figures in brief 5. Interview with the VP Projects 6. The technology 9. Design and technology 10

Transcription

1 ANNUAL REPORT 2005

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3 CONTENTS The Company 2 Letter from the CEO 3 Key figures in brief 5 Construction projects/ Interview with the VP Projects 6 The technology 9 Design and technology 10 Kanfa AS 12 Interview with the Managing Director Kanfa AS 13 PLM at Sevan Marine 14 Sevan Deepsea Driller 16 The market 18 Interview with the VP Business Development 21 Venture Production 22 Interview with the Asset Manager Venture Production 23 Shareholder info 24 The board of directors report 27 The board of directors 29 Corporate governance 30 Business strategy 33 Sevan Marine Group: Consolidated balance sheet 34 Consolidated income statement 35 Consolidated statement of changes in equity 36 Consolidated cash flow statement 37 Notes to the consolidated financial statements 38 Sevan Marine ASA: Income statement 67 Balance sheet 68 Cash flow statement 70 Notes to the financial statements 71 Auditor s report 83 3 Contact us! 84

4 THE COMPANY Sevan Marine is an offshore technology company focused on the market for floating production, storage and offloading. The Company offers proprietary solutions related to floating production units. The Company s vision is to create a world-class company in the technologically challenging segments of offshore floating production and storage of hydrocarbons. These goals shall be reached primarily by offering superior capabilities within design, engineering and project execution and maintaining local presence in international markets. Growth is expected to be achieved mainly through organic development and partnership arrangements. Sevan Marine ASA Sevan Production AS (SSP Piranema) 75 % Sevan Invest AS Norway 100 % Sevan Drilling AS Norway 100 % Sevan Marine do Brasil Ltda. 100 % Kanfa AS Norway 100 % Piranema Serviçio de Petroleo Ltda Brasil 100 % Sevan Production Pte Ltd Singapore SSP Chestnut 100 % SPC TBN Singapore (SSP No. 3) 100 % Sevan Drilling Pte Ltd Singapore 100 % Kanfa Tec AS 49,9 % 2 Sevan Production Services Ltd UK Operating co. Chestnut 100 % Sevan Production General Partnership Singapore 80 % Hummingbird Oil Pte Ltd (Venture) Singapore 20 % Etseco Production Ltd Cyprus 25 %

5 LETTER FROM THE CEO 2005 was an exciting year for Sevan Marine. In the beginning of the year we entered into a definitive agreement with Petrobras S.A. for the charter of the SSP Piranema on the Piranema field, offshore Brazil, where the unit will work under an 11-year charter. Our yard supervision team at the Yantai Raffles Shipyard, supported by our staff at the home base in Norway, has done a tremendous job with the construction of the first SSP hull, and the SSP Piranema is now heading for the Keppel Verolme Shipyard in Rotterdam where the outfitting and assembly of the process plant will take place. During the year we had discussions with several potential clients, which culminated in August with a 2,5-year contract with Venture Production (North Sea Developments) Limited for the second SSP. The SSP Chestnut would be installed mid-2007 on the Chestnut field in the central UK North Sea. In December 2005, Sevan Marine and Venture Production announced an alliance agreement under which the parties will utilize the SSP floating production solution in the UK sector of the North Sea. In third quarter the Company signed an agreement with Yantai Raffles Shipyard for the construction of the third SSP, to be delivered from the shipyard in second quarter At the same time, we secured options to order four additional SSPs from the same yard, and in this way securing capacity for further growth of the Company. During the year the Sevan Marine stock has been traded regularly on the Oslo Stock Exchange. In 2005 we carried out three private placements, with gross proceeds of NOK 500 million. Additionally, in the first quarter of 2006, we carried out a private placement of NOK 1,550 million in order to part-finance the construction of the first SSP drilling unit. The share issues were well received in the market and they have provided a solid foundation for the future growth of our Company. We are satisfied that we also have been able to attract international investors. As of today, foreign shareholders own about 65% of the outstanding shares. Going forward we will continue to keep the financial markets informed about our activities, both in Norway and abroad. markets. In March 2005, a bond issue of NOK 670 million was carried out in order to part-finance the construction of SSP Piranema. In December, the Company signed a USD 120 million senior project finance facility for SSP Piranema, intended to refinance the outstanding of this bond issue once it matures in March Furthermore, in January 2006, the Company placed a USD 50 million bond, primarily intended to part-finance the construction of the SSP Chestnut. The organization has grown considerably during the year and we have been fortunate that many highly qualified people have decided to join Sevan Marine. With our skilled and motivated staff in Arendal, Asker, Tananger, Rio de Janeiro, Rotterdam and Yantai, we are well prepared for the opportunities and challenges that lie ahead of us. The competitive strengths of Sevan Marine have traditionally been within the design and engineering areas on the marine side. With the acquisition of the remaining 52% of the process design and engineering company Kanfa AS, we have the capacity and knowledge to offer complete and competitive solutions within floating production, storage and offloading to clients world-wide. The offshore market s reception of the SSP has been positive. Based on the strong market outlook, our ambition is to add more SSP units to our fleet. Our aim is to increase the value creation, to the benefit for our shareholders, clients and employees, utilizing our competitive advantages. During 2005 and first quarter 2006, we carried out an evaluation of complementary uses of our patented SSP technology. In particular, we evaluated the possibility of utilizing the SSP hull as basis for a drilling unit with ultra deepwater and harsh environment capabilities. Based on the encouraging results of such evaluation, we decided to order the first drilling unit, the Sevan Deepsea Driller.The drilling unit will be owned by Sevan Drilling, a 100% owned subsidiary of Sevan Marine. An application for a listing of Sevan Drilling on Oslo Børs will be filed in I would like to thank our employees and board, our clients, suppliers and other partners that made the fantastic development for Sevan Marine possible. On behalf of the Sevan Marine organization, I would also like to thank our shareholders for your confidence in us. April 3, In order to finance the ongoing construction programme, the Company has also been active in the international debt Jan Erik Tveteraas CEO

6 2005 KEY FIGURES INCOME STATEMENT Amounts in NOK million * IFRS IFRS N-GAAP N-GAAP N-GAAP Operating revenues 147,8 1,0 1,0 3,6 4,7 Total operating expenses 195,1 19,4 18,3 13,0 17,0 EBITDA -47,3-18,4-17,3-9,4-12,3 Depreciation/amortization -4,7-0,4-0,4-0,2-0,1 Operating Profit -52,0-18,8-17,7-9,7-12,4 Income from associates 3,1 0,0 0,0 0,0 0,0 Interest income 2,7 1,3 1,3 0,3 0,2 Interest expenses -2,1-0,2-0,2-0,2-1,3 Net financial items 3,7 1,1 1,1 0,1-1,1 Profit before tax -48,3-17,7-16,6-9,6-13,5 Tax 8,0 3,9 8,2 1,9 2,9 Net Profit -40,3-13,8-8,4-7,7-8,9 BALANCE SHEET Amounts in NOK million * IFRS IFRS N-GAAP N-GAAP N-GAAP Construction in progress 980,3 95,5 95,5 0,0 0,0 Other fixed assets 4,7 0,9 2,2 0,7 0,6 Goodwill 52,6 0,0 0,0 0,0 0,0 Software 3,1 1,3 0,0 0,0 0,0 Investment in associated companies 3,1 15,0 15,0 0,0 0,0 Deferred tax 25,0 14,7 14,7 6,5 4,7 Other long-term receivables 0,9 0,0 0,0 0,0 0,0 Derivatives 0,1 0,0 0,0 0,0 0,0 Total long-term assets 1 069,8 127,4 127,4 7,2 5,2 Current receivables 172,9 6,8 6,8 4,7 7,5 Derivatives 2,5 0,0 0,0 0,0 0,0 Cash and cash equivalents 487,8 65,3 67,0 2,5 1,8 Total current assets 663,2 72,1 73,8 7,2 9,3 Total assets 1 733,0 199,5 201,2 14,4 14,5 SHAREHOLDERS' EQUITY AND LIABILITIES Share capital 18,5 13,2 13,2 3,9 3,2 Other equity 667,8 169,6 171,3 7,9 5,9 Total shareholders' equity 686,3 182,8 184,5 11,8 9,1 Minority interest 48,7 0,0 0,0 0,0 0,0 Total equity 735,0 182,8 184,5 11,8 9,1 4 Long term loan 704,4 0,0 0,0 0,0 0,0 Derivatives 1,8 0,0 0,0 0,0 0,0 Pension obligations 5,0 0,3 0,3 0,3 0,0 Warranties 1,2 0,0 0,0 0,0 0,0 Total long term debt 712,4 0,3 0,3 0,3 0,0 Trade and other payables 143,2 11,5 11,5 2,3 5,4 Deferred income tax liabilities 2,6 0,0 4,9 0,0 0,0 Provisions for other liabilities and charges 139,9 4,9 4,9 0,0 0,0 Total current liabilities 285,6 16,4 16,4 2,3 5,4 Shareholders' equity and liabilities 1 733,0 199,5 201,2 14,4 14,5 * Unaudited amounts

7 2005 IN BRIEF First Quarter Sevan Marine do Brasil Ltda entered into a letter of intent for the use of the SSP 300 FPSO under an 11 year charter contract with options on the Piranema field in the State of Sergipe, off the north-east coast of Brazil. A private placement with gross proceeds of NOK million was carried out. A bond issue of NOK 670 million, primarily in order to part-finance the construction of the SSP Piranema, was carried out with a term of 3 years and a fixed interest rate of 9% p.a. Second Quarter Venture Production (North Sea Developments) Limited, entered into a letter of intent with Sevan Marine ASA for the use of Sevan s SSP 300 FPSO on the Chestnut field in the central UK North Sea. The fixed term of the charter contract is 30 months, with options for an additional 24 months. Kanfa AS received an order from Bergesen Worldwide Offshore in Norway to supply process modules for the PEMEX operated KMZ (Ku, Maloob and Zaap) field in the Gulf of Mexico.The project includes the delivery of an oil separation module, gas compression module, gas fuel module and flare system. Sevan Marine Management AS acquired the remaining 52% of the shares in Kanfa AS. Following the acquisition, Sevan Marine ASA owns 100% of Kanfa AS. A directed share issue with gross proceeds amounted to NOK million was carried out. Third Quarter Venture Production (North Sea Developments) Limited and Sevan Marine ASA signed a contract for the use of Sevan s floating production unit SSP 300 FPSO on the Chestnut field confirming a letter of intent signed in June this year. Sevan Marine signed an agreement with Yantai Raffles Shipyard for the construction of the third SSP 300 and secured options to order four additional SSPs with delivery times beyond the third unit. A directed share issue was completed with gross proceeds amounted to NOK million. Fourth Quarter The steel for the SSP Chestnut was ordered and the steel cutting and welding has started. The steel for the SSP no. 3 was ordered and the steel cutting has started. Sevan Marine and Venture Production announced an alliance agreement under which the parties will utilize Sevan Marine's SSP floating production solution in the UK sector of the North Sea. Under the agreement, Venture has agreed to take a 20% equity stake in the SSP Chestnut. Sevan Production AS has signed a USD 120 million senior debt project finance facility for SSP Piranema, with GE and ANZ, acting as joint Mandated Lead Arrangers. A bond issue of USD 50 million, primarily intended to part-finance the construction of the SSP Chestnut, million was carried out with a fixed interest rate of 9.75% p.a., a term of 5 years and a call option after 3 years. First Quarter 2006 A bond of USD 50 million was issued in January, The bond loan has a term of 5 years with a call option after 3 years and carries an interest at a rate of 9.75% p.a. The board of directors decided to establish Sevan Drilling, a 100% owned subsidiary that will be the owner of a drilling unit, the Sevan Deepsea Driller. The estimated all-in delivery cost is USDm 430, with delivery in 1st half The Company carried out a Private Placement and a Subsequent Offering, in order to part-finance the construction and to raise necessary equity for the construction of the first drilling unit. 43,055,500 and 7,882,638 new shares respectively were issued. Gross proceeds were NOK 1,550 and NOK million respectively.

8 CONSTRUCTION PROJECTS INTERVIEW WITH THE VP PROJECTS The Company has currently three SSPs under construction at the Yantai Raffles Shipyard, all of which will be used as floating production, storage and offloading units. In March 2004, the Company entered into a contract with Yantai Raffles Shipyard in China for the construction of the first SSP 300, the SSP Piranema. The platform will leave the Chinese shipyard in April 2006, heading for the Keppel Verolme Shipyard in Rotterdam where the outfitting and assembly of the process plant will take place. The SSP Piranema will be installed on the Piranema field offshore Brazil, under an 11-year plus 11-year extension option contract with Petrobras.The second SSP 300 from Yantai Raffles Shipyard is expected to be installed on the Chestnut field in central North Sea mid-2007, under a 2.5-year contract plus 2-year and further extension options with Venture Production. The third SSP 300 unit is expected to be delivered from the shipyard second quarter 2007, and is available for clients. Under a separate agreement with the shipyard, the Company has secured options to order four additional SSPs with delivery times beyond the third unit. What has been the most exiting phase during last year? - The positive, innovative and demanding team-work within a fast growing Sevan Marine organisation, both in Norway, Brasil and China, has been the No. 1 exitement during the year. The construction of the first, highly innovative SSP300 in China has for all involved parties been an exiting and demanding process. The most exiting phase during the last year of construction was the assembly period of the prebuilt hull sections. The schedule for this work was highly ambisious with unusually low tolerance limits. However, it turned out to be a very smooth phase in the construction period. What was the biggest challenge during the year? - The biggest challenge was cathcing up with the building schedule due to unstable and challenging weather condtitions at the Yantai site. Further, the follow-up of the engineering process using advanced CAD tools, and a continuously ongoing classification approval process, combined with a tight construction process, created high work pressure at the Yantai Raffles Shipyard SSP site. Cultural wise, the construction of the first SSP300 has been a demanding challenge, merging a young Chinese shipyard with a small, but innovative and rapidly expanding Norwegian offshore company. Sevan Marine has now just finished construction of the first SSP hull. Since SSP no. 2 and 3 will be based on the same technology and will be built at the same shipyard, what are the advantages next time around? - Regarding the repetitive effects, we expect to see advantages extracted from the steep learning curve made on no. 1. The SSP hull production is expected to take place in a fast track lane; there will be established an exclusive "SSP Hull Production Line" at the shipyard, based on the experience made from SSP no. 1. In addition, the construction methodes as well as the contruction philosophy should show improvements, simplifying the construction and saving valuable time and cost. April 2005 August 2005 September 2005 October % of the steel has been cut and 70% of the welding is completed. 100% of the steel has been cut and the blocks are ready for assembly. Erection of blocks recently started. Double bottom sections under assembly. The protective outer ballast tanks under assembly. Cargo tanks with radial bulkheads around the central shaft section with piping.

9 Arne Lindstøl, Vice President Projects November 2005 December 2005 January 2006 February First main deck block in place at level Four weeks after first main deck block lifted on, the deck is completed. Process deck under erection 4 meter above main deck. The structure is completed with process deck, blast walls and helideck, and final installation ongoing.

10 The SSP Piranema was successfully skidded out onto the drytow vessel Kang Sheng Kou at the Yantai Raffles Shipyard in China in March, Sevan s Chairman Mr. Jan-Fredrik Wilhelmsen and Petrobras s E&P Director Mr. Guilherne de Oliveira Estrella signing Heads of Agreement in Beijing in February,

11 THE TECHNOLOGY The Company has since its origin focused its business on the development of a new cylinder shaped platform type for storage and production of hydrocarbons in deep and shallow waters (FPSO). The platform is named SSP ( Sevan Stabilized Platform ) and is designed to operate in all types of offshore conditions. The main competitive advantage of the SSP platform is that it combines internal oil storage capacity and ability to carry high topside weights with a low construction cost compared to other FPSOs. The SSP is an alternative to ship based production and storage solutions as well as semi-submersibles, TLPs and Spar platforms. The platform is suitable for use in all offshore markets including harsh environment areas and on both marginal and large field developments, due to its flexible design and favourable motion characteristics. Due to its versatility, the SSP design may also be used in connection with applications such as deepwater and harsh environment drilling, accommodation and various gas applications. Going forward, the Company will evaluate the potential for such complementary uses of the SSP technology. 9

12 No Turret No Swivel High Deck Load Capacity and Robustness Large Storage Capacity Segregated Ballast Excellent Motions Simple interface between hull and topside

13 DESIGN AND TECHNOLOGY SSP - SEVAN STABILIZED PLATFORM The SSP is classified with DNV as an Offshore Installation (toi) and Floating Production with the following notations: COW POSMOOR OFFLOADING HELDK S CRANE PROD FPSO FLAG STATE: Bahamas MAIN ACHIEVEMENTS WITH THE SSP TECHNOLOGY: High capacity for both oil storage and deck load Low cost and fast construction High flexibility for various applications FSO MAIN SSP FEATURES: No turret No swivel Spread mooring Any number and type of riser Oil storage Segregated ballast High deck load capacity Simple interface between hull and topside Excellent motions High safety standard Offloading to tankers Offloading WIDE CAPACITY RANGE: The SSP has a wide capacity range with an oil storage capacity of up to 2 million bbls. Design Storage (bbl) Displacement (mt) Draft (m) Diameter (m) Segregated ballast SSP SSP SSP SSP SSP SSP Piping arrangements 11

14 KANFA AS FACTS ABOUT KANFA AS Kanfa, a limited company incorporated in Norway, is a process design and engineering company offering services to the offshore industry. Kanfa s employees has a long track record and has been involved in most of the Norwegian field developments over the past 16 years, as well as several international projects. Kanfa is located in Asker, Norway, and is a supplier of process equipment and systems, as well as consultancy services, i.e. design, studies and troubleshooting. Piranema SSP 300 scrubber module. Client: Sevan Marine/ Petrobras SERVICES Equipment and process systems: Separators and pressure vessels Oil separation and stabilization systems Produced water treatment systems Sand cleaning Fresh water makers Water, methanol and chemical injection systems Gas dehydration VOC recovery (from offshore production and loading) Utility systems (fuel gas, compressed air, nitrogen generation, seawater, fresh water, etc.) Studies and troubleshooting: Front end and conceptual studies System design, cost estimation, review and optimization Offshore troubleshooting CFD calculations (FLUENT) HYSYS calculations Commissioning and start-up Project management and other technical support 12 PROJECT EXPERIENCE Client Project Scope of work 2005 Sevan Marine / Venture Oil Chestnut, UK FPSO Topside Bergesen Worldwide Offshore/Pemex Ku Maloop Zaap, Mexico FPSO Topside Vetco Aibel / Marathon Alvheim, Norway Misc Pressure Vessels Vetco Aibel / Marathon Alvheim, Norway Scrubbers Sevan Marine / Petrobras Piranema, Brazil FPSO Topside 2004 Hamworthy KSE / BP Greater Plutonia, Nigeria Inert Gas Generator Aker Kværner / Norsk Hydro Ormen Lange, Norway Inert Gas Generator 2003 Norske Shell AS / Aker Kværner AS Draugen, Norway Heat Exchangers Dansk Olie og Naturgas E&P A/S (DONG) Siri Tie-in, Norway TEG Gas Dehydration Unit Mærsk Olie og Gas as Gorm C, Denmark Flare Knock Out Drum Aker Offshore Partner / Esso Balder FPU, Norway Compressor Volume Suction Bottles Dansk Olie og Naturgas E&P A/S (DONG) Siri Tie-in, Norway Chemical Injection Skid Fabricom / Statoil Gullfaks A/B/C, Norway H2S Scavenger Removal Separators Statoil Kårstø, Norway Filter / Separator Gas Treatment Module SAMSUNG / ConocoPhillips Corocoro FSO, Venezuela Sea Water Treatment Module, Crude Metering and Prover, Crude Coolers ABBOS / ConocoPhillips Eldfisk Project, Norway Double perforated plates for separators Fred Olsen Production / Addax Adanga / Borgen Dolphin Upgrade, West Africa Process Plant Upgrade

15 HEADING? INTERVIEW WITH THE MANAGING DIRECTOR KANFA AS You, together with 4 collegues incorporated Kanfa in What was the background? - The oil industry was, and is changing. Smaller oil fields necessitate more cost efficient solutions. More responsibility is put on the contractors and vendors through EPC contracts and turn-key system packages. At the same time, at least the Norwegian vendors were becoming fewer and bigger, often closely attached to a large contracting company, thus not being a preferred supplier for competing contractors. In line with this development, both the operating companies and the large contracting companies have been cutting down on manpower. In this context, we saw the requirement for professional resources on design and engineering. This opened for a cost efficient and independent process consulting and process packaging company with multidiscipline employees with a hands-on and do-it attitude. Our business idea was to become a recognised supplier of services and systems to Norwegian and international process industry. We have become 'sligthly' more that that. What do you see as the biggest advantage of being part of the Sevan Group? - Except from being a part of an exiting technological environment, we have been introduced to oil company management levels that have not been available before. What are the strenghts of Kanfa? - The major strenghts of Kanfa is the people behind the organisation. They have mulidiciplinary competence, market know-how, focus on project execution and the organisation is very flexible and effective. We have a history of creating alliances and partnership. We offer personal service, and full process and mechanical guaranty. There are no conflicts of interests and we are focused on QA. Aslak Hjelde, Managing Director, Kanfa AS 13

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17 PLM AT SEVAN MARINE Sevan Marine chooses Product Lifecycle Management (PLM) tools from IBM and Dassault Systems. In the beginning, Sevan Marine used several different systems and software to create basic designs, perform analysis and to visualise ideas. Multiple systems created multiple problems, however forcing us to repeatedly translate designs from one system to the other, creating time-consuming workflow and raising the potential for error. The risk was unacceptable, especially because we were introducing a cautious industry to an innovative design the SSP. To succeed in the market, we needed an error-free process that could prove the advantages of its design, including its ability to endure the ocean s incessant pounding even in hurricane-force winds. we can share common business processes and product knowledge with engineering, manufacturing and product service, as well as with suppliers and customers, says Tom Erik. - The PLM-software we use is Smarteam for organizing all kind of documentation and Catia together with Enovia, to handle all aspects of engineering and 3D-modelling. When finished with the on-going migration we will extensively share knowledge, data and expertise quickly and easily between all disciplines and between our team players worldwide throughout the whole development lifecycle of our SSP. Tom Erik Smedal, Project Manager, PLM Systems - Although we offer many variations of the SSP, we wanted one single process to engineer and manufacture all of its designs, regardless of discipline, product variations and organizational structure. As you can imagine, designing a unit like our SSP is a rather complex task within a lot of disciplines, and there are no margins for errors, says Tom Erik Smedal, the company s Project Manager for PLM Systems. - Today, our PLM solutions enable us to conceptualize, design and generate information for manufacturing and support or maintenance of our products. From initial product concept to retirement, - One of the cornerstones in our PLM-systems is the way it manages the complexity of our product designs, variations, and production processes to satisfy international market and standards requirements, Tom Erik adds. - Sevan Marine has only begun to realize the full benefit of the PLMimplementation and the significant value it gives us by sharing knowledge, data and experiences learned between disiplines. The great enthusiasm shown by our employees really contributes to make the implementation of our new PLM-systems a rewarding work, Tom Erik concludes. 15

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19 SEVAN DEEPSEA DRILLER GENERAL DESCRIPTION The Sevan Deepsea Driller is designed for operations in deep water, in harsh environment and in the most environmentally sensitive areas. The rig is designed to carry riser weight for operations in a water depth of down to 12,500 ft. It will be equipped with a dual (parallel) activity drill tower and will be prepared for full winterisation. The deck area will be large, providing for a variable deck load capacity in excess of 15,000 MT. HIGH COST EFFICIENCY COMPARED TO SEMIS AND DRILLSHIPS The SSP hull provides certain features, which makes the hull very cost effective. These are amongst other things, related to limited interface between the topside modules and the hull structure. Moreover, the hull is simple in its design, reducing the steel weight and construction time. The low stress level in the design increase the fatigue life of the SSP hull and allows the use of lower steel grades. DEEPWATER DRILLING CAPABILITIES The Sevan Deepsea Driller will be capable of drilling in water depths down to 12,500 ft, deeper than any of the existing semis or semis under construction, as a result of the SSP s high deckload capacity. It will be equipped with a class III dynamic positioning system enabling the unit to have excellent station keeping capabilities. The transit speed is expected to be 7-9 knots. HARSH ENVIRONMENT DRILLING CAPABILITIES The Sevan Deepsea Driller will be capable of drilling in the world s harshest environments, including the Northern North Sea and the Barents Sea. The heave and roll motions are favourable and the rig will be designed to drill in weather conditions with a significant wave height of up to 8 meter. ENVIRONMENTALLY FRIENDLY AND SAFE OPERATIONS The Sevan Deepsea Driller is designed for environmentally friendly and safe operations. The rig will comply with rules and regulations for all environmentally sensitive areas. The rig will be equipped with: Zero discharge, closed drain system Waste management system Low emission engines Compliance with rules and regulations in all environmentally sensitive areas Double sides double bottom Cranes for safe lifting operations MOTION CHARACTERISTICS Model testing and analysis show that the SSP has the same operations window as a semi-submersible and better operations window than a drillship. The model tests have been extensive and have included operating conditions as well extreme sea states, in the Northern North Sea area. OPTIMIZED DRILLING EFFICIENCY The Sevan Deepsea Driller is equipped with a state-of-the-art drilling package and parallel (dual) activity derrick enabling stand-building of pipes while drilling. This is expected to result in a % improved operating efficiency compared to a 4th generation semi. The drilling package has the following characteristics: Electric drawwork with autodriller functions Derrick with 2,000,000 lbs capacity Racking capacity: 46,000 ft drillpipe and 13,000 ft casing Remote operations Vertical pipe handling system Two iron roughnecks on drillfloor Electric Topdrive with 1,000 ton capacity Rotary table (60.5 ) Direct acting riser tensioning system Four mudpumps 17

20 THE MARKET The focused market areas for the SSP are the North Sea, Brazil, South-East Asia and West Africa. These are areas where the number of field developments over the next 10 years will be high, based on oil discoveries that have already been revealed. Fuelled by high oil and gas prices, the outlook for the oil service industry in general is very attractive. This secures high profitability for the petroleum companies short term. The market for Floating Production Units (FPUs) has grown steadily since the early 90 s. From 37 fields in operation using a FPU at the end of 1990, the number at the end of 2005 was estimated to 191 units, equal to an annual growth of 12 %. 18

21 NORTH AMERICA Future opportunity Still no FPSOs in operation Long-term potential EUROPE & EURASIA FOCUSED MARKET Rough weather conditions Strict regulations Marginal field growt (150 + fields in North Sea) SOUTH & SENTRAL AMERICA FOCUSED MARKET Brazil main area of activity Co-op with Petrobras Weather conditions suited for SSP Large reserves in deep- and ultra deepwater AFRICA Future opportunity Benign weather conditions Long-term potential MIDDLE EAST Future opportunity Shallow water - propensity for fixed facilities ASIA PACIFIC FOCUSED MARKET Indonesia, China and Malaysia largest activity Weather conditions suited for SSP Medium/marginal fields Large reserves on deepwater GLOBAL FLOATING PRODUCTION UNITS: AFRICA: % ASIA: % AUSTRALASIA: % EUROPE: % LATIN AMERICA: % MIDDLEAST & CASPIAN:. 2 % NORTH AMERICA: % 19

22 INVESTMENT IN EXPLORATION AND DEVELOPMENT Despite strong oil prices since 1999, oil companies have until recently been reluctant to increase exploration and production spending. Until mid 2003 the high prices were seen more as a result of limited oil supplies rather than growing demand. However, oil demand has increased significantly and as a result of the current low capacity surplus, exploration and production activity is expected to increase. Fuelled by declining reserves and record high earnings, oil & gas companies have now started to increase exploration and production spending significantly. This has lead to increased activity and capacity utilisation in most oil service segments including floating production and drilling for deepwater equipment and services. Based on SEB Enskilda Research s annual E&P survey, summarizing in-depth interviews with 25 major oil and gas companies which is estimated to represent approx. 60 % of global E&P spending. The spending growth is estimated to be 20 % in 2005, followed by 26 % growth in both 2006 and The estimates for 2005, 2006 and 2007 are SEB Enskilda Research s own estimate and not the actual forecast for the individual oil & gas companies. MARKET OUTLOOK FLOATING PRODUCTION Historically the market for floating production systems has grown by 12 % annually since the end of 1990 and a total of 191 floaters are in operation at the end of The strong growth in demand for the Floating Production Units (FPUs) is expected to continue well into Some of the most important market drivers for FPUs are: Constantly moving towards deeper water and marginal fields Cost advantage vs. other type of concepts Can be removed and re-used Shorter field lifetime The more long-term view of this market is shown in the figure below, which shows the estimated number of fields planned for start-up during the period 2006 to 2010 using some type of a floating production concept. GLOBAL E&P SPENDING FOR A SELECTED GROUP OF OIL & GAS COMPANIES E Source: SEB Enskilda Research annual E&P survey NUMBER OF FIELD DEVELOPMENTS BY START-UP YEAR Source: Infield, SEB Enskilda Research

23 INTERVIEW WITH THE VP BUSINESS DEVELOPMENT The floating production market is blooming today, where do you consider the SSP to be most competitive? - We do believe we can be competitive in all markets, but we have initially decided to focus on areas with relatively harsh environmental conditions such as North-West Europe, South America and Australasia. We have furthermore initially focused on marginal fields where competing technology with higher cost would not create satisfactory economy for the development. Having said that, we have SSP designs with storage capacity of up to 2 million barrels and clearly see benefits for larger developments too. What about the Gulf of Mexico? - Although the environmental conditions with hurricane attacks will put the SSP in a very favorable position, there are still no FPSOs in this area. However, we believe US Gulf to be an interesting area going forward and we have received quite a lot of interest after the strong 2005 hurricane season with well-known disasters for other platform designs. What do you consider to be the main benefits with the SSP design? - The benefits are every feature making the SSP a safer, more environmentally friendly and cost effective unit than competing concepts. Examples of such features are distinct segregation of hazardous and safe zones on board, segregated ballast, double sides and bottom, no turret/ swivel, lower steel weight for same storage volume and concentrated piping/ valves/ pump system for cargo ballast and seawater. The SSP has also proven to be outstanding with regards to construction simplicity resulting in shorter construction time. How do you see the future for the SSP design? - We have already got the answer from the market ensuring us that we were right when we decided to use the SSP technology for an FPSO application. Now, we have launched the Sevan Deepsea Driller and I would be surprised if this is the last type of application we will create based on the circular hull. Fredrik Major, Vice President Business Development What have in your opinion been the most important reasons for Sevan Marine being able to launch a new floater concept in the market? - Having the right skills, lots of patience and confidence from our investors has given us the necessary time and opportunity to fine-tune the motion behavior and the other characteristics of the SSP. And without the confidence from our first users, Petrobras and Venture Production we would of course not have been able to cross the starting line. Fredrik Major has been engaged in the turret business for ten years before joining Sevan Marine, so a natural last question to him is: Why can the SSP operate in harsh environments without a turret whereas a ship would need one? - The answer to this is much of the clue of the SSP design: Make it round so you do not have to make it go round. The SSP has a bow in all directions and can remain with a constant orientation regardless of the direction of wind, waves and current. 21

24 VENTURE PRODUCTION FACTS ABOUT VENTURE Venture Production plc is a leading new generation oil and gas company focused on recapturing the potential of stranded reserves Venture acquires, operates, and revitalises 'stranded' assets - oil and gas fields with proven but untapped potential. Venture brings advanced technology, modern operating practices, and a talented team of engineers, geologists and other professionals - ready to focus on fields that may no longer fit the portfolios of other companies. As operators, Venture works directly to ensure the success of our fields Venture applies the highest standards of safety, quality, and efficiency Venture cares about the communities where they work and are committed to hiring locally, protecting the environment, and building partnerships that work. Ventures standards are high. And it's paying off. In just six years, Venture has increased production from only 200 barrels of oil (equivalent) per day in 1999 to over 50,000 barrels of oil (equivalent) per day at the end of Venture have established themselves as a trusted partner in the United Kingdom's North Sea, and are poised for continued future growth. VENTURE CHOSE THE SSP 300 FOR CHESTNUT FIELD In August, 2005 Sevan Marine signed a contract with Venture Production for the use of one SSP 300, as an FPSO on the Chestnut field in the central North Sea. The water depth at the field is 120 m. The unit will have an oil processing capacity of bbls/day and a water injection capacity of bbls/day. The unit will carry up to 3 risers and umbilicals. The Chestnut Field will be developed utilising two sub-sea wells tied back to the SSP300 floating. The 22/2a-11x well, drilled in 2001 will be re-used along with a new water injection well planned to be drilled during the second half of The figure below shows the contract status for the SSP for Chestnut Venture Production. CONTRACT TERMS CLIENT FIRST OIL LENGTH OPTION OWNERSHIP OPERATION Venture 3Q ,5 years 4 x 67 month 80 % Sevan Marine/ Prod. further extension Venture 20 % Wood group Project phase Fixed term Options FIELD CHARACTERISTICS Total reserves: 10 mbbl Water depth: Shallow water 120 meters Low gas oil ratio 22 SSP CHARACTERISTICS Storage capacity: bbl oil Processing capacity: bbl/d Water injection: bbl/d Risers and umbilicals: 3

25 INTERVIEW WITH THE ASSET MANAGER VENTURE PRODUCTION Can you please tell us about yourself and your history at Venture? investors in the SSP300technology. We own a 20% share in the Chestnut SSP I joined Venture in 2001 in charge of operations in Trinidad. I came to Aberdeen in 2003 and joined the Oil Asset Team where one of my tasks was to find development solution for the Chestnut Field. Venture exploits Stranded oil and gas assets. That is to say discoveries which other oil and gas companies have been unable to get into production. This is for a variety of reasons but usually small size and distance from existing infrastructure are problems. Why did Venture select Sevan Marine as a vendor for the FPSO? - We see the SSP300 concept as a breakthrough concept which fits perfectly with our long term strategy of exploiting stranded oil fields in the North Sea. It will provides a low cost and high availability development solution for Chestnut. The floating solution manages the downsides risks inherent in this kind of project by minimising the initial capital investment. When the field is no longer economic, we will quite simply take the Chestnut SSP300 to another location and produce the next field. The SSP300 solution was the only economic solution for the Chestnut field when we sanctioned the project in early What do you expect from Sevan Marine? - We anticipate a long and healthy relationship with Sevan Marine to the extent that we have forged a strategic alliance with them and are direct What we have seen from Sevan so far is innovation, marine design and construction expertise, openness and honesty, and an ability to understand customers needs and turn them into practical and commercial reality. Our expectation is that we continue with the very healthy relationship which we have established. We consider them to be one of Ventures key alliance Partners and an important element of of our own strategy going forward. What are the geological characteristics for the Chestnut field? - The Chestnut Field was discovered in The reservoir is the Eocene Nauchlen Sand at a depth of some 6900 ft. The field has been appraised by six wells. The 22/2a-11x well was drilled in 2001 and placed on extended test. The well produced approximately 1 MMb during the test. The well test helped to reduce the STOIIP uncertainty and confirmed the reservoir deliverability. A new water injection well will be drilled as part of the development. Where do you see the future possibilities for cooperation between Venture and Sevan Marine? - Our existing portfolio of fields contains several other opportunities for the SSP300 concept. The opportunities for re-use of the Chestnut SSP300, or even additional units, is something we are already exploring. Mike Travis, Asset Manager Venture Production Ltd. 23

26 SHAREHOLDER INFO SHAREHOLDER POLICY The Company shall aim at making the Shares in the Company an attractive investment object. The Company shall provide its shareholders with a competitive return on investment over time, in terms of dividend and development in the share price. The Company s target is that the underlying values shall be reflected in the share price. STOCK PERFORMANCE Sevan Marine Osebx The Company shall be managed based on principles that seek to ensure openness, integrity and equal treatment of shareholders. The Company shall seek to clarify its long-term potential, including its strategy, value drivers and risk factors. The Company shall maintain an open and proactive investor relations policy, a best-practice website and shall give presentations regularly in connection with interim results IPO Dec 13, 2004 Dec. Jan. Feb. Mar The Company shall provide shareholders, Oslo Børs and the market as a whole with timely and accurate information. Such information will take the form of annual reports, quarterly interim reports, press releases, stock exchange notifications and investor presentations, as applicable. SHAREHOLDER DISTRIBUTION 60% Holding # share- % share- % shares holders holders % 0.4% % 2.7% % 7.8% % 34.3% < % 54.8% 20% On foreign hands Org. / Enterprises 11% 5% 2% 2% Private individuals Insurance / Pension funds Banks / Inv. banks Securities funds SHAREHOLDER STRUCTURE THE 20 LARGEST SHAREHOLDERS AS AT MARCH 31, 2006: Shareholder No of shares % 24 Goldman Sachs Intern Equity Nontreaty Cus Bank of New York, BR S/A Equity Tri-Party Credit Suisse Securi (Europe) Ltd Morgan Stanley & Co. Client Equity Accoun Arne Smedal Supernova AS Hallingen AS Aasen AS MP Pensjon Skandinaviska Enskilda (PUBL) Oslofilialen Morgan Stanley & Co Deutche Bank Ag LON Prime Brokerage Full Credit Suisse Securi(Europe) Prime Brok JPMorgan Chase Bank Clients Treaty Accou UBS AG, London Branc Equities/Corporate Skandinaviska Enskil A/C Clients Account Euroclear Bank S.A./ 25% Clients Goldman Sachs Intern Equity House Clearan Statoil Pensjonskasse v/ Statoil Kapitalforvaltning State street bank & Client Omnibus D largest shareholders Remaining Total

27 DIVIDEND POLICY Long-term, the Company shall aim at paying a dividend to its shareholders on a regular basis. Near-term, the Company s focus will be on completing the construction of the SSPs and on growth in the Company s share price based on the market s valuation of existing and future earnings. In the last three years, there has been no payout. INVESTOR RELATIONS POLICY In order to treat all its shareholders equally, an important aim for Sevan Marine is to ensure that the stock market at all times is in possession of correct and complete information about the Company s operations and condition, and thereby to contribute to the most accurate pricing of its shares. Approaches taken to meet this aim include prompt and comprehensive reporting of the Company s interim results and the distribution of annual and quarterly reports. In addition, information of significance for assessing the Company s underlying value and prospects is reported to the Oslo Stock Exchange and made available on the Company s internet site. Presentations are given in connection with the publication of the quarterly results and throughout the year, both nationally and internationally, to inform existing and potential investors about the Company. BOND LOAN SEVAN01 Amount: NOK 670m Issue date: March 31, 2005 Maturity: March 31, 2008 Coupon: 9 % Issue price: 100 % Bond holders: Norwegian and international institutional investors TRADE DEVELOPMENT BOND LOAN (SEVAN01) BOND LOAN SEVAN Amount: USD 50m 99 Issue date: January 31, 2006 Maturity: January 31, 2011 Coupon: 9.75 % Issue price: 100 % Call option: March 31, 2008 at 103% Bond holders: Norwegian and international institutional investors 98 April May June July Aug. Sep. Oct. Nov. Dec. Jan. Febr. Mar

28 THE BOARD OF DIRECTORS REPORT was an important year in Sevan Marine ASAs (the Company) history. During the first and second quarter, the Company acquired 100 % of the shares in Kanfa AS. Kanfa is a process design and engineering company located in Asker, Norway. The purchase was a strategic move intended to secure specific engineering capacity and knowledge for ongoing and future projects. In the second quarter, Petrobras S.A. informed the Company that its board of directors had approved the contract with Sevan Production for the use of the first SSP the SSP Piranema - under a long-term contract on the Piranema field offshore Brazil. The fixed term of the charter contract is 11 years, with extension options for a further 6 x 1 years plus additional 5 years mutually agreed. The contract value for the fixed term is approximately USD 399 million. The construction of the SSP Piranema s hull takes place at the Yantai Raffles Shipyard in China, while the outfitting and assembly of the process plant is carried out at the Keppel Verolme Shipyard in Rotterdam. As a part of its long-term strategy in Brazil, the Company entered into an agreement with its Brazilian partner, Etesco Construção e Comércio Ltda, for the common ownership and operations of the SSP Piranema, under which Etesco agreed to take a 25 % ownership interest in the unit. In the third quarter, the second SSP contract was signed with Venture Production (North Sea Developments) Limited for the use of an SSP 300 FPSO on the Chestnut field in the central UK North Sea. The fixed term of the charter contract is 30 months, with options for an additional 24 months, and further extension options. Under a separate agreement with the shipyard, the Company has secured options to order four additional SSPs with delivery times beyond the third unit. INCOME STATEMENT AND BALANCE SHEET Consolidated revenues for 2005 totaled NOK 148 million, an increase of NOK 147 million from 2004, due to the acquisition of Kanfa. The Company incurred an operating loss of NOK 52 million, an increase of NOK 33 million from 2004, due to an increase in activity caused by the construction projects and operations preparations, resulting in an increase in employees from 17 to 70. The net loss came to NOK 40 million, compared to NOK 14 million in At December 31, 2005, total consolidated assets amounted to NOK 1,733 million, of which construction in progress amounted to NOK 980 million and NOK 488 million was cash and cash equivalents. At yearend, the equity ratio was 42 %. The Company has prepared the financial statements in accordance with International Financial Reporting Standards (IFRS). The financial statements include comparative amounts for 2004, which have been restated to comply with applicable IFRS standards. CAPITAL AND FINANCING Net consolidated cash flow for 2005 was NOK 423 million. Cash flows from operations amounted to NOK 20 million, cash flows from investments amounted to minus NOK 926 million and cash flows from financing amounted to NOK 1,329 million. In February, June and September the Company carried out directed share issues with gross proceeds of NOK 112 million, NOK 131 million and NOK 258 million, respectively. 26 In the fourth quarter, the Company and Venture Production announced an alliance agreement under which Venture agreed to take a 20% equity stake in the SSP Chestnut. The parties will jointly co-operate on a non-exclusive basis to pursue additional oil field development opportunities in the UK sector of the North Sea. In the third quarter, the Company signed an agreement with Yantai Raffles Shipyard for the construction of the third SSP 300, to be equipped as an FPSO. The unit is currently available for clients. In order to part-finance the construction of the SSP Piranema, a bond issue of NOK 670 million was carried out in March. The loan has a term of three years, a coupon of 9 % payable annually in arrears and maturity in March, The loan is listed at Oslo Børs. Furthermore, in December the Company signed a USD 120 million senior debt project finance facility for the SSP Piranema. The facility is structured as a limited recourse financing containing a pre-completion construction financing of up to USD 20 million that converts into a ten-year amortizing term loan following

29 delivery of the SSP Piranema to Petrobras. The facility is complimentary to the funding raised by the Company through the bond issue as described above, and is envisaged to refinance the outstanding of the bond issue once such matures. After the balance sheet date, in January 2006, the Company carried out a bond issue of USD 50 million, with a fixed interest rate of 9.75 % payable annually in arrears. The loan has a term of 5 years with maturity in January, The Company has a call option on March 31, 2008 at 103 %. The loan is listed on Oslo Børs, and is primarily intended to part-finance the construction and outfitting of the SSP Chestnut. GOING CONCERN In accordance with the Accounting Act s 3-3, the board confirms that the annual accounts have been prepared based on the going concern assumption. The basis for this assumption is the Company s strategic plan and financial prognoses. The Company s financial position is sound. RISK The Company was founded in 2001 and has focused on developing the SSP concept and the construction and financing of the SSP 300 units. As a result, the Company has limited experience as an operating company and has generated only limited revenues. In addition, the Company is in a dynamic growth period with expansion in activities, new-building programmes and financial exposure, all of which constitute challenges which require continuous monitoring and ability to control and adapt to inherent risk. The SSP is based on new technology that has not yet been tested under real operating conditions. The assessment of the performance of the SSP is based on model tests and theoretical analyses. The Company has made its best efforts and evaluation using recognized methods and expertise available to ensure that model scale test and analysis reflects fullscale behavior of the unit. However, the Company cannot guarantee that all hydrodynamic effects have been revealed or identified. In connection with the construction of the SSPs, the Company has used its best efforts to prepare proper specifications, including the supply and installation of equipment. Despite these efforts there can be no assurances that delays and cost overruns will not occur and such events, if occurring, could have an adverse impact on the Company s financial position. The Company contemplates utilizing a combination of equity, bond financing and/or bank financing to finance the construction of SSP units. Obtaining such financing may be subject to market risks and other risks that may influence the availability, structure and terms of such financing. Historically, demand for offshore exploration, development and production has been volatile and closely linked to the price of hydrocarbons. The demand for the Company s services in connection with production and exploration in the offshore oil and gas sector is particularly sensitive to price decreases, fluctuations in production levels and disappointing exploration results. Contracts in the offshore sector require high standards of performance and safety, entailing considerable risks and responsibilities. These include technical, operational, commercial and political risks. There is often considerable uncertainty as to the duration of offshore charters because most of the agreements give the operator both extension and early cancellation options. Changes in the legislative and fiscal framework (including tax rules) governing the activities of the oil companies could have material impact on exploration, production and development activity or affect the Company's operations directly. HSE AND CORPORATE GOVERNANCE Developing sound health, safety and environment (HSE) principles are critical success factors for the Company. The Company s business in 2005 did not pollute the environment. Total sickness absence came to 1 % both for the parent company and the group. No serious work incidents or accidents resulting in personal injuries or damages to materials or equipment happened in The work environment is good. The board and management will work to establish equal positions and opportunities for men and women among its employees and in the board. Currently, 23 % and 29% of the employees in the parent company and group, respectively, are women. There are no women elected as board members. The Company aims at developing sound corporate governance routines that provide the basis for longterm value creation, to the benefit of shareholders, 27

30 employees, other interested parties and the society at large. As a basis for its conduct of corporate governance, the Company uses the national Norwegian code of practice for corporate governance. OTHER MATTERS In first quarter 2006, the Company announced that it had carried out an evaluation of complementary uses of its patented SSP technology. In particular, the Company has evaluated the possibility of utilizing the SSP hull as basis for a drilling unit with capabilities of operating in ultra-deep water and harsh environment. Based on the encouraging results of the evaluation, the board of directors decided to establish Sevan Drilling. Accordingly, the Company has secured rights to enter into contracts with yards and equipment suppliers for the construction and outfitting of the first SSP drilling unit. The unit will be designed for operations in ultradeep water and harsh environment. A 100% owned subsidiary, Sevan Drilling, will be the owner of the drilling unit. It is intended that an application for a listing of Sevan Drilling on Oslo Børs will be filed within 12 months. In order to part-finance the construction of the first SSP drilling unit, the Company carried out a Private Placement in March, 2006 of 43,055,500 shares at a subscription price of NOK 36. Gross proceeds from the transaction amounted to 1,550,000,000. Furthermore, an extraordinary general meeting held in March, 2006, resolved to carry out a subsequent offering, directed at those shareholders that were not offered to participate in the Private Placement, at the same subscription price as in the Private Placement. OUTLOOK The floating production and drilling markets continue to look good. Several field development projects are coming to the market, in particular small and mediumsized fields. The Company is discussing several project opportunities with potential clients. In connection with the commencement of the Petrobras contract for SSP Piranema, the Company expects to generate revenues as from fourth quarter The board would like to thank the employees for the achievements in ANNUAL RESULT AND YEAR-END APPROPRIATIONS The board propose the following appropriation of the annual result in the parent company Sevan Marine ASA: Transfer from share premium account: NOK 22,211,950 Total appropriations: NOK 22,211,950 The Company did not have distributable equity as at December 31, Tananger, March 16, 2006 Jan-Fredrik Wilhelmsen Arne Smedal Kåre Syvertsen Chairman of the Board Board member Board member Jean-Philippe Flament John Hatleskog Lars M. Haugen Board member Board member Board member 28 Jan Erik Tveteraas CEO

31 THE BOARD OF DIRECTORS JAN-FREDRIK WILHELMSEN (1953) CHAIRMAN Mr. Wilhelmsen graduated with a law degree from the University in Oslo in He was admitted to the Supreme Court Bar in 1992 and is now partner in the law firm Sørlie Wilhelmsen in Oslo. During his law practice he has gained extensive knowledge of the offshore industry. Mr. Wilhelmsen is currently a member of the board in Skibs AS Abaco, Sigdal Kjøkken AS and Tubinor AS. Mr. Wilhelmsen is a Norwegian citizen with residence in Oslo. Mr. Wilhelmsen s term expires at the annual general meeting in ARNE SMEDAL (1947) BOARD MEMBER AND RESPONSIBLE FOR TECHNOLOGY AND DEVELOPMENT Mr. Smedal holds an MSc in hydrodynamics from the Norwegian institute of Technology (NTNU) in Trondheim. Mr. Smedal has previous experience as President and CEO of Navis ASA , Executive Vice President of Hitec ASA from , founder and President of Marine Consulting Group and Advanced Production Loading from , as well as various positions, incl. President at Pusnes from 1979 to Before this, Mr. Smedal worked for Det Norske Veritas from Mr. Smedal has been a board member of various companies within shipping and electronics. Mr. Smedal is a Norwegian citizen with residence in Arendal. Mr. Smedal s term expires at the annual general meeting in KÅRE SYVERTSEN (1951) BOARD MEMBER AND VICE PRESIDENT TECHNOLOGY Mr. Syvertsen graduated with an MSc in ship construction from the Norwegian Institute of Technology (NTNU) in Trondheim in Mr. Syvertsen was previously the Vice President Technology of Navis ( ), Vice President Technology of Advanced Production Loading from 1994 to 1997, Project Manager of Marine Consulting Group from 1990 to 1994 and Professor in marine technology at the Norwegian Institute of Technology (NTNU), Trondheim from 1976 to Mr. Syvertsen s term expires at the annual general meeting in JOHN HATLESKOG (1940) BOARD MEMBER Mr. Hatleskog graduated with an MBA from Handelshøjskolen in Copenhagen, Denmark in Mr. Hatleskog manages his own business activities through Jaco Invest AS. He is a co-owner and chairman of Belden Shipping PTE, a shipping company that specializes in the transport of cement and he has various investments in gas carriers operated by Solvang ASA. Previously, Mr. Hatleskog was co-owner of Havtor ASA, which was sold to Bergesen in Mr. Hatleskog is chairman of Gard P&I, Gard H&M and Gard AS. He is also chairman of Solvang ASA and on the board of various gas ship companies operated by Solvang ASA. Mr. Hatleskog is a Norwegian citizen with residence in Oslo. Mr. Hatleskog s term expires at the annual general meeting in JEAN-PHILIPPE FLAMENT (1968) BOARD MEMBER Mr. Flament holds a BS in inance and International Business from New York University. Since 2003, Mr. Flament has worked as a Portfolio Manager in Cheyne Capital Management. Mr. Flament has previously served as a Managing Director of Morgan Stanley & Co Intl Ltd ( ) and as Assistant Director of NatWest Financial Products plc ( ). Mr. Flament is a Belgian citizen with residence in London. Mr. Flament s term expires at the annual general meeting in LARS M. HAUGEN (1953) BOARD MEMBER Mr. Haugen holds an MBA from the Norwegian School of Economics and Administration (NHH) in Bergen in Mr Haugen has previously worked in investment banking in Oslo and London and worked thereafter for 10 years in stock broking. Since 1996 he has been an independent full time investor with main focus on the Norwegian stock market. Mr. Haugen s term expires at the annual general meeting in

32 CORPORATE GOVERNANCE STATUS AS OF APRIL Corporate governance in Sevan Marine The Company shall be managed based on principles that seek to ensure openness, integrity and equal treatment of shareholders, and is in the process of further developing and implementing sound corporate governance principles based on the Norwegian Code of Practice for Corporate Governance. Such principles includes norms regarding business ethics, including the handling of matters such as conflicts of interest, confidentiality and protection of assets, insider trading, bribery, corruption and the use of IT systems. 2. Business strategy Sevan Marine s vision is to be a world-class company in the technologically challenging segments of the offshore market. Sevan Marine shall utilize its competitive advantages within design, engineering and project execution to offer cost-effective and innovative products and solutions to its clients, based on the patented SSP technology. The Company shall aim at maintaining a local presence in international markets. Growth will be achieved mainly through organic development and partnership arrangements. The Company s business strategy is outlined in more detail on page 33 in the annual report. 3. Equity and dividend payment The Company shall aim at establishing a sound financial structure, reflecting the capital intensive nature of its business, the offshore market fluctuations and the duration of the contract portfolio for its SSPs. In this respect, the Company shall ensure that its equity basis is sufficient. The Company shall provide its shareholders with a competitive return on investment over time, in terms of dividend and development in the share price. The Company s target is that the underlying values shall be reflected in the share price. Long-term, the Company shall aim at paying a dividend to its shareholders on a regular basis. Near-term, the Company s focus will be on completing the SSPs under construction and on the growth in the Company s share price, based on the market s valuation of existing and future earnings. Mandates granted to to Board of Directors with regards to increase in the share capital shall specify the purpose. The Board s authorizations to issue new shares in connection with the financing of capital requirements related to its business activities, stockbased incentive schemes and acquisition of treasury shares are outlined in more detail in the notes to the accounts and in the minutes from the annual general meeting May 3, 2005 which are available on our website. 4. Equal treatment of shareholders and transactions with related parties The Company has only one class of shares and each share entitles the holder to one vote at the General Meeting. Transactions with close associates shall be on an arms-length basis, and always according to the Norwegian Public Limited Companies Act. A Private Placement of NOK 1,550 million carried out in March 2006, were directed at larger existing shareholders and institutional investors. In order to treat each shareholder equally, a Subsequently Offering was carried out towards existing shareholders that were not offered to participate in the private placement, at the same subscripction price. Related party transactions for 2005 consist of sales to Kanfa-Tec AS (49,995% owned associate) of NOK 0.9 million and purchases from Kanfa-Tec of NOK 11.0 millions. All transactions with Kanfa-Tec AS were made on an arm s lenghts basis. 5. Freely negotiable shares All shares are freely negotiable. 6. General Meetings The general meeting is the Company s supreme corporate body. It elects the board members and the auditor and is the forum for presentation and discussion of other issues of general interest to shareholders. Every shareholder in the Company has the right to attend the general meeting. The board, the nomination committee and the auditor are obligated to attend the general meeting. The general meeting elects a chairman for the meeting. The date of the general meeting is published through the Oslo Børs information system as a part of the Financial Calender for the next year, no later than October each year. The Financial Calender is also available at the Company s website.

33 Notice of the general meeting is given two weeks in advance and all shareholders are notified at the address under which they are registered in the Register of Shareholders. In addition, the general meeting is announced in two newspapers. Attendence forms may be sent to the Company until the day before the general meeting in order to enable as many shareholders as possible to attend. If the shareholder is unable to attend he or she may attend by proxy. The minutes from the general meeting will be published as soon as practical possible both on the Oslo Børs information system and on the website. 7. Nomination committee A nomination committee, which works under the mandate and authority of the general meeting, makes preparations and recommends candidates for the general meeting s election of the Board, and proposes the Board s remuneration. The nomination committee consists of the chairman of the Board and two members elected by the general meeting. The members elected by the general meeting are appointed for two years. The chairman of the board of directors acts as the chairman of the nomination committee. In addition, the nomination committee consists of Mimi Kristine Berdal and Christel Borge. Mimi Kristine Berdal works as a lawyer in private practice. Christel Borge is a business and management graduate and works with strategic development at the Telenor group. Within one month before the general meeting the nomination committee will provide contact information to its members and any deadlines for submitting proposals to the committee. This information will be published on the Company s website. 8. Corporate assembly and board of directors Since the Company have less than 200 employees, it is not required to have a corporate assembly. administering the Company s affairs and for ensuring that the Company s operations are organized in a satisfactory manner. Moreover, the Board is responsible for establishing supervisory systems and for overseeing that the business is run in accordance with the Company s core values and ethical guidelines. The Board constitutes itself. Currently the Board has not appointed a deputy chairman, but will however consider appointing such deputy chairman in connection with the upcoming general meeting. The Board meets eight to twelve times a year and more frequently if required. 10. Remuneration of the Board The remuneration of the Board is determined on a yearly basis by the ordinary general meeting. The directors may also be reimbursed for, inter alia, travelling, hotel and other expenses incurred by them in attending meetings of the directors or in connection with the business of the Company. A director who has been given a special assignment, besides his normal duties as a director, in relation to the business of the Company, may be paid such additional remuneration as the directors may determine. At the Company s ordinary general meeting on May 3, 2005, the annual remuneration for 2004 of the chairman of the Board was set to NOK 200,000 and NOK 100,000 for each director. All board members are independent of the Company s main shareholders, while four out of six board members are independent of the Company s executive management and material business contacts. The Company aims at complying with applicable gender requirements as to board composition in a timely fashion. 9. The work of the board of directors The board of directors is ultimately responsible for With respect to options to board members, three board members have such options, which were awarded prior to the listing of the Company in Remuneration of the executive management The Company s remuneration policy for senior officers is to provide a competitive total package. By and large, the basis for comparison is the practice followed by other companies involved in the oil and gas sector in the 31

34 geographic areas where Sevan Marine pursues its operations. The total remuneration package for the CEO and other senior officers comprises basic pay, share options, company car, pension and insurance schemes. Key management s compensation is disclosed in the notes to the accounts. In order to incentivise employees, the Company has established a share-based compensation plan. Any award shall be based on individual performance and results achieved. The strike price of awarded options is at minimum the market price. Share options may typically be exercised over a threeyear period. The total number of stock options and bonus options awarded under the Company s stock option and bonus option program are disclosed in the notes to the accounts. 12. Information and Communication In order to ensure equal treatment of its shareholders, an important aim for Sevan Marine is to make sure that the stock market is in possession of correct, clear and timely information about the Company s operations and condition at all times. This is essential for an efficient pricing of the shares and for confidence in the Company. Approaches taken to meet this aim include prompt and comprehensive reporting of the Company s interim results, and the distribution of annual and quarterly reports. In addition, information of significance for assessing the Company s underlying value and prospects is reported to the Oslo Børs and made available via the web site and distribution. Further details, such as contact names, addresses and news about the Company, are available at the web site. The Company will also strive to ensure that its progress is monitored by securities analysts. The Company has established a designated Investor Relations position for relations with shareholders, Oslo Børs, analysts and investors in general. The Company shall seek to clarify its long-term potential, including its strategy, value drivers and risk factors. The Company shall maintain an open and proactive investor relations policy, a bestpractice website and shall give presentations regularly in connection with interim results. In February 2005, Sevan Marine was awarded the Oslo Børs Information and English symbols. These symbols have been established to identify companies working professionally and systematically to make financial information readily available to investors and other market players, both nationally and internationally. 13. Take overs The Board will not seek to hinder or obstruct takeover bids for the Company s activities or shares unless there are particular reasons for this. 14. Auditor The Auditor annually reports the main features of the plan for the audit of the Company to the board of directors. When the board meeting deals with annual accounts, the Auditor participates. Once a year the Auditor presents a review of the Company s internal control procedures, including identifying weaknesses and proposals for improvement. The remuneration paid to the auditor is reported to the annual general meeting. 32

35 BUSINESS STRATEGY Sevan Marine s vision is to be a world-class company in the technologically challenging segments of the offshore market. Sevan Marine shall utilize its competitive advantages within design, engineering and project execution to offer cost-effective and innovative products and solutions to its clients, based on the patented SSP technology. The Company shall aim at maintaining a local presence in international markets. Growth will be achieved mainly through organic development and partnership arrangements. The Company s primary focus is to create values for its shareholders by delivering products and solutions to the offshore industry, utilizing its core competences within the areas of design, engineering and project execution. The basis for the products and solutions shall be the SSP technology. Until now, the Company has concentrated its efforts in utilizing the SSP platform as a floating production, storage and offloading unit. However, due to its versatility, the SSP design may also be used in connection with applications such as deepwater and harsh environment drilling, accommodation and various gas applications. Going forward, the Company will evaluate the potential for such complementary uses of the SSP technology. The business model is based on a build-ownoperate scheme, whereby the Company takes the responsibility for the construction, ownership an operation of the SSP platforms. Co-ownership in the platforms may be considered if it is deemed beneficiary. Operations may be carried out by inhouse personnel or in cooperation with recognized operations & maintenance contractors. The SSP platform will typically be leased to clients under multi-year contracts, under which the Company undertakes to carry out the production activities on a specific offshore field containing hydrocarbons. The Company s remuneration will consist of an agreed dayrate, which the client (i.e. the oil company) pays for the bareboat or time charter of the platform. Such dayrate will typically consist of an operating element and a capital element. The Company aims to reduce as much as possible any element of reservoir risk in the remuneration it receives. Should the client prefer to be the owner of SSP, the Company will evaluate this on a case-by-case basis, taking into consideration factors like risk, remuneration and construction and engineering capacity. Design Engineering Construction Ownership Operation FOCUS Proprietary technology In-house expertise - Hull - Topside (Kanfa) Co-operation with yards Close follow up and cooperation Ownership in all units Partnerships on a case by case basis Operation responsibility Combines international and external resources Lease contracts - no reservoir exposure Core area Core area Core area RATIONALE The core competencies and competitive advantages are within the technology Inhouse marine and process expertise provides optimization and flexibility Full control of own technology Higher returns over a longer period Full control through own operation management Icreased flexibility 33 Figure: Business model

36 SEVAN MARINE GROUP CONSOLIDATED BALANCE SHEET Note IFRS 2005 IFRS 2004 N-GAAP 2004 ASSETS Non-current assets Construction in progress Other fixed assets Intangible assets Intangible software Investments in associates Deferred income tax assets Derivative financial instruments Trade and other receivables Total non-current assets Current assets Trade and other receivables Derivative financial instruments Cash and cash equivalents Total current assets Total assets EQUITY Capital and reserves attributable to equity holders of the Company Share capital Share premium Other reserves Retained earnings Total shareholders equity Minority interest Total equity LIABILITIES Non-current liabilities Borrowings Derivative financial instruments Retirement benefit obligations Provisions for other liabilities and charges Total non-current liabilities Current liabilities Trade and other payables Deferred income tax liabilities Provisions for other liabilities and charges Total current liabilities Total liabilities Total equity and liabilities

37 SEVAN MARINE GROUP CONSOLIDATED INCOME STATEMENT Note IFRS 2005 IFRS 2004 N-GAAP 2004 N-GAAP 2003 Sales Cost of goods Depreciation, amortisation and impairment charges 6, Employee benefit expense 21, Other expenses Total cost of goods sold, marketing and distribution costs and administrative expenses Operating profit Finance income Finance costs Share of (loss)/profit of associates Profit before income tax Income tax expense Profit for the year Attributable to: Equity holders of the Company Minority interest Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in NOK per share) -basic 25-0,51-0,27-0,17-0,34 -diluted -0,51-0,27-0,17-0,34 Tananger, March 16, 2006 Jan-Fredrik Wilhelmsen Arne Smedal Kåre Syvertsen Chairman of the Board Board member Board member Jean-Philippe Flament John Hatleskog Lars M. Haugen Board member Board member Board member 35 Jan Erik Tveteraas CEO

38 SEVAN MARINE GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Note Attributable to equity holders Minority Total of the Company interest equity Share Share Other Retained capital premium reserves Earnings Balance at December 31, Correction of elimination error from Change of accounting policy (pensions) Social security, share based incentive plans Balance at January 1, 2004 IFRS Total proceeds from share issues in Share issue costs Tax effect on share issue costs Net loss for the year Currency translation difference Value of employee services, share option scheme Cash flow hedges Balance at December 31, 2004 IFRS Total proceeds from share issues in Share issue costs Tax effect of share issue costs Value of employee services, share option scheme Net loss for the year CF hedge PY transferred to construction in progress Cash flow hedges, net of tax Currency translation differences Balance at December 31, 2005 IFRS

39 SEVAN MARINE GROUP CONSOLIDATED CASH FLOW STATEMENT Note IFRS 2005 IFRS 2004 N-GAAP 2004 Cash flows from operating activities Cash generated from operations Interest paid Income tax paid Net cash generated from operating activities Cash flows from investing activities Acquisition of subsidiary, net of cash acquired Purchases of property, plant and equipment (PPE) Proceeds from sale of PPE Purchases of intangible assets Purchases of available-for-sale financial assets Loans granted to related parties Loan repayments received from related parties Interest received Dividends received Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of ordinary shares Purchase of treasury shares Proceeds from issuance of convertible bond Proceeds from issuance of redeemable preference shares Proceeds from borrowings Repayments of borrowings Changes in pension liabilities Exhange rate changes foreign subsidiary Net cash from financing activities Net (decrease)/increase in cash, cash equivalents and bank overdrafts Cash, cash equivalents and bank overdrafts at beginning of the year Exchange gains/(losses) on cash and bank overdrafts Cash, cash equivalents and bank overdrafts at end of the year

40 SEVAN MARINE GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION Sevan Marine ASA ( the Company ) and its subsidiaries (together the Group ) primary focus has been the niche for floating production, storage and offloading solutions for demanding sea conditions. In January 2006, the Company announced its intention of moving into the drilling segment and has recently carried out a private placement to part finance its first drilling unit with capabilities of operating in ultra-deep water and harsh environment. The operating activty takes place in the international offshore market for both segments. During the year, the Group acquired control of Kanfa AS, a company with expertise and capacity to design and construct processing equipment, which enables Sevan Marine ASA to offer complete FPSO solutions within the Group. Kanfa AS will also serve external customers. The Company is a public limited liability company incorporated and domiciled in Norway. The address of its registered office is Hammeren 23, 4056 Tananger. The Company s shares are listed on the Oslo Stock Exchange. These consolidated financial statements have been approved for issue by the Board of Directors on March 16, Overview of the Group s structure as of December 31, 2005 Subsidiaries Registered office Interest held Equity 2005 Profit/loss 2005 Kanfa AS Asker 100 % Sevan Production Pte Ltd Singapore 100 % Sevan Marine do Brasil Ltda. Brasil 100 % Piranema Servicos De Petroleo Ltda. Brasil 75 % Sevan Production AS Tananger 75 % Associated Companies Registered office Interest held Equity 2005 Profit/loss 2005 Kanfa-Tec AS Asker 49,995 % The following companies are in the process of formalization, establishment, or have been established in 2006: Sevan Invest AS, Sevan Drilling AS, Sevan Holding I AS, Sevan Holding II AS, Sevan Holding III AS, Sevan Holding IV AS, Sevan Pte Ltd, Sevan SSP Pte Ltd, Sevan Holding I Pte Ltd, Sevan Holding II Pte Ltd, Sevan Holding III Pte Ltd, Sevan Holding IV Pte Ltd, Sevan Production General Partnership Singapore, and Sevan Production Services Ltd. A co-operation related to the SSP Chestnut will be organized in the form of Sevan Production General Partnership, a general partnership in Singapore, in which Sevan Marine ASA and Venture Production Plc will have an ownership interest of 80% and 20% respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all financial years presented, unless otherwise stated. All numbers are in NOK 1,000 unless otherwise stated Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The Group prepared its consolidated financial statements in accordance with Norwegian GAAP (NGAAP) until December 31, In preparing these consolidated financial statements, management has amended certain accounting policies and valuation methods to comply with IFRS. The comparative 2004 accounts have been restated to reflect these adjustments.

41 The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. Standards, interpretations and amendments to published standards that are not yet effective Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group s accounting periods beginning on or after January 1, 2006, or later periods but which the Group has not early adopted, as follows: IAS 19 (Amendment), Employee Benefits (effective from January 1, 2006). The Group will apply this amendment from annual periods beginning January 1, IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions (effective from January 1, 2006). This amendment is not relevant to the Group s operations. IAS 39 (Amendment), The Fair Value Option (effective from January 1, 2006). The Group will apply this amendment from annual periods beginning January 1, IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts (effective from January 1, 2006). Management considered this amendment to IAS 39 and concluded that it is not relevant to the Group. IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources (effective from January 1, 2006). These amendments are not relevant to the Group s operations as the Group does not carry out exploration for and evaluation of mineral resources. IFRS 6, Exploration for and Evaluation of Mineral Resources (effective from January 1, 2006). IFRS 6 is not relevant to the Group s operations. IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements Capital Disclosures (effective from January 1, 2007). The Group will apply IFRS 7 and the amendment to IAS 1 from annual periods beginning January 1, IFRIC 4, Determining whether an Arrangement contains a Lease (effective from January 1, 2006). Management is currently assessing the impact of IFRIC 4 on the Group s operations. IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (effective from January 1, 2006). IFRIC 5 is not relevant to the Group s operations. IFRIC 6, Liabilities arising from Participating in a Specific Market Waste Electrical and ElectronicEquipment (effective from December 1, 2005). IFRIC 6 is not relevant to the Group s operations. 2.2 Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement. Inter-company transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 39

42 (b) Transactions and minority interests The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests resulting in gains and losses for the Group, are recorded in the income statement. Purchases from minority interests resulting in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. (c) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The Group s share of its associates post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. 2.3 Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and return that are different from those of segments operating in other economic environments. Business segments The Group is organized in two business areas, Floating Production and Equipment and Systems. In connection with the establishment of Sevan Drilling, the Group will in the future also have a third segment, Drilling. Until the first drilling unit is complete, estimated first half of 2009, the activities in this segment will be related to design, engineering, and construction. Revenues are not expected before completion of the drilling unit. As of December 31, 2005, the segment Floating Production has not generated significant revenues, as the operations have been related to design, engineering, and construction of the SSP s, including SSP Piranema and SSP Chestnut. Operating revenues are expected to be generated from 4th quarter 2006, when SSP Piranema is expected to start working on its contract with Petrobras. The segment Equipment and Systems consists of the Kanfa operations, which include sale of equipment and systems related to design and engineering of processing systems. Kanfa s main segment activity is related to delivery of services and equipment to the SSP s which are under construction. In addition, Kanfa also serves external customers. Geographical segments The Company s operating segments operate in the global offshore market and have common marketing and senior management functions. Currently the Group does not divide its operations into geographical segments. As the units are completed and start operating, dividing into main geographical areas (segments) will be assessed Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in NOK, which currently is the Company s functional and presentation currency. As the Company will start generating revenues in USD from 2006 and taking on financing in USD, the Company will reassess its functional currency in 2006.

43 (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges. Translation differences are recognized in profit or loss, and other changes in carrying amount are recognized in equity. Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss. (c) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (iii) all resulting exchange differences are recognized as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders equity. When a foreign operation is sold, exchange differences that were recorded in equity are recognized in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 2.5 Property, plant and equipment Fixed assets are generally stated at historic cost less accumulated depreciation. The Group has not used, and has no plans of utilizing the revaluation option in IAS 16. Depreciation is calculated using the straight-line method. Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to estimated discounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated discounted future cash flows, an impairment charge is recognized. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Sevan Stabilized Platform (SSP) is the name of the Groups newly developed cylinder shaped platform for floating production. Each major component of the SSP s will be depreciated separately when the platforms are available for intended use. Other fixed assets consist of fixtures/office equipment and are depreciated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, 3-8 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. 41

44 2.6 Construction in progress Construction contracts are included in fixed assets as construction in progress based on installments paid to the yard and other suppliers. Transactions in foreign currencies, for which a hedge of the exposure to changes in exchange rates has been designated (cash-flow hedge), are translated to NOK at the exchange rate of the underlying hedging instrument. Insurance and net interest expenses during the construction period are included as construction-in-progress. Direct and indirect cost of man-hours directly attributable to the construction of the SSPs are also included. 2.7 Construction contracts (Equipment- and System Contracts) Contract costs are recognized when incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognized over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately. The Group uses the percentage of completion method to determine the appropriate amount to recognize in a given period. The stage of completion is estimated, using judgmental assessment, of the progress of completion of subcomponents of identified milestone deliverables in each contract up to the balance sheet date as a percentage of total identified contract milestone deliverables. The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognized profits (less recognized losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within trade and other receivables. The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognized profits (less recognized losses). 2.8 Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Separately recognized goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. (b) Computer software Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives (three to five years). Costs associated with developing or maintaining computer software programs are recognized as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. 42 (c) Customer contracts/production backlog Customer contracts/production backlog acquired in business combinations are recorded in the balance sheet on the basis of their estimated fair values. These intangible assets are amortized over their estimated useful lives/production periods (normally three to twelve months).

45 2.9 Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date Financial assets The Group classifies its financial assets as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet Derivative financial instruments and hedging activities Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of derivative instruments used for hedging purposes are disclosed. Movements on the hedging reserve in shareholders equity are shown. The full fair value of hedging derivatives is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and as a current asset or liability if the remaining maturity of the hedged item is less than 12 months. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement within other losses/gains net. Amounts accumulated in equity related to cash-flow hedges designated to the purchase of assets are added to the initial cost of the asset. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Certain derivatives do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement Inventories The Group currently has no inventories. As the SSP s go into operation, inventories will be stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method Trade receivables Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of 43

46 receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the income statement within selling and marketing costs Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, and is included in equity attributable to the Company s equity holders Borrowings Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the nominal amount value is recognized in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects either accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future Employee benefits (a) Pension obligations As of December 31, 2005 the Group operates pension schemes funded through payments to an insurance company and determined by periodic actuarial calculations. The Group currently operates defined benefit plans, which defines an amount of pension benefit that an employee will receive on retirement, dependent on factors such as age, years of service, and compensation. The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for

47 unrecognized actuarial gains or losses and past service costs. The defined benefit obligations calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in NOK and with terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees expected average remaining working lives. Past-service costs are recognized immediately in income. (b) Share-based compensation The Company operates a share-based compensation plan. In line with IFRS 2, the cost represented by the fair value at grant date is expensed over the vesting period. The fair value at grant date is confirmed by a third party calculation using the Black & Scholes option-pricing model. Cost represented by employer s tax of the excess of fair value of the share relative to the strike prices (intrinsic value) is expensed over the vesting period in line with the changing market price of its stock. (c) Profit-sharing and bonus plans The Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation Provisions A provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expected expenditures required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group s activities. Revenue is shown, net of value-added tax, estimated returns, rebates and discounts and after eliminated sales within the Group. Revenue is recognized as follows: Operating revenues are recognized in line with the development of projects. Operating expenses are recorded when incurred in accordance with the matching principle. Sales of goods are recognized when a Group entity has delivered products to the customer, the customer has accepted the products and collectability of the related receivables is reasonably assured. Sales of services are recognized in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Interest income is recognized on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognized using the original effective interest rate. 45 Dividend income is recognized when the right to receive payment is established.

48 2.21 Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease Dividend distribution Dividend distribution to the Company s shareholders is recognized as a liability in the Group s financial statements in the period in which the dividends are approved by the Company s shareholders Government grants Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognized in the income statement over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the income statement on a straight-line basis over the expected lives of the related assets Research and development Cost associated with research activities are expensed as incurred. Direct and indirect cost of man-hours relating to the construction of the SSPs, are capitalized as construction in progress. 3. FINANCIAL RISK MANAGEMENT 3.1 Financial risk factors The Group s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and interest rate risk. The Group s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures. Risk management operations are lead by the CFO under policies approved by the Board of Directors. The CFO identifies, evaluates and hedges financial risks in close co-operation with the Group s operating units. The Board approves the principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity. (a) Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, EURO and the UK pound. Foreign exchange risk arises from future commercial transactions, recognized assets or liabilities, and net investments in foreign operations. 46 To manage their foreign exchange risk arising from future commercial transactions and recognized assets and liabilities, entities within the Group use forward contracts and similar instruments. Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity s functional currency. External foreign exchange contracts are designated at Group level to perform hedges of foreign exchange exposures on a gross basis. The Group s risk management policy is to hedge anticipated transactions (mainly import purchases) in each major currency. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.

49 (ii) Price risk The Group is exposed to commodity price risk at two main levels: The demand for FPSO s and drilling units is sensitive to oil price developments, fluctuations in production levels, exploration results and general activity within the oil industry. The cost of construction for future units is sensitive to changes in market prices for the inputs. (b) Credit risk The Group has no significant concentrations of credit risk. The Group has policies that limit the amount of credit exposure to any financial institution. (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and/or marketable securities, the availability of funding through an adequate amount of committed credit facilities, and the ability to close out market positions. The Group aims to maintain flexibility in funding by keeping committed credit lines available. (d) Cash flow-and interest rate risk The Group s policy is to maintain liquidity through placement of excess as bank-deposits and/or short-term, marketable investments at limited risk. The Group s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain part of its borrowings in fixed rate borrowing facilities. 3.2 Fair value estimation The fair value of forward foreign exchange contracts is determined using valuation techniques. The assumptions in the calculations are based on market conditions existing at each balance sheet date. The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of the bond loan for disclosure purposes is based on the market price for the bonds at each balance sheet date. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate for similar financial instruments. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under current circumstances. Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Estimated impairment of goodwill The Group annually tests whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 2.8. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. 47 If the revised estimated gross margin at December 31, 2005, had been 10% lower than management s estimates at balance sheet date, the Group would still have a positive value in use on the goodwill relating to the acquisition of Kanfa AS.

50 (b) Income taxes The Group is subject to income taxes in various jurisdictions. Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. The accounting for deferred income taxes relies upon management s judgment of the Group companies ability to generate future positive taxable income, and of the estimated value in use of the balance sheet item. (c) Revenue recognition The Group uses the percentage-of-completion method in accounting for its sales of construction contracts. Use of the percentage-of-completion method requires the management s estimates on several factors. This relates to estimates of progress relative to total contract, total costs, remaining services, and final revenues from each contract. (d) Share based payment The Group uses estimates when calculating the costs of share-based payment through options. The main assumptions subject to estimates are the duration of the option, and assumed stock volatility. (e) Commitments The Group uses estimates in calculating the remaining commitments concerning construction in progress. (f) Warranties The Group uses estimates in calculating the provision for warranties to customers. 5. SEGMENT INFORMATION Primary reporting format business segments The Group is organized in two business areas, Floating Production and Equipment and Systems. In connection with the establishment of Sevan Drilling, the Group will move into a third business area, Drilling. Until the first drilling-unit is expected completed in first half of 2009, the activity within the Drilling segment will be concentrated on design, engineering and construction and is not expected to generate significant operational revenue. At December 31, 2005, the Floating Production division has generated no revenues, due the fact that its activities have been related to the design, engineering and construction of the SSPs, including SSP Piranema and SSP Chestnut. It is expected that revenues will be generated as from the 4th quarter 2006, when the SSP Piranema is expected to commence its charter contract with Petrobras. The Equipment and Systems division consist of the activities of Kanfa AS, which includes the sale of equipment and systems related to the design and engineering of process plants. Kanfa AS s primary business activity is related to the provision of services and equipment to the processing plant of the SSPs that are under construction. In addition, Kanfa is also serving clients outside of the Sevan Group. The Equipment and Systems segment is new in 2005 on the basis of the acquisition of Kanfa AS. 48

51 The segment results for the year ended December 31, 2004, are as follows: Floating Production Equipment & Systems Group Total gross segment sales Sales Operating profit/segment result Finance costs net Share of profit /(loss)of associates 0 Profit before income tax Income tax expense Profit for the year The segment results for the year ended December 31, 2005, are as follows: Floating Production Equipment & Systems Group Total gross segment sales Sales across segments Sales Operating profit/segment result Finance costs net 591 Share of profit /(loss)of associates Profit before income tax Income tax expense Profit for the year Specification of certain segment items included in the income statement : Year ended December 31, 2005 Year ended December 31, 2004 Floating Equipment Group Floating Equipment Group Production & Systems Production & Systems Depreciation Amortisation Total The segment assets and liabilities at December 31, 2004, and capital expenditure for the year then ended are as follows: Floating Production Equipment & Systems Group Assets Associates Total assets Liabilities Capital expenditure The segment assets and liabilities at December 31, 2005, and capital expenditure for the year then ended are as follows: Floating Production Equipment & Systems Group Assets Associates Total assets Liabilities Capital expenditure

52 Segment assets consist primarily of property, plant and equipment, intangible assets, inventories, receivables and operating cash. They exclude deferred taxation. Segment liabilities comprise operating liabilities. They exclude items such as taxation and corporate borrowings. Capital expenditure comprises additions to property, plant and equipment and intangible assets, including additions resulting from acquisitions through business combinations. Secondary reporting format geographical segments The Company s operating segments operate in the global offshore market and have common marketing and senior management functions. Currently the Group does not divide its operations into geographical segments. As the units are completed and start operating, division into main geographical segments will be assessed. 6. PROPERTY, PLANT AND EQUIPMENT Construction in progress Machinery, fixtures Total At January 1, 2004 Cost or valuation Accumulated depreciation Net book amount Year ended December 31, 2004 Opening net book amount Additions Software reclassified to intangible Disposals Depreciation charge Closing net book amount At December 31, 2004 Cost or valuation Accumulated depreciation Net book amount Year ended December 31, 2005 Opening net book amount Acquisition of subsidiary Additions Disposals CTA Depreciation charge Closing net book amount At December 31, 2005 Cost or valuation Accumulated depreciation Net book amount

53 7. INTANGIBLE ASSETS Goodwill Software Contract Total value At January 1, 2004 Cost Accumulated amortisation and impairment Net book amount Year ended December 31, 2004 Opening net book amount Reclassified from other fixed assets Additions Amortisation charge Closing net book amount At December 31, 2004 Cost Accumulated amortisation and impairment Net book amount Year ended December 31, 2005 Opening net book amount Exchange differences Additions Acquisition of subsidiary Impairment charge Amortisation charge Closing net book amount At 31 December 2005 Cost Accumulated amortisation and impairment Net book amount Impairment tests for goodwill Goodwill is allocated to the Group s cash-generating units (CGUs) identified according to country of operation and business segment. A segment-level summary of the goodwill allocation is presented below. Year ended December 31, 2005 Year ended December 31, 2004 Floating Equipment Group Floating Equipment Group Production & Systems Production & Systems Europe South America Asia The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management.

54 Key assumptions used for value-in-use calculations: Floating Production Equipment & Systems Europe South America Asia Europe South America Asia Income before tax* Growth rate ** ,00 % - - Discount rate *** ,00 % - - These assumptions have been used for the analysis of each CGU within the business segment. Management has estimated budgeted results based on past performance and expectations for future market developments. The discount rate applied is pre-tax and reflects specific risks relating to the relevant segments. * Budgeted result before tax year 1 (2006). ** Weighted average growth rate used to extrapolate cash flows in the five-year budget period. For the purpose of impairment testing, zero growth has been assumed beyond the budget period. *** Pre-tax discount rate applied to the cash flow projections. 8. INVESTMENTS IN ASSOCIATES Beginning of the year Acquisition of associats Reclassification* Share of (loss)/profit Exchange differences 0 0 Other equity movements 0 0 End of the year * 48% of the shares in Kanfa AS were acquired in December No share of profit/loss for the year 2004 was recognized due to the acquisition taking place late in the year. In June 2005, the remaining 52% of the shares was acquired and the investment was reclassified from associate to subsidiary. The gross balance sheet and income statement numbers for the Group s associates are listed in the table below. The Group s share of ownership is disclosed in the last column. Name Country of Assets Liabilities Revenues Profit/loss % interest incorporation 100 % 100 % 100 % 100 % held 2004 Kanfa AS Norway ,00 % 2005 Kanfa Tec AS Norway ,99 % Kanfa AS (before acquisition) Norway N/A N/A N/A ,00 % 9. DERIVATIVE FINANCIAL INSTRUMENTS Current Assets Liabilities Assets Liabilities Forward foreign exchange contracts cash flow hedges Total Less non-current portion: Forward foreign exchange contracts cash flow hedges Total Net position

55 Forward foreign exchange contracts The notional principal amounts of the outstanding forward foreign exchange contracts at December 31, 2005, were NOK million (2004: NOK 0). Gains and losses recognized in the hedging reserve in equity on forward foreign exchange contracts as of December 31, 2005, will be added to the initial cost of the construction in progress items at various dates. 10. TRADE AND OTHER RECEIVABLES Trade receivables Receivables from related parties (Kanfa-Tec AS) Less: provision for impairment of receivables 0 0 Trade receivables net Prepayments Loans to related parties Less non-current portion: loans to related parties 0 0 Current portion All non-current receivables are due within five years from balance sheet date. The fair values of trade and other receivables are the same values as set out in the above table. The Group has recognized a loss of NOK 0 (2004: NOK 0) for the impairment of its trade receivables during the year ended December 31, The Group has acquired provision for impaired receivables of NOK 50, through the acquisition of Kanfa AS June 30, CASH AND CASH EQUIVALENTS Cash, cash equivalents, and bank overdrafts include the following: Cash at bank and in hand Restricted employees' tax deduction fund Restricted interest account Short-term bank deposits SHARE CAPITAL Number of Shares Share capital Share premium Total At January 1, Proceeds from shares issued Cost of share issues At December 31, Proceeds from shares issued Acquisition of subsidiary Cost of share issues At December 31, The total authorized number of ordinary shares is 92.7 million shares (2004: 66.2 million shares) with a par value of NOK 0.20 per share (2004: NOK 0.20 per share). All issued shares are fully settled at balance sheet date.

56 Share options Share options are granted to all employees. The exercise price of the granted options is at a minimum, equal to the market price of the shares at the date of the grant. The granted options can be exercised with 1/3 each year, first time one year from the award. All options expire five years following the award. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Average exercise Options Average exercise Options price in NOK per share price in NOK per share At January 1 4, , Granted 22, , Forfeited 0,00 0 0,00 0 Exercised 2, ,00 0 Lapsed 0,00 0 0,00 0 At December 31 13, , Of the 5.1 million outstanding options (2004: 3.9 million options), 1.8 million options (2004: 2.0 million) were exercisable. Options exercised in 2005 resulted in 1.2 million shares (2004: 0 shares) being issued at an average of NOK 2.90 (2004: N/A). The weighted average market price at the time of exercise was NOK (2004: N/A) per share. There were no related transaction costs for the Group. Share options outstanding at the end of the year have the following expiration dates and exercise prices: Year of expiration Exercise price in Shares NOK per share , , , , , , , , , , , , , The fair value of options granted during the period, determined using the Black-Scholes option-pricing model, was NOK (2004: NOK 9.80). The significant inputs into the model were share price at the grant dates, exercise price shown above, standard deviation of expected share price returns of 25-35% (2004: 35-40%), dividend yield of 0% (2004: 0%) option life disclosed above, and annual risk-free interest rate of % (2004: %).

57 As at December 31, 2005, the 20 largest shareholders were: Name No of shares % share Morgan Stanley & Co. Client equity account % Goldman Sachs inten equity nontreaty cus % Bank of New York, BR BNY GCM client acc % Smedal Arne % Supernova AS % Hallingen AS % Aasen AS (Arne Smedal) % MP Pensjon % Deutsche Bank AG LON prime brokerage full % Styrbjørn AS % Skandinaviska Enskilda (publ) Oslofilialen % Goldman Sachs & Co Equity nontreaty cus % Bear Stearns securit A/C customer safe ke % JPMorgan Chase Bank clients treaty account % Euroclear Bank S.A./ 25% clients % Schmidt Raul Felippe junior % Jaco Invest AS c/o Havinvest AS % Waterman Holding Inc % Cais Bank Paris CA-IS % Credit Suisse First (Europe) Prime Broke % Total, 20 largest % Other investors % Total % At December 31, 2005, Sevan Marine ASA had 1,364 shareholders of which 55,55% reside outside of Norway. 13. OTHER RESERVES Hedging reserve Currency translation Total differeces Balance at January 1, Cash flow hedges: Fair value gains in year Tax on fair value gains Transfers to net profit Tax on transfers to net profit Net investment hedge Currency translation differences: Group Associates Balance at December 31,

58 Hedging reserve Currency translation Total differeces Balance at December 31, Revaluation gross Revaluation tax Revaluation associates Depreciation transfer gross Depreciation transfer tax Cash flow hedges: Fair value gains in year Tax on fair value gains Transfers to net profit Tax on transfers to net profit Transfers to construction-in-progress Tax on transfers to c-i-p Net investment hedge Currency translation differences: Group Associates Convertible bond equity component Tax on equity component Balance at December 31, TRADE AND OTHER PAYABLES Trade payables Amounts due to related parties (Kanfa-Tec AS) Total trade payables Social security and other taxes Accrued expenses BORROWINGS Nominal Amortized Fair value Nominal Amortized Fair value Non-current Bank borrowings Bond Total borrowings Reference is made to note 2.16 for accounting treatment of borrowings. The bank borrowing has been drawn in USD and is to be settled in USD. The Bond loan is denominated in NOK. 56 Fair value of the bank loan is estimated by discounting the contractual cash flows at a rate reflecting the underlying risk. Fair value of the bond loan is based on market rate of the bond at balance sheet date. As security for the Bondholders, Sevan Marine ASA has pledged in favor of the Loan Trustee all of its shares in its subsidiary Sevan Production AS, the current owner of SSP Piranema.

59 Of a total USD 120 million bank finance facility, USD 10 million was drawn at the balance sheet date. The single purpose loan holds security in the shares in Sevan Production AS and relevant subsidiary companies, the unit (SSP Piranema), its earnings, insurance, equipment, related contracts and accounts. The Group is not exposed to changes in interest rate on the bond loan as the interest rate is fixed for the full period. The bank finance facility is subject to 3-month Libor plus a fixed interest margin varying between 2.5% p.a. and 3.0% p.a. and as such is exposed to changes in Libor. The maturity of non-current borrowings is as follows: Nominal Amortized Nominal Amortized Between 1 and 2 years Between 2 and 5 years More than 5 years The effective interest rates at the balance sheet date were as follows: NOK US$ NOK US$ Bank overdrafts Bank borrowings 7,50 %* Bond 10,31 % Debentures and other loans * Due to a large proportion of the borrowing facility on the USD loan not beeing drawn at balance sheet date, and the fact that the total handling fee is charged to the drawn amount, an actual effective interest rate has not been calculated at balance sheet date. The draw-down of the loan was done in December The effective interest rate of the bank borrowing reflects the nominal interest rate and a proportional part of the fee. The carrying amounts of the Group s borrowings are denominated in the following currencies: NOK US dollar (USD) The Group has the following un-drawn borrowing facilities: Floating rate: Expiring within one year Expiring beyond one year Fixed rate: Expiring within one year 0 0 Expiring beyond one year The un-drawn borrowing facilities are converted into functional currency (NOK) using balance sheet date exchange rates. 57

60 16. DEFERRED INCOME TAX Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows: Deferred tax assets: Deferred tax asset to be recovered after more than 12 months Deferred tax asset to be recovered within 12 months Deferred tax liabilities: Deferred tax liability to be recovered after more than 12 months Deferred tax liability to be recovered within 12 months Net deferred tax assets: Deferred tax asset to be recovered after more than 12 months Net deferred tax liabilities: Deferred tax liability to be recovered within 12 months The gross movement on the deferred income tax account is as follows: Beginning of the year Exchange differences 0 0 Acquisition of subsidiary Income statement charge Tax charged to equity End of the year The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Spesification of deferred tax asset/deferred tax Unrealized profit hedging instrument Fixed assets Construction contracts Total deferred tax Unrealized loss hedging instrument Options Pension liabilities Accounts receivable 14 0 Accounting allocation Losses carry forward Total deferred tax asset Deferred income tax assets are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through the future taxable profits is probable. The Group did not recognize deferred income tax assets of NOK 2,718 (2004: NOK 1,400) in respect of losses in Sevan Marine do Brasil Ltda.

61 17. RETIREMENT BENEFIT OBLIGATIONS The amounts recognized in the balance sheet are determined as follows: Present value of funded obligations Fair value of plan assets Present value of unfunded obligations 0 0 Unrecognised actuarial losses Sosial security pension liabilities Liability in the balance sheet The amounts recognized in the income statement are as follows: Current service cost Interest cost Expected return on plan assets Estimate changes 33 0 Administration cost Social security on pension liabilities Total, included in staff costs The movement in the liability recognized in the balance sheet is as follows: Beginning of the year Exchange differences 0 0 Liabilities acquired in a business combination Total expense charged in the income statement Contributions paid End of the year The principal actuarial assumptions used were as follows: Discount rate 4,40 % 5,00 % 5,50 % Expected return on plan assets 4,90 % 5,50 % 6,00 % Future salary increases 3,50 % 3,50 % 2,50 % Future pension increases 2,50 % 2,50 % 2,50 % Assumptions regarding future mortality are set based on advice from published statistics and experience in each territory. The average life expectancy in years of a pension retiring at age 67 is as follows: Male 15,1 15,1 Female 18,5 18,5 59

62 18. PROVISIONS FOR OTHER LIABILITIES AND CHARGES Warranties Profit-sharing Total & bonuses At January 1, 2005 Charged to consolidated income statement: Additional provisions Unused amounts reversed Acquisition of subsidiary Increase in provision discount unwinding Used during year At December 31, Analysis of total provisions: Non-current (warranties) Current Warranties Provisions for warranties are based on historical experience. 19. CONSTRUCTION CONTRACTS (EQUIPMENT- AND SYSTEMSCONTRACTS) Contract revenues Contract cost ( ) 0 Gross profit on contracts Included in the amounts above are internal contract revenues and costs for contracts within the Group. Reference is made to note 5 on Segment Reporting. Recognized, not yet invoiced on work in progress Incurred cost on construction-in-progress included in current liabilities Accounts receivable with outstanding amount due to conditions in contracts The amount outstanding was withheld by the client pending the setup of a bank guarantee. This amount has subsequently been paid. 20. GOVERNMENT GRANTS Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognized in the income statement over the period necessary to match them with the costs that they are intended to compensate. 60 Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the income statement on a straight-line basis over the expected lives of the related assets. Grants from SND/Innovasjon Norge (The Norwegian District and Industrial Development Fund) and SkatteFUNN have been recorded as reductions in related operating expenses with NOK 0.5 million (2004: NOK 2.8 million).

63 21. EMPLOYEE BENEFIT EXPENSE Wages and salaries Social security costs Time-value of share options granted to employees Employer's tax on in-the-money value of share options granted to employees Pension costs defined benefit plans Other employee related expences Refundable expenses Total Personnell cost allocated to construction in progress Net FINANCIAL INCOME AND FINANCIAL COST Financial income interest currency gain Financial cost interest currency loss Borrowing costs incurred for the construction of any qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. Borrowing costs of NOK 51.3 million (2004: NOK 0) arising on financing specifically entered into for the construction of SSP Piranema and SSP Chestnut were capitalized during the year and are included in Additions in property plant and equipment. The capitalization represents the net borrowing cost of the loan used to finance the project. 23. INCOME TAX EXPENSE Current tax 0 0 Deferred tax The tax on the Group s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated companies as follows: Profit before tax Tax calculated at domestic tax rates applicable to profits in the respective countries Income not subject to tax Expenses not deductible for tax purposes Tax losses for which no deferred income tax asset was recognised Tax charge The weighted average applicable tax rate was 29.1% (2004: 29.6%). The decrease is caused by a change in the profitability of the Group s subsidiaries in the respective countries.

64 24. EARNINGS PER SHARE Basic Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Company and held as treasury shares Profit attributable to equity holders of the Company (MNOK) -40,3-12,7 Weighted average number of ordinary shares in issue (thousands) Basic earnings per share (NOK per share) -0,51-0,27 Diluted The Company has one category of dilutive potential ordinary shares; share options. The number of diluted shares are calculated as above with the addition of the assumtion that all share options granted are exercised Profit attributable to equity holders of the Company (MNOK) -40,3-12,7 Profit used to determine diluted earnings per share (MNOK) -40,3-12,7 Weighted average number of ordinary shares in issue (thousands) Total not-exercised share options at balance date (thousands) Weighted average number of ordinary shares for diluted earnings per share (thousands) Diluted earnings per share (NOK per share) -0,51-0,27 Due to net losses for the periods, and according to the principle of no negative dilution (positive effects on earnings per share resulting from an increase in number of shares outstanding, are not to be included), earnings per share diluted have been calculated equal to earnings per share. 25. DIVIDENDS PER SHARE No dividend was paid in 2005 or No dividend is to be proposed at the Annual General Meeting on May 4, CASH GENERATED FROM OPERATIONS Profit for the period Adjustments for: Tax 0 0 Depreciation Amortisation Net movements in provisions for liabilities and charges Net fair value gains on derivative financial instruments 0 0 Interest expense 0 0 Share of loss/(profit) from associates Exchange (gains)/losses on borrowings Changes in working capital (excluding the effects of acquisition and exchange differences on consolidation): Inventories 0 0 Trade and other receivables Other financial assets at fair value through profit or loss 0 0 Trade and other payables Cash generated from operations

65 27. CONTINGENCIES The Group has contingent liabilities in respect of bank and other guarantees as well as other matters arisen in the ordinary course of business. It is not anticipated that any material liabilities will arise from the contingent liabilities. The Group has made a provision for guarantees amounting to NOK 1,200 (2004: NOK 0). This guarantee relates to the external operation of the acquired company Kanfa AS. No additional payments are anticipated at the date of these financial statements. The Group has entered into the following security arrangements Security arrangements related to loans: SSP Piranema: Security pledge (i) on 1. priority terms in the shares of Sevan Production AS, hull/rig, insurance contracts, equipment and contracts for SSP Piranema and Sevan Production's bank account deposits of up to USD 20 million to the bank on 1. priority terms and (ii) on 2. priority terms up to NOK 670 million to the bond holders of the mentioned shares and insurance contracts, while corresponding security pledge in hull/rig is being established. In addition, Sevan Marine ASA has pledged as security, to the banks for the USD 20 million loan. When the SSP Piranema goes on contract with the charterer, expected summer 2006, the banks will also obtain security in the charter hire, and other revenues, and in the shares of Piranema Servicos de Petroleo Ltda. SSP "Chestnut": Security pledge in the shares of Sevan Production Pte Ltd is being set up in favour of the bond holders of the USD 50 million loan. This pledge will be junior secured to the USD 65 million on the 1. priority bank loan when drawn. When feasible, the bondholders will also obtain security in the hull/rig and insurance contracts, junior secured to an up to USD 65 million bank loan. Security arrangements related to construction contracts: SSP Piranema, SSP "Chestnut" and SSP no 3: Sevan Marine ASA has issued guarantees for the subsidiaries correct fulfilment of their contractual commitments as purchasers towards the shipyard. Security arrangements related to operations: SSP Piranema: Sevan Marine ASA has guaranteed for correct fulfilment of the contract with the charterer for up to USD 10 million and granted a performance guarantee towards the technical manager. SSP "Chestnut": Sevan Marine ASA has guaranteed for correct fulfilment of the contract with the charterer. The associated company Kanfa-Tec AS: Sevan Marine ASA has guaranteed for Kanfa-Tec s correct fulfilment of a customer contract. Kanfa AS has pledged the following securities in favour of its banks: Guarantee Book value amounting to December 31, 2005 Property, plant and equipment 20 millions 418 Accounts receivable and construction contracts 40 millions Sum 60 millions At December 31, 2005, the Group has issued bank guarantees towards customers relating to sales contracts amounting to: NOK 3.2 millions DKK 0.3 millions USD 4.2 millions In January 2006, an additional bank guarantee towards a customer amounting to USD 6.3 millions was issued. 63

66 28. COMMITMENTS Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: Property, plant and equipment Intangible assets Lease obligations The Group has entered into several lease/rental contracts for rent of offices, software, ASP solutions, and cars. The contracts are entered into on ordinary operational terms. The Groups annual rental expenses for offices amount to NOK 1.8 million (2005). The rental contracts expire between 2008 and The Groups annual lease expenses for software, ASP solutions, and cars amount to NOK 1.6 millions. 29. BUSINESS COMBINATIONS On June 20, 2005, the Group acquired the remaining 52% of the share capital of Kanfa AS. The acquired business contributed with operating revenues of NOK million, operating margin of NOK 3.8 million, and profit before tax of NOK 1.6 million, to the Group for the period from June 20, to December 31, If the acquisition had occurred on January 1, 2005, Group operating revenue would have been NOK million and profit before allocations would have been NOK 8.3 million. These amounts have been calculated using the Group s accounting policies and by adjusting the results of the subsidiary and reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1,2005. Details of net assets acquired and goodwill are as follows: Consideration: Cash paid for initial 48% of the shares Cash paid for the remaining 52% Direct costs relating to the acquisition 934 Fair value of shares issued Addition for profit in associate Total purchase consideration Fair value of net assets acquired Goodwill The goodwill is mainly attributable to the synergies expected to arise following the acquisition. The fair value of the 3 million Sevan Marine ASA shares issued was based on the published share price, deducted by a lockup discount, based on calculation using Black & Scholes option-pricing model. 64

67 The assets and liabilities arising from the acquisition were as follows: Fair value Acquiree s carrying amount Cash and cash equivalents Property, plant and equipment Customer contracts/order backlog I/C contracts (construction in progress) Investment in associates Work in progress Receivables Payables Retirement benefit obligation Borrowings 0 0 Net deferred tax liabilities Net assets Minority interests (0%) Net assets acquired Purchase consideration settled in cash Cash and cash equivalents in subsidiary acquired Cash outflow on acquisition RELATED-PARTY TRANSACTIONS The Group is widely held (Ref. Note 12). The following transactions were carried out with related parties: Sales of goods and services Sales to associates: Kanfa-Tec AS Related-party transactions were made on an arm s length basis. Services are usually negotiated with related parties on cost-plus basis. Purchases of goods and services Purchases from associates: Kanfa-Tec AS Kanfa AS (before acquisition) Key Management Compensation 2005 Salaries/short- Other Total term benefits benefits benefits J.E. Tveteraas CEO K. Syvertsen Board/VP, Technology A. Smedal Board/Director, Business Development E. Kvannli CFO E. A. Ronglan VP, Operations F. Major VP, Business Development G. Peccioli President, Sevan Brasil Total The overview indicates the benefits as if the employment had been for the full year. The company also operates a collective retirement benefit plan, which has not been specified in the table above.

68 In addition, Key Management personnel has been granted the following stock options during their tenure: No.of options Grant/yr Strike/NOK J.E. Tveteraas ,20 J.E. Tveteraas ,00 K. Syvertsen ,20 K. Syvertsen ,00 A. Smedal ,20 A. Smedal ,00 E. Kvannli ,80 E. A. Ronglan ,60 F. Major ,30 G. Peccioli ,90 Total/avg ,30 Year-end balances arising from sales/purchases of goods/services Receivables from related parties: Kanfa-Tec AS (associate company) Payables to related parties: Kanfa-Tec AS (associate company) Loans to directors and key management of the Company (and their families): Beginning of the year Loans advanced during year 0 0 Loan repayments received Interest charged 0 0 Interest received 0 0 End of the year EVENTS AFTER THE BALANCE SHEET DATE In January 2006, the Company carried out a Bond Loan of USD 50 million, with a fixed interest rate of 9.75% p.a. The bond loan has a term of 5 years and will mature on January 31, The Company has a call option on March 31, 2008 at a rate of 103%. An application will be made for a listing of the loan at Oslo Stock Exchange. The loan is primarily intended to part-finance the construction and outfitting of the SSP Chestnut. In February 2006, the Company carried out a private placement of NOK 1,550 million to part finance the construction of its first drilling unit. The Group is planning to utilize the SSP hull as basis for the drilling unit with capabilities of operating in ultra-deep water and harsh environment. Sevan Drilling, a wholly owned subsidiary of the Group, will be the owner of the unit. It is intended that an application for a listing of Sevan Drilling on Oslo Stock Exchange will be filed within 12 months. The estimated all-in delivery cost is USD 430 million with expected delivery in first half of

69 SEVAN MARINE ASA INCOME STATEMENT Note Operating income and operating expenses Revenue 0 0 Operating Income 0 0 Payroll expenses 9, Depreciation and amortisation expense Other operating expenses 9, 11, Operating expenses Operating profit Financial income and expenses Income from subsidiaries and other group entities Income from other group entities Interest income from group entities Other interest income Other financial income Other Interest expenses Other financial expenses Net financial income and expenses Operating result before tax Tax on ordinary result Annual net result Brought forward Loss brought forward Net brought forward

70 SEVAN MARINE ASA BALANCE SHEET Note ASSETS Fixed assets Intangible fixed assets Deferred tax assets Total intangible assets Tangible fixed assets Equipment, fixtures and fittings Total tangible fixed assets Financial fixed assets Investments in subsidiaries Investments in other group companies Loans to group companies 4, Derivative contract Other receivables Total financial fixed assets Total fixed assets Current assets Debtors Other receiveables Intercompany balances Derivative contract Total debtors Cash and bank deposits Total current assets Total assets EQUITY Restricted equity Share capital 1, 8, Share premium reserve Total restricted equity Retained earnings Other equity Total retained earnings Total equity

71 Note LIABILITIES Provisions Pension liabilities Deffered tax Total provisions Other long term liabilities Convertible loans Bonds Total of other long term liabilities Current liabilities Trade creditors Public duties payable Intercompany liabilities Other short term liabilities Total short term liabilities Total liabilities Total equity and liabilities Tananger, March 16, 2006 Jan-Fredrik Wilhelmsen Arne Smedal Kåre Syvertsen Chairman of the Board Board member Board member Jean-Philippe Flament John Hatleskog Lars M. Haugen Board member Board member Board member 69 Jan Erik Tveteraas CEO

72 SEVAN MARINE ASA CASH FLOW STATEMENT NOK Cash flows from operations Income/-loss before tax Taxes paid during the period 0 0 Depreciation Income from associates 0 0 Change in accounts receivable 0 0 Change in accounts payable Change in other accruals Net cash flows from operations Cash flows from investment activities Investment in shares Investment in tangible fixed assets Net cash flows from investment activities Cash flows from financing activities Net change in long term debt Proceeds from share issues Net change in pension liabilities Intercompany funding Exchange rate changes foreign subsidiary 0 0 Net cash flows from financing activities NET CASH FLOWS FOR THE PERIOD Cash and cash equivalents January Cash and cash equivalents December

73 SEVAN MARINE ASA NOTES TO THE FINANCIAL STATEMENTS ACCOUNTING POLICIES Sevan Marine ASA s ( the Company ) annual accounts have been prepared in accordance with the Accounting Act and generally accepted accounting principles in Norway. All amounts in the Financial Statement are in NOK 1. All amounts in the notes are in NOK 1,000 unless otherwise stated. Use of estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to use estimates and assumptions, which affect the value of the assets and liabilities, and disclosure notes. Such estimates and assumptions may have significant impact on the reported revenues and costs for a specific reporting period. The actual amounts may deviate from the estimates. Contingent losses, which are likely to occur and quantifiable, are expensed when incurred. Principal rule for evaluation and classification of assets and liabilities Assets intended for long term ownership or use have been classified as fixed assets. Assets relating to the operating cycle have been classified as current assets. Receivables are classified as current assets if they are to be repaid within one year after the transaction date. Similar criteria apply to liabilities. Current assets are valued at the lower of purchase cost and net realizable value. Short-term liabilities are reflected in the balance sheet at nominal value at the establishment date. Fixed assets are valued at purchase cost. Fixed assets whose value will deteriorate are depreciated on a straight-line basis over the asset's estimated useful life. The fixed assets are written down to net realizable value if a value reduction occurs which is not believed to be temporary. Long-term liabilities in NOK, except other accruals, are reflected in the balance sheet at nominal value on the establishment date. Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized over the period of the borrowings using the effective interest method. Debtor Trade debtors and other debtors are reflected in the balance sheet at nominal value after deduction of estimated bad debts. Bad debts are provided for on the basis of an individual assessment of each debtor. Tangible fixed assets Fixed assets are reflected in the balance sheet and depreciated over the asset's expected useful life on a straight-line basis. Direct maintenance of an asset is expensed under operating expenses as incurred. Additions or improvements are added to the asset's cost price and depreciated together with the asset. When changes in circumstances indicate that the carrying value of an asset may not be recoverable, an impairment charge is recognized, and the asset is written down to recoverable amount. Recoverable amount is the highest of net sales value and value in use. Value in use is the net present value of future cash flows, which are expected to be generated from the asset. Shares in subsidiaries and associated companies In the parent company accounts, investments in subsidiaries and associated companies have been recorded under the cost method. Investments are written down to fair value when a reduction in value is not expected to be temporary. 71 Dividend is recognized as income the same year as the provision is made in the subsidiary. If the dividend exceeds retained earnings, the excess represent a repayment of invested capital, and the dividend is deducted from the book value of the investment in the balance sheet.

74 Research and development and public grants Costs associated with research activities are expensed as incurred. Direct and indirect costs of man-hours relating to the construction of the SSPs are charged to the rig-owning entities where the expenses are capitalized as constructionin-progress. Cash and bank deposits Cash and bank deposits include cash, bank deposits and other means of payment with an original due date of three months or less from the date of purchase. Currency Cash and bank deposits, current assets, and short-term liabilities nominated in foreign currencies are converted to exchange rates that prevail on the balance sheet date. Realized and unrealized exchange gains and losses on assets and liabilities in foreign currencies have been included as financial items in the income statements, except for deposits designated as cash flow hedges (ref. foreign currency hedge note). Derivative financial instruments and hedging activities Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of derivative instruments used for hedging purposes are disclosed. Movements on the hedging reserve in shareholders equity are shown. The full fair value of hedging derivatives is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and as a current asset or liability if the remaining maturity of the hedged item is less than 12 months. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. Amounts accumulated in equity related to cash flow hedges designated to the purchase of assets are added to the initial cost of the asset. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Certain derivatives do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement. 72 Pension plans The pension expenses and pension commitments are calculated on a straight-line earning profile basis, based on assumptions relating to discount rates, projected salaries, the amount of benefits from the National Insurance Scheme, future return on pension assets, and actuarial calculations relating to mortality rate, voluntary retirement, etc. Pension funds are valued at net realizable value and deducted from the net pension obligation in the balance sheet. Changes in the pension obligation due to changes in the pension plans are amortized over the expected remaining service period.

75 Taxes Deferred taxes / deferred tax assets are calculated on temporary differences between balance sheet accounting and tax values, and losses carried forward at the end of the accounting year. Tax-reducing temporary differences and losses carried forward are offset against tax-increasing temporary differences that are reversed in the same time intervals. Taxes consist of taxes payable (taxes on current year taxable income), and change in net deferred taxes. Earnings per share Earnings per share are calculated by dividing the net income/loss by the weighted average of the total number of outstanding shares. Shares issued during the year are weighted in relation to the period they have been outstanding. Share based incentive plans The Company operates a share-based compensation plan. In line with IFRS 2, the cost represented by the fair value at grant date is expensed over the vesting period. The fair value at grant date is confirmed by a third party calculation using the Black & Scholes option-pricing model. Cost represented by employer s tax of the excess of fair value of the share relative to the strike prices (intrinsic value) is expensed over the vesting period in line with the changing market price of its stock. Cash flow statement The cash flow statement has been prepared in accordance with the indirect method. NOTE 1 EQUITY Share Share Other Total capital premium equity equity Share capital December 31, Capital increase Capital increase, takeover Kanfa Capital increase, Capital increase Capital increase Capital increase Capital increase Capital increase Capital increase Share issue costs Tax effect of share issue costs Options Effect of cash flow hedge, net of tax Net result Share capital December 31,

76 NOTE 2 TAXES Profit before tax Permanent differences Payment of merger receivable Changes in temporary differences Tax basis Loss to be brought forward Basis for taxes payable Taxes payable 0 0 Change in deferred tax assets Tax expenses Temporary differences Unrealized profit hedging instrument Fixed assets Options Pension liabilities Merger receivable Net temporary differences Losses carry forward Basis for deferred tax assets Deferred tax assets in balance sheet Deferred tax assets have been accounted for at nominal value. A deferred tax liability due to hedging activity of NOK 641 has been recognized. The reversal of this temporary difference is expected to occur next year, and the liability has not been offset against the deferred tax assets in accordance with N-GAAP. Therefore, deferred taxes have been presented both as a liability and as an asset in the balance sheet. Deferred tax assets have been recognized based on expectations of future taxable profits. Reconciliation between expected tax charge based on the nominal Norwegian statutory tax rate of 28% and actual tax charge: Profit before tax Expected tax charge Tax charge in the profit and loss accounts Difference Tax effect of share issue costs Tax effect of other premanent differences Explained difference

77 NOTE 3 TANGIBLE FIXED ASSETS Machinery, fixtures Cost price January 1, Additions Disposals 0 Cost price December 31, Accumulated depreciations December 31, Book value December 31, Depreciations current year Economic life/depreciation rates 3-5 years /20-30 % NOTE 4 INVESTMENTS IN SUBSIDIARIES AND ASSOCIATED COMPANIES AND INTERCOMPANY BALANCES Investments in subsidiaries Office No. of Share Book Ownership Company name located Cost price shares capital value share Kanfa AS Asker ,0 % Sevan Production AS Stavanger ,0 % Sevan Marine do Brasil Ltda Brasil ,9 % Sevan Production Pte Ltd Singapore 100,0 % Total book value Intercompany balances Loan to Sevan Production AS Long term receivable against Kanfa AS Long term receivable intercompany Receivable against Sevan Production AS Receivable against Sevan Production Pte Ltd/General Partnership Receivable against Kanfa AS (previously Sevan Marine Managment AS) Short term receivable intercompany Liabilities to Sevan Marine do Brasil Ltda Short term debt intercompany NOTE 5 RECEIVABLE AND DEBT Receivable due later than one year Intercompany loan Other receivables Total Debt which is due later than five year 0 0 NOTE 6 CASH AND BANK DEPOSITS Included in cash and bank deposits are restricted cash related to taxes withheld from employees of Other restricted bank deposit amounts to and relates to interest on the bond loan. This interest is due for payment on March 31,2006. Interest income consists of interest on bank deposits and intercompany interest. 75

78 NOTE 7 SHARES, OPTIONS, AND BONUS SHARE OPTIONS OWNED OR CONTROLLED BY THE BOARD OF DIRECTORS AND MANAGEMENT As of December 31, 2005 the following board members and management owned or controlled shares in the Company: Jan-Fredrik Wilhelmsen, Chairman of the board, owns shares, Arne Smedal, Board member and Director of Business Development, owns shares directly, shares through his wholly owned company Aasen AS, and shares through Elvheim AS, where he holds a controlling ownership interest. He also has share options with a strike price of NOK 3.00 and bonus share options with a strike price of NOK Kåre Syvertsen, Board member and VP Technology, owns shares directly, and shares through his wholly owned company Hallingen AS. He also has share options with a strike price of NOK 3.00, and bonus share options with a strike price of NOK Jean-Philippe Flament, Board member, owns shares and has share options with a strike price of NOK John Hatleskog, Board member, owns shares through his wholly owned company Jaco Invest AS. Lars Haugen, Board member, owns shares through his wholly owned company Normandie Invest AS. Jan Erik Tveteraas, CEO, owns shares through his wholly owned company Supernova AS. He also has share options with a strike price of NOK 3.00 and bonus share options with a strike price of NOK Egil Kvannli, CFO, owns shares and has share options with a strike price of NOK Erling Ronglan, VP Operation, owns shares and has share options with a strike price of NOK 16,60. Fredrik Major, VP Marketing and Business Development, owns shares and has share options with a strike price of NOK 19,30. NOTE 8 SHAREHOLDER INFORMATION As at December 31, 2005 the Company had shareholders. Of these were 55,55% resident outside of Norway. The 20 largest shareholders as at December 31, 2005 were: 76 Name Number of shares % Shares Morgan Stanley & Co. Client equity account % Goldman Sachs inten equity nontreaty cus % Bank of New York, BR BNY GCM client acc % Smedal Arne % Supernova AS % Hallingen AS % Aasen AS (Arne Smedal) % MP Pensjon % Deutsche Bank AG LON prime brokerage full % Styrbjørn AS % Skandinaviska Enskilda (publ) Oslofilialen % Goldman Sachs & Co Equity nontreaty cus % Bear Stearns securit A/C customer safe ke % JPMorgan Chase Bank clients treaty account % Euroclear Bank S.A./ 25% clients % Schmidt Raul Felippe junior % Jaco Invest AS c/o Havinvest AS % Waterman Holding Inc % Cais Bank Paris CA-IS % Credit Suisse First (Europe) Prime Broke % 20 largest shareholders % Remaining % Total %

79 As balance sheet date, 4.6 million of share options granted to employees and senior management under the Company s share option plans remain. The average strike price for the remaining options is NOK 14,82. As at December 31, 2005, 0.5 million bonus share options granted to management under the Company s bonus share plan remain. The strike price for the awarded options is equal to par value of the Company s shares, NOK Under both plans, the options may be exercised at given time periods, but expire 5 years after grant date. NOTE 9 SALARIES, OTHER BENEFITS, NUMBER OF EMPLOYEES Salaries and vacation pay Employer's share of social security Sosial security regarding options (ITM) Pension costs Options - fair value at grant date Reinvoiced salary expenses Other salary related costs Total salaries and wages Average number of employees Remuneration to management Salaries Other benefits CEO Board member/director, Business development Board member/vp, Technology The Company also operates a collective retirement benefit plan, which has not been specified in the table above. The CEO has an agreement for post service remuneration of 18-month salaries from the date of resignation. No loan or guarantee has been granted to CEO or any Member of the Board in cost relating to the Board of Directors was expensed in Spesification of auditors fees 2005 Audit fees 468 Other attestation services 84 Tax consultancy 7 Other services 378 Fees charged directly to equity -295 Total auditor's fees charged to the accounts 642 NOTE 10 PENSION LIABILITIES The Company has a collective pension plan (defined benefit plan) for all its employees. The pension plan gives right to defined future benefit. These are mainly dependent on the number of years of service, salary level at pension age, and the amount of benefits from the National Insurance Scheme. The commitment is covered through an insurance company. Financial assumptions at January 1: Discount rate 4,4% 5,0% 5,5% Expected return on assets 4,9% 5,5% 6,0% Expected pension increases / G-regulation 2,5% 2,5% 2,5% Expected salary increases 3,5% 3,5% 2,5% 77 For demographic assumptions and turnover rates, commonly used assumptions in the insurance industry have been applied.

80 Specification of pension costs 2005 Net present value of this year's pension earned Interest cost of the pension liabilities 97 Expected return on pension assets -102 Fees charged 50 Estimate changes charged to income 33 Social security on pension liabilities 577 Pension costs including social security Net pension liabilities Estimated incurred liabilities Estimated value pension assets Estimated net pension liabilities Effect of changes on estimates not recorded to the income statement Social security pension liabilities Net pension liabilities NOTE 11 OTHER OPERATING COSTS Purchase of service and other fees Rental of location and other assets Materials Travel costs Office costs Other Total other operating costs NOTE 12 RENTAL AND LEASE AGREEMENTS The Company has entered into several agreements for rental of offices. This year rent expenditure were For 2004 annual rental amounts were 237. The Company has also entered into rental agreements for various software, ASP solutions and cars. Annual rental amounts for 2005 were 964. For 2004 annual rental amounts were 293. All lease agreements are operating leases. NOTE 13 EARNINGS PER SHARE Earnings per share (NOK) -0,28-0,16 Earnings per share diluted (NOK) -0,28-0,16 Average no of outstanding shares (thousands) Weighted average number of ordinary shares for diluted earnings per share (thousands) Due to net losses for the periods, and according to the principle of no negative dilution (positive effects on earnings per share resulting from an increase in number of shares outstanding, are not to be included), earnings per share diluted have been calculated equal to earnings per share.

81 NOTE 14 CURRENCY Currency gain through income statement Currency loss through income statement NOTE 15 SHARE BASED INCENTIVE PLANS The Company has various share option plans and bonus share plans. Shares under the bonus share plan were granted in 2002 and 2003, at an exercise price of NOK The market value of the options have, effective from 2005, been expensed as payroll costs over the vesting periods. The offsetting entry to payroll costs is an increase in equity. For 2005 the salary charges relating to the fair value of the options is The comparable amount for 2004 is 606. The employer s share of social security related to the above mentioned plan has been expensed by for 2005, while comparable amounts for 2004 is 86. In 2004, the treatment was in accordance with notes previously issued by Oslo Stock Exchange, where only the intrinsic value of the options was charge as an expense over the vesting periods. In 2005 the share based incentive plans have been treated in line with IFRS 2. Shares under the share option plan granted in 2001 and 2002 have an exercise price of NOK 3.00, the shares granted in 2003 have an exercise price of NOK 4.00, the shares granted in 2004 have an exercise price of NOK 9.80 and the shares granted in 2005 have exercise prices in the range of NOK 15,00 30,90. These exercise prices have been set equal to the assessed market value at the time of grant. Under the bonus share plan of June 2002, rights to purchase a total number of shares have been granted. All of these are fully vested at December 31, These options must be declared by June In 2005, of these shares was declared. Under the bonus share plan of May 2003, rights to purchase a total number of shares were granted. Of these, 2/3 were fully vested at December 31, 2005, and the remaining 1/3 will be fully vested in May These options must be declared by May In 2005, of these shares were declared. Under the share option plan of 2001, rights to purchase a total number of shares were granted. These are all fully vested at December 31, 2005, and must be declared by July In 2005, of these shares were declared. Under the share option plan of 2002, rights to purchase a total number of shares were granted. These are fully vested at December 31, These options must be declared by October In 2005, of these shares were declared. Under the share option plan of 2003, rights to purchase a total number of shares were granted. Of these, 2/3 are fully vested at December 31, 2005, and the remaining 1/3 will be fully vested in May These options must be declared by May In 2005, of these shares were declared. Under the share option plan of 2004, rights to purchase a total number of shares were granted. Of these, 1/3 are vested at December 31, 2005, another 1/3 will vest in November 2006, and the remaining 1/3 will vest in November These options must be declared by November None of these shares were declared in Under the share option plan of 2005, rights to purchase a total number of shares were granted shares were granted in March, in April, in May, in June, in August and in December. None of these are vested as at December 31, /3 will vest after 1 year, 1/3 after 2 years and 1/3 after 3 years. The average strike price of options granted during the period was NOK (2004: NOK 9.80). Fair value of the options has been determined using the Black-Scholes valuation model. The significant inputs into the model were share price at the grant dates, exercise price shown above, standard deviation of expected share price returns of 25-35% (2004: 35-40%), dividend yield of 0% (2004: 0%) option life disclosed above, and annual risk-free interest rate of % (2004: %). The volatility measured at the standard deviation of expected share price returns is based on third party estimates. 79

82 NOTE 16 RELATED PARTY TRANSACTIONS The Company has charged direct and indirect wages of 13,082 during 2005 to subsidiaries, which has been capitalized on the SSPs. The Company has calculated interest for an intercompany receivable from Kanfa AS, as well as for historical funding of SSP Piranema to Sevan Production AS of 895 and 12,060, respectively. For more information about intercompany balances, see note 4. NOTE 17 FINANCIAL RISK The Company s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and interest rate risk. The Company s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company s financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. Risk management operations are lead by the CFO under policies approved by the Board of Directors. The CFO identifies, evaluates and hedges financial risks in close co-operation with the Group s operating units. The Board approves the principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity. (a) Market risk (i) Foreign exchange risk The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, EURO and the UK pound. Foreign exchange risk arises from future commercial transactions, recognized assets or liabilities, and net investments in foreign operations. To manage their foreign exchange risk arising from future commercial transactions and recognized assets and liabilities, The Company use forward contracts and similar instruments. Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity s functional currency. External foreign exchange contracts are designated at Group level to perform hedges of foreign exchange exposures on a gross basis. The Group s risk management policy is to hedge anticipated transactions (mainly import purchases) in each major currency. The Company has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. (ii) Price risk The Company is exposed to commodity price risk at two main levels: The demand for FPSO s and drilling units is sensitive to oil price developments, fluctuations in production levels, exploration results and general activity within the oil industry. The construction price of future SSP s is exposed to potential changes in market price of the inputs. (b) Credit risk The Company has no significant concentrations of credit risk. The Company has policies that limit the amount of credit exposure to any financial institution. 80 (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and/or marketable securities, the availability of funding through an adequate amount of committed credit facilities, and the ability to close out market positions. The Company aims to maintain flexibility in funding by keeping committed credit lines available. (d) Cash flow and Interest rate risk The Company s policy is to maintain liquidity through placement of excess as bank-deposits and/or short-term, marketable investments at limited risk.

83 The Company s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk and Company policy is to maintain part of its borrowings in fixed rate borrowing facilities. NOTE 18 LOANS, GUARANTEES, SECURITIES AND COLLATERALS Security arrangements related to loans: SSP Piranema: Security pledge (i) on 1. priority terms in the shares of Sevan Production AS, hull/rig, insurance contracts, equipment and contracts for SSP Piranema and Sevan Production's bank account deposits of up to USD 20 million to the bank on 1. priority terms and (ii) on 2. priority terms up to NOK 670 million to the bond holders of the mentioned shares and insurance contracts, while corresponding security pledge in hull/rig is being established. In addition The Company has pledged as security, to the banks for the USD 20 million loan. SSP "Chestnut": Security pledge in the shares of Sevan Production Pte Ltd is being set up in favour of the bond holders of the USD 50 million loan. This pledge will be junior secured to the USD 65 million on the 1. priority bank loan when drawn. When feasible, the bondholders will also obtain security in the hull/rig and insurance contracts, junior secured to an up to USD 65 million bank loan. Security arrangements related to construction contracts: SSP Piranema, SSP "Chestnut" and SSP no 3: The Company has issued guarantees for the subsidiaries correct fulfilment of their contractual commitments as purchasers towards the shipyard. Security arrangements related to operations: SSP Piranema: The Company has guaranteed for correct fulfilment of the contract with the charterer for up to USD 10 million and granted a performance guarantee towards the technical manager. SSP "Chestnut": The Company has guaranteed for correct fulfilment of the contract with the charterer. NOTE 19 CONTINGENT LIABILITIES The Company has contingent liabilities in respect of bank and other guarantees and other matters arising in the ordinary course of business. It is not anticipated that any material liabilities will arise from the contingent liabilities. NOTE 20 EVENTS AFTER THE BALANCE SHEET DATE In January 2006, the Company carried out a Bond Loan of USD 50 million, with a fixed interest rate of 9.75% p.a. The bond loan has a term of 5 years and will mature on January 31, The Company has a call option on March 31, 2008 at a rate of 103%. An application will be made for a listing of the loan at Oslo Stock Exchange. The loan is primarily intended to part-finance the construction and outfitting of the SSP Chestnut. In February 2006, the Company carried out a private placement of NOK 1,550 million to part finance the construction of its first drilling unit. The Company is planning to utilize the SSP hull as basis for the drilling unit with capabilities of operating in ultra-deep water and harsh environment. Sevan Drilling, a wholly owned subsidiary to the Sevan group will be the owner of the unit. The intention is to file an application for a listing of Sevan Drilling on Oslo Stock Exchange within 12 months. The estimated all-in delivery cost is USD 430 million with delivery in 1st half of

84 NOTE 21 BOND LOAN Time of expiration Capitalized cost regarding the bond loan Bond loan Average nominal interest 10,31 % 0 % The debt is denominated in the folllowing currencies NOK There are no repayments for the loan until it is due March 31, Average interest is calculated on the basis of the actual interest cost and the total handling fee of the loan. The interest is paid annually in arrears. The first interest payment is due March 31, NOTE 22 DERIVATIVE FINANCIAL INSTRUMENTS Current Assets Liabilities Assets Liabilities Forward foreign exchange contracts cash flow hedges Total Less non-current portion: Forward foreign exchange contracts cash flow hedges Total Net position Forward foreign exchange contracts The notional principal amount of the outstanding forward foreign exchange contracts at December 31, 2005 was NOK million (2004: NOK 0). Net gains and losses recognized in the hedging reserve in equity on forward foreign exchange contracts as of December 31, 2005 will be added to the initial cost of the construction in progress items at various dates. All positions in foreign currency are valued at market rates at balance date. NOTE 23 GOVERNMENT GRANTS A grant related to SND/Innovasjon Norge of 500 has been classified as a reduction of other operating cost. 82

85 AUDITOR S REPORT To the Annual Shareholders Meeting of Sevan Marine ASA Auditor s report for 2005 We have audited the annual financial statements of Sevan Marine ASA as of December 31, 2005, showing a loss of NOK for the parent company and a loss of NOK for the group. We have also audited the information in the directors report conserning the financial statements, the going consern assumption, and the proposal for the allocation of the loss. The annual financial statements comprise the financial statements of the parent company and the group. The financial statements of the parent company comprise the balance sheet, the statements of income and cash flows, the statement of changes in equity and the accompanying notes. The financial statements of the group comprise the balance sheet, the statements of income and cash flows, the statement of changes in equity and the accompanying notes. The regulations of the Norwegian accounting act and accounting standards, principles and practices generally accepted in Norway have been applied in the preparation of the financial statements of the parent comapny. IFRSs as adopted by the EU have been applied in the preparation of the financial statements of the group. These financial statements are the responsibility of the Company s Board of Directors and Managing Director. Our responsibility is to express an opinion on these financial statements and on other information according to the requirements of the Norwegian Act on Auditing and Auditors. We conducted our audit in accordance with laws, regulations and auditing standards and practices generally accepted in Norway, including standards on auditing adopted by The Norwegian Institute og Public Accountants. These auditing standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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. To the extent required by law and auditing standards an audit also comprises a review of the management of the Company s financial affairs and its accounting and internal control systems. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements of the parent company have been prepared in accordance with the law and regulations and give a true and fair view of the financial position of the company as of December 31, 2005, and the results of its operations and its cash flows for the year then ended, in accordance with accounting standards, principles and practices generally accepted in Norway the finanancial statements of the group have been prepared in accordance with the law and regulations and give a true and fair view of the financial position of the group as of December 31, 2005, and the results of its operations and its cash flows and the changes in equity for the year then ended, in accordance with IFRSs as adopted by the EU the company s management has fulfilled its duty to produce a proper and clearly set out registration and documentation of accounting information in accordance with the law and good bookkeeping practice in Norway the information in the directors report conserning the financial statements, the going concern assumption, and the proposal for the allocation of the loss are consistent with the financial statements and comply with the law and regulations Stavanger, March 16, 2006 PricewaterhouseCoopers AS 83 Torbjørn Larsen State Authorised Public Accountant (Norway) Note: This translation from Norwegian has been prepared for information purpose only.

86 CONTACT US! Sevan Marine Tananger Hammaren 23 N-4056 Tananger, Norway Phone: Fax: Sevan Marine Arendal Kittelsbuktveien 5 N-4836 Arendal, Norway Phone: Fax: post@sevanssp.com Sevan Marine Stjørdal Strandveien 1, N-7500 Stjørdal, Norway Phone: post@sevanmarine.com Sevan Marine do Brasil Ltda. Rua da Assembléia 10 Suite 3110 ZIP CODE Rio de Janeiro - RJ, Brasil Phone: Fax: post@sevanmarine.com Kanfa AS Solbråveien Asker, Norway 84 Phone: Fax: office@kanfa.no