I.M. Skaugen - Annual Report 2006

DEAR FELLOW SHAREHOLDERS

Welcome to the 2006 edition of the I.M. Skaugen Business Review and a look back at another year of great efforts to develop our business. But it has also been another year of change to ensure we are even better positioned for the future.

At an operational level we have performed well to produce acceptable returns for the year in most areas, save for SPT that has struggled in great headwinds with very high costs for the tankers that we need to perform our services. SPT should improve in 2007 as we take delivery of the first of six special ‘made-for-purpose’ crude oil vessels that will improve our cost position and improve margins for the benefit of our shareholders. The decision to build dedicated vessels for SPT was made in late 2003 and it has taken some three years and more to get these unique ships, but they will be very welcome indeed.

However, most significantly for the year 2006 we have seen a number of milestone innovations that will elevate our entire business to a decisive new level from 2007 and for many years to come. I believe this ability to successfully innovate - and break out of the mould of the more traditional shipping company - will bring us brighter customer prospects, greater efficiencies and lower cost, thereby higher earnings potential.

In the fourth quarter of the year we changed our corporate description, which now states: I.M. Skaugen – Innovative Maritime Solutions. It seems a simple statement, but behind it we have a lot of achievements to talk about - and achievements to show that we are committed.

And there is a difference between interest and commitment. There is a saying that when you are interested in doing something, you do it only when it is convenient. When you are committed to something you accept no excuses, only results. At IMS we are truly committed to achieving a lower cost base than our competitors and our innovative maritime solutions are a key driver.

Skaugen Marine Construction (SMC) - or Ships More Competitive - is an important expression of this philosophy. This new division is entirely responsible for all activities pertaining to our new building programme, including managing the very important joint ventures and alliances we have created for this purpose. Through the hard work at SMC, culminating in the delivery of the first SMC-built gas carrier in early January this year, we have proven our capabilities in bringing vessels to market at prices substantially below comparable market levels. It was in September 2005 we decided to pursue the SMC concept in earnest and from then we have not looked back. In future, we may even use this experience to build vessels for third-parties, using our competence to offer ships to the petrochemical industry in China and beyond. Before that, however, SMC will ensure we have a series of at least 16 advanced gas carries for our own needs - and 13 of these are high specification vessels with unique design features that will create our continued competitive advantage. Remember that ‘operational effectiveness means you’re running the same race faster. But strategy is choosing to run a different race because it’s the one you’ve set yourself up to win’. By the creation of our many activities in China we are trying to create a different race to win. Some of you may not know that at present we have about 1,000 colleagues in China and working in 10 different establishments. I do not think any other Norwegian-based company enjoys a more extensive presence in China.

We have also in 2006 been working hard to develop opportunities in the fast growing LNG sector. That is why our new builds programme in China includes up to ten of the world’s first small-scale advanced ‘Multigas’ carriers, capable of carrying LNG, as well as ethylene and LPG. This size of vessel can transport LNG to customers along the coastlines around the globe - something the very large gas carriers cannot do - giving us access to a possible major gas transportation niche.

We believe that LNG in the future will be distributed very much in the way diesel and fuel oil is today and if this prediction is realised our ships will be there to offer the services needed. The core of all this is our own design of cargo plants on the ships that allows these vessels to carry a wider range of gases, as well as cool the cargo better and quicker than other vessels in the market.

LNG will also be crucial to the growth of SPT. In the summer, the company performed the world’s first commercial lightering operation of LNG and shows that we have a depth of knowledge that puts us at the forefront of this new market. SPT also made a significant acquisition that will allow us to function as a global lightering operator. Under the name SPT Marine Services we can now offer our industry-leading ship-to-ship transfers in the UK, mainland Europe, Russia and Africa.

On a financial level, the IMS share price by year-end had dipped from its levels earlier in the year, which in itself is a little disappointing. However, I feel that we have a strong enough financial footing which should give us continued value creation by exploring our newbuilding programs without tapping the capital markets. Thus our low cost operations and excellent market position, combined with our efforts in securing all the new gas and crude vessels at well below present market rates, shows that we are in a good position to bring about excellent returns for our shareholders going forward.

And we will make sure we continue to operate successfully by holding to a number of core fundamentals: