SKAUGEN MARINE CONSTRUCTION (SMC)

SMC was established as a division and a management company in Shanghai in the 2H06 and has a comprehensive program in place to build up to 16 gas carriers to augment the Norgas fleet. The first SMC ship was delivered in 2007 and we have yet to confirm four of these ships with the subcontractors, but we are aiming to complete the full plan. SMC is in charge of the construction management that encompass design, engineering, supervision, procurement, cost and quality control for these shipbuilding projects. A successful low cost fleet renewal programme is imperative to Norgas future development to both retain its market position and to enter into new markets. The creation of SMC will ensure this happens.

In early 2006 the Taizhou Skaugen Wuzhou Shipbuilding Co. Ltd was established and in 2Q06 and IMS entered into the Joint Venture Shenghui Gas & Chemical Systems. These are two key J/Vs to complete the SMC projects. The Taizhou Skaugen Wuzhou Shipbuilding has invested in the infrastructure at the Taizhou based shipyard to improve quality, productivity and safety. Shenghui currently specializes in the fabrication of structured non-standard pressure vessels, spherical tanks and cryogenic steel structures; all used in the marine and petrochemical industry. It will now add a new division focusing on marine related business. The complete cargo plants, designed by IMS and our alliance partners will be built and installed into the new vessels at the new Shenghui facilities.


At the end of September, we successfully launched the first SMC built vessel - a 3,200cbm LPG pressurized tanker which was completed and delivered in early January 2007. This first ship is a strong validation of our innovative builds strategy. The first vessel was built on budget for USD7.5 million - almost half of comparable industry prices - and to timescale. We have, therefore, gained a clear and proven competitive advantage over the usual method of industry build programmes.

In total, we expect to deliver two vessels in our series during 2007 and one vessel will follow just about every six months going forward and for years to come.

In December 2006 IMS entered into an agreement with Teekay LNG Partners for a "sale lease back" of the three combination carriers (5,800 cbm gas garriers/9800 tdw chemical carriers) called "Wintergas" series and being built by SMC. The vessels are sold to Teekay LNG Partners, when completed, at a price of about USD29 million per vessel and will be taken back on long term leases upon delivery in 2007/08/09. The transaction allows us to monetize the low building cost and realize a gain and secure the long term use of the vessels for our Norgas business in the future at competitive rates. The positive results of this transaction will become visible in our profit and loss statements starting in 2007.

The advantage of our own unique design and SMC built "Multigas" vessels is that by carrying LNG, in addition to LPG and Ethylene, we will gain access to new markets, reduce dependency on any individual sector and increase vessel revenues while improving operational efficiency and flexibility. These complex vessels will be the first of its kind in the world.

Another two 10,000 cbm sized Multigas carriers were confirmed in early January 07. These two will have advanced ice-class specifications. We have so far six such carriers now under construction by SMC and the plans call for a further four more to be added during 2007.

FiveStar Marine
Also part of SMC is FiveStar Marine Ltd, in Shanghai which manufactures and markets the "Nordic Star" range of pleasure boats. FiveStar Marine is owned by I.M. Skaugen and the UMOE Group on a 50/50 per cent basis.

FiveStar Marine was established in China in 2005 and we began shipping of our first boats to Europe during spring 2006. The company was amongst the first non Chinese boat builders in China and the company aims to build worldwide distribution network, but with a long term aim for Chinese markets. The establishment of a "green field" factory and recruitment of skilled workers and management allows for a gradual increase of manufacturing output at our purpose-built factory on the outskirts of Shanghai. Such a gradual increase of production should still enable the company to reach break even levels during its third year of operation.