Voluntary Filer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________

FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______.
 
Commission file number 333-75899
_________________
TRANSOCEAN INC.
(Exact name of registrant as specified in its charter)
_________________

Cayman Islands
  
66-0582307
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
     
4 Greenway Plaza
  
77046
Houston, Texas
  
(Zip Code)
(Address of principal executive offices)
    

Registrant’s telephone number, including area code: (713) 232-7500

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

Title of class
Exchange on which registered
Ordinary Shares, par value $0.01 per share
New York Stock Exchange, Inc.

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

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x  No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

As of June 30, 2006, 319,904,208 ordinary shares were outstanding and the aggregate market value of such shares held by non-affiliates was approximately $25.7 billion (based on the reported closing market price of the ordinary shares on such date of $80.32 and assuming that all directors and executive officers of the Company are “affiliates,” although the Company does not acknowledge that any such person is actually an “affiliate” within the meaning of the federal securities laws). As of February 23, 2007, 292,967,692 ordinary shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of December 31, 2006, for its 2007 annual general meeting of shareholders, are incorporated by reference into Part III of this Form 10-K.
 


TRANSOCEAN INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2006

Item
  
Page
     
 
PART I
  
5
 
5
 
5
 
9
 
10
 
10
 
11
 
11
 
11
 
12
 
12
13
17
17
17
19
 
19
     
 
PART II
  
21
23
24
47
48
95
95
95
     
 
PART III
  
95
95
95
95
95
     
 
PART IV
  
96
 

Forward-Looking Information

The statements included in this annual report regarding future financial performance and results of operations and other statements that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this annual report include, but are not limited to, statements about the following subjects:

·
contract commencements,
·
issuance of new debt,
·
contract option exercises,
·
debt reduction,
·
revenues,
·
planned asset sales,
·
expenses,
·
timing of asset sales,
·
results of operations,
·
proceeds from asset sales,
·
commodity prices,
·
our effective tax rate,
·
customer drilling programs,
·
changes in tax laws,
·
supply and demand,
·
treaties and regulations,
·
utilization rates,
·
tax assessments,
·
dayrates,
·
our other expectations with regard to
·
contract backlog,
 
market outlook,
·
planned shipyard projects and rig
·
operations in international markets,
 
mobilizations and their effects,
·
the level of expected capital
·
newbuild projects and opportunities,
  
expenditures,
·
the upgrade projects for the Sedco 700-
·
results and effects of legal proceedings
 
series semisubmersible rigs,
  
and governmental audits and
·
other major upgrades,
 
assessments,
·
rig reactivations,
·
adequacy of insurance,
·
expected downtime,
·
liabilities for tax issues, including those
·
insurance proceeds,
 
associated with our activities in Brazil,
·
future activity in the deepwater, mid-
  
Norway and the United States,
 
water and the jackup market sectors,
·
liquidity,
·
market outlook for our various
·
cash flow from operations,
 
geographical operating sectors,
·
adequacy of cash flow for our
·
capacity constraints for fifth-generation
 
obligations,
 
rigs and other rig classes,
·
effects of accounting changes,
·
effects of new rigs on the market,
·
adoption of accounting policies,
·
income related to the TODCO tax
·
pension plan and other postretirement
 
sharing agreement,
 
benefit plan contributions,
·
uses of excess cash, including ordinary
·
benefit payments, and
 
share repurchases,
·
the timing and cost of completion of
·
the timing and funding of share
  
capital projects.
 
repurchases,
    

Forward-looking statements in this annual report are identifiable by use of the following words and other similar expressions among others:

·
“anticipates”
·
“may”
·
“believes”
·
“might”
·
“budgets”
·
“plans”
·
“could”
·
“predicts”
·
“estimates”
·
“projects”
·
“expects”
·
“scheduled”
·
“forecasts”
·
“should”
·
“intends”
    

Such statements are subject to numerous risks, uncertainties and assumptions, including, but not limited to:
 
 
·
those described under “Item 1A. Risk Factors,”
 
·
the adequacy of sources of liquidity,

- 3 -

 
·
the effect and results of litigation, audits and contingencies, and
 
·
other factors discussed in this annual report and in the Company’s other filings with the SEC, which are available free of charge on the SEC’s website at www.sec.gov.
 
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated.

All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements.

- 4 -

PART I
 
ITEM 1.
Business 

Transocean Inc. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. As of February 2, 2007, we owned, had partial ownership interests in or operated 82 mobile offshore drilling units. As of this date, our fleet included 33 High-Specification semisubmersibles and drillships (“High-Specification Floaters”), 20 Other Floaters, 25 Jackups and four Other Rigs. We also have three High-Specification Floaters under construction.

Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world. Our primary business is to contract these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. We specialize in technically demanding segments of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. We also provide additional services, including integrated services. Our ordinary shares are listed on the New York Stock Exchange under the symbol “RIG.”

Transocean Inc. is a Cayman Islands exempted company with principal executive offices in the U.S. located at 4 Greenway Plaza, Houston, Texas 77046. Our telephone number at that address is (713) 232-7500.

Background of Transocean

On January 31, 2001, we completed our merger transaction (the “R&B Falcon merger”) with R&B Falcon Corporation (“R&B Falcon”). At the time of the R&B Falcon merger, R&B Falcon operated a diverse global drilling rig fleet, consisting of drillships, semisubmersibles, jackup rigs and other units in addition to the Gulf of Mexico Shallow and Inland Water segment fleet. R&B Falcon and the Gulf of Mexico Shallow and Inland Water segment later became known as TODCO (together with its subsidiaries and predecessors, unless the context requires otherwise, “TODCO”). In preparation for the initial public offering of TODCO, we transferred all assets and subsidiaries out of TODCO that were unrelated to the Gulf of Mexico Shallow and Inland Water business.

In February 2004, we completed an initial public offering (the “TODCO IPO”) of approximately 23 percent of TODCO’s outstanding shares of its common stock. In September 2004, December 2004 and May 2005, respectively, we completed additional public offerings of TODCO common stock. In June 2005, we completed a sale of our remaining TODCO common stock pursuant to Rule 144 under the Securities Act of 1933, as amended.

For information about the revenues, operating income, assets and other information relating to our business and the geographic areas in which we operate, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 21—Segments, Geographical Analysis and Major Customers to our consolidated financial statements included in Item 8 of this report.

Drilling Fleet

We principally operate three types of drilling rigs:
 
 
·
drillships;
 
 
·
semisubmersibles; and
 
 
·
jackups.

Also included in our fleet are barge drilling rigs and a mobile offshore production unit.

Most of our drilling equipment is suitable for both exploration and development drilling, and we normally engage in both types of drilling activity. Likewise, most of our drilling rigs are mobile and can be moved to new locations in response to client demand. All of our mobile offshore drilling units are designed for operations away from port for extended periods of time and most have living quarters for the crews, a helicopter landing deck and storage space for pipe and drilling supplies.

- 5 -

As of February 2, 2007, our fleet of 82 rigs, which excludes assets held for sale and rigs under construction, included:
 
 
·
33 High-Specification Floaters, which are comprised of:
- 13 Fifth-Generation Deepwater Floaters;
- 16 Other Deepwater Floaters; and
- four Other High-Specification Floaters;
 
 
·
20 Other Floaters;
 
 
·
25 Jackups; and
 
 
·
four Other Rigs, which are comprised of:
- two barge drilling rigs;
- one mobile offshore production unit; and
- one coring drillship.

As of February 2, 2007, our fleet was located in the Far East (14 units), India (12 units), U.S. Gulf of Mexico (11 units), United Kingdom (10 units), Nigeria (eight units), the Mediterranean and Middle East (seven units), Brazil (six units), Norway (five units), other West African countries (five units), Australia (one unit), Canada (one unit), the Caspian Sea (one unit) and Venezuela (one unit).

We categorize our fleet as follows: (i) “High-Specification Floaters,” consisting of our “Fifth-Generation Deepwater Floaters,” “Other Deepwater Floaters” and “Other High-Specification Floaters,” (ii) “Other Floaters,” (iii) “Jackups” and (iv) “Other Rigs.” Within our High-Specification Floaters category, we consider our Fifth-Generation Deepwater Floaters to be the semisubmersibles Deepwater Horizon, Cajun Express, Deepwater Nautilus, Sedco Energy and Sedco Express and the drillships Deepwater Discovery, Deepwater Expedition, Deepwater Frontier, Deepwater Millennium, Deepwater Pathfinder, Discoverer Deep Seas, Discoverer Enterprise and Discoverer Spirit. These rigs were built in the construction cycle that occurred from approximately 1996 to 2001 and have high-pressure mud pumps and a water depth capability of 7,500 feet or greater. The Other Deepwater Floaters are generally those other semisubmersible rigs and drillships that have a water depth capacity of at least 4,500 feet. The Other High-Specification Floaters, built as fourth-generation rigs in the mid to late 1980s, are capable of drilling in harsh environments and have greater displacement than previously constructed rigs resulting in larger variable load capacity, more useable deck space and better motion characteristics. The Other Floaters category is generally comprised of those non-high-specification floaters with a water depth capacity of less than 4,500 feet. The Jackups category consists of our jackup fleet, and the Other Rigs category consists of other rigs that are of a different type or use. These categories reflect how we view, and how we believe our investors and the industry generally view our fleet.

Drillships are generally self-propelled, shaped like conventional ships and are the most mobile of the major rig types. All of our drillships are dynamically positioned, which allows them to maintain position without anchors through the use of their onboard propulsion and station-keeping systems. Drillships typically have greater load capacity than early generation semisubmersible rigs. This enables them to carry more supplies on board, which often makes them better suited for drilling in remote locations where resupply is more difficult. However, drillships are typically limited to calmer water conditions than those in which semisubmersibles can operate. Our three existing Enterprise-class drillships include our patented dual-activity technology. Dual-activity technology includes structures and techniques for using two drilling stations within a single derrick to perform drilling tasks. Dual-activity technology allows our rigs to perform simultaneous drilling tasks in a parallel rather than sequential manner. Dual-activity technology reduces critical path activity and improves efficiency in both exploration and development drilling.

During 2006, we were awarded drilling contracts requiring the construction of three enhanced Enterprise-class drillships. The newbuilds are expected to be placed in service and commence operations during the second quarter of 2009, mid-2009 and the first quarter of 2010. Newbuilds are included in our drilling fleet upon testing and acceptance of the rig. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Outlook.”

Semisubmersibles are floating vessels that can be submerged by means of a water ballast system such that the lower hulls are below the water surface during drilling operations. These rigs are capable of maintaining their position over the well through the use of an anchoring system or a computer controlled dynamic positioning thruster system. Some semisubmersible rigs are self-propelled and move between locations under their own power when afloat on pontoons although most are relocated with the assistance of tugs. Typically, semisubmersibles are better suited for operations in rougher water conditions than drillships. Our three Express-class semisubmersibles are designed for mild environments and are equipped with the unique tri-act derrick, which was designed to reduce overall well construction costs.

- 6 -

Jackup rigs are mobile self-elevating drilling platforms equipped with legs that can be lowered to the ocean floor until a foundation is established to support the drilling platform. Once a foundation is established, the drilling platform is then jacked further up the legs so that the platform is above the highest expected waves. These rigs are generally suited for water depths of 300 feet or less.

Depending on market conditions, we may “warm stack” or “cold stack” non-contracted rigs. “Warm stacked” rigs are not under contract and may require the hiring of additional crew, but are generally ready for service with little or no capital expenditures and are being actively marketed. “Cold stacked” rigs are not actively marketed on short or near term contracts, generally cannot be reactivated upon short notice and normally require the hiring of most of the crew, a maintenance review and possibly significant refurbishment before they can be reactivated. Cold stacked rigs and some warm stacked rigs would require additional costs to return to service. The actual cost, which could fluctuate over time, is dependent upon various factors, including the availability and cost of shipyard facilities, cost of equipment and materials and the extent of repairs and maintenance that may ultimately be required. For some of these rigs, the cost could be significant. We would take these factors into consideration together with market conditions, length of contract and dayrate and other contract terms in deciding whether to return a particular idle rig to service. We may consider marketing cold stacked rigs for alternative uses, including as accommodation units, from time to time until drilling activity increases and we obtain drilling contracts for these units.

High-Specification Floaters (33) 

The following tables provide certain information regarding our High-Specification Floaters as of February 2, 2007:

       
Year
  
Water
  
Drilling
      
       
Entered
  
Depth
  
Depth
      
       
Service/
  
Capacity
  
Capacity
      
Name
  
Type
  
Upgraded(a)
  
(in feet)
  
(in feet)
  
Location
  
Fifth-Generation Deepwater Floaters (13)
                      
Deepwater Discovery (b) 
    
HSD
    
2000
    
10,000
    
30,000
    
Nigeria
  
Deepwater Expedition (b)
    
HSD
    
1999
    
10,000
    
30,000
    
Egypt
  
Deepwater Frontier (b)
   
HSD
    
1999
    
10,000
    
30,000
    
India
  
Deepwater Millennium (b)
    
HSD
    
1999
    
10,000
    
30,000
    
U.S. Gulf
  
Deepwater Pathfinder (b)
    
HSD
    
1998
    
10,000
    
30,000
    
Nigeria
  
Discoverer Deep Seas (b) (c)
   
HSD
    
2001
    
10,000
    
35,000
    
U.S. Gulf
  
Discoverer Enterprise (b) (c)
    
HSD
    
1999
    
10,000
    
35,000
    
U.S. Gulf
  
Discoverer Spirit (b) (c)
    
HSD
    
2000
    
10,000
    
35,000
    
U.S. Gulf
  
Deepwater Horizon (b)
    
HSS
    
2001
    
10,000
    
30,000
    
U.S. Gulf
  
Cajun Express (b) (d)
    
HSS
    
2001
    
8,500
    
35,000
    
U.S. Gulf
  
Deepwater Nautilus (e)
    
HSS
    
2000
    
8,000
    
30,000
    
U.S. Gulf
  
Sedco Energy (b) (d)
    
HSS
    
2001
    
7,500
    
25,000
    
Nigeria
  
Sedco Express (b) (d)
    
HSS
    
2001
    
7,500
    
25,000
    
Angola
  
     
 
    
 
    
 
    
 
    
 
  
Other Deepwater Floaters (16)
    
 
    
 
    
 
    
 
    
 
  
Deepwater Navigator (b)
    
HSD
    
2000
    
7,200
    
25,000
    
Brazil
  
Discoverer 534 (b)
    
HSD
    
1975/1991
    
7,000
    
25,000
    
Singapore
  
Discoverer Seven Seas (b)
   
HSD
    
1976/1997
    
7,000
    
25,000
    
India
  
Transocean Marianas
    
HSS
    
1979/1998
    
7,000
    
25,000
    
U.S. Gulf
  
Sedco 707 (b)
    
HSS
    
1976/1997
    
6,500
    
25,000
    
Brazil
  
Sedco 702
    
HSS
    
1973/(f)
 
  
6,500
    
(f)
 
  
Singapore
  
Jack Bates
    
HSS
    
1986/1997
    
5,400
    
30,000
    
U.S. Gulf
  
Peregrine I (b)
    
HSD
    
1982/1996
    
5,200
    
25,000
    
Brazil
  
Sedco 709 (b)
    
HSS
    
1977/1999
    
5,000
    
25,000
    
Nigeria
  
M. G. Hulme, Jr.
   
HSS
    
1983/1996
    
5,000
    
25,000
    
Nigeria
  
Transocean Richardson
    
HSS
    
1988
    
5,000
    
25,000
    
Angola
  
Jim Cunningham
    
HSS
    
1982/1995
    
4,600
    
25,000
    
Nigeria
  
 
- 7 -

       
Year
  
Water
  
Drilling
      
       
Entered
  
Depth
  
Depth
      
       
Service/
  
Capacity
  
Capacity
      
Name
  
Type
  
Upgraded(a)
  
(in feet)
  
(in feet)
  
Location
  
Transocean Leader
    
HSS
    
1987/1997
    
4,500
    
25,000
    
Norwegian N. Sea
  
Transocean Rather
    
HSS
    
1988
    
4,500
    
25,000
    
U.K. North Sea
  
Sovereign Explorer
    
HSS
    
1984
    
4,500
    
25,000
    
Venezuela
  
Sedco 710 (b)
   
HSS
    
1983/2001
    
4,500
    
25,000
    
Brazil
  
     
 
    
 
    
 
              
Other High-Specification Floaters (4)
  
 
    
 
              
Henry Goodrich
    
HSS
    
1985
    
2,000
    
30,000
    
Canada
  
Paul B. Loyd, Jr.
    
HSS
    
1990
    
2,000
    
25,000
    
U.K. North Sea
  
Transocean Arctic
    
HSS
    
1986
    
1,650
    
25,000
    
Norwegian N. Sea
  
Polar Pioneer
    
HSS
    
1985
    
1,500
    
25,000
    
Norwegian N. Sea
  
_______________________________________
“HSD” means high-specification drillship.
“HSS” means high-specification semisubmersible.

(a)
Dates shown are the original service date and the date of the most recent upgrade, if any.
(b)
Dynamically positioned.
(c)
Enterprise-class rig.
(d)
Express-class rig.
(e)
The Deepwater Nautilus was previously leased from its owner, an unrelated third party, pursuant to a fully defeased lease arrangement. We terminated the lease and purchased the rig in December 2006. 
(f)
In the fourth quarter of 2005, we entered into agreements with clients to upgrade two of our Sedco 700-series semisubmersible rigs in our Other Floaters fleet, the Sedco 702 and Sedco 706, at a cost expected to be approximately $300 million for each rig. A rig is counted within the upgraded rig class and removed from the prior rig class when it enters the shipyard to begin upgrade work. The Sedco 702 entered the shipyard for the upgrade in early 2006.

Other Floaters (20)

The following table provides certain information regarding our Other Floaters as of February 2, 2007:

       
Year
  
Water
  
Drilling
      
       
Entered
  
Depth
  
Depth
      
       
Service/
  
Capacity
  
Capacity
      
Name
  
Type
  
Upgraded(a)
  
(in feet)
  
(in feet)
  
Location
  
Sedco 700
   
OS
    
1973/1997
    
3,600
    
25,000
    
E. Guinea
  
Transocean Amirante
   
OS
    
1978/1997
    
3,500
    
25,000
    
U.S. Gulf
  
Transocean Legend
   
OS
    
1983
    
3,500
    
25,000
    
Indonesia
  
C. Kirk Rhein, Jr.
   
OS
    
1976/1997
    
3,300
    
25,000
    
U.A.E.
  
Transocean Driller
   
OS
    
1991
    
3,000
    
25,000
    
Brazil
  
Falcon 100
   
OS
    
1974/1999
    
2,400
    
25,000
    
U.S. Gulf
  
Sedco 703
   
OS
    
1973/1995
    
2,000
    
25,000
    
Australia
  
Sedco 711
   
OS
    
1982
    
1,800
    
25,000
    
U.K. North Sea
  
Transocean John Shaw
   
OS
    
1982
    
1,800
    
25,000
    
U.K. North Sea
  
Sedco 714
   
OS
    
1983/1997
    
1,600
    
25,000
    
U.K. North Sea
  
Sedco 712
   
OS
    
1983
    
1,600
    
25,000
    
U.K. North Sea
  
Actinia
   
OS
    
1982
    
1,500
    
25,000
    
India
  
Sedco 601
   
OS
    
1983
    
1,500
    
25,000
    
Myanmar
  
Sedneth 701
   
OS
    
1972/1993
    
1,500
    
25,000
    
Angola
  
Transocean Prospect
    
OS
    
1983/1992
    
1,500
    
25,000
    
U.K. North Sea
  
Transocean Searcher
   
OS
    
1983/1988
    
1,500
    
25,000
    
Norwegian N. Sea
  
Transocean Winner
   
OS
    
1983
    
1,500
    
25,000
    
Norwegian N. Sea
  
J. W. McLean
   
OS
    
1974/1996
    
1,250
    
25,000
    
U.K. North Sea
  
Sedco 704
   
OS
    
1974/1993
    
1,000
    
25,000
    
U.K. North Sea
  
Sedco 706 (b)
    
OS
    
1976/1994
    
1,000
    
25,000
    
U.K. North Sea
  
 
- 8 -

_______________________________________
“OS” means other semisubmersible.

(a)
Dates shown are the original service date and the date of the most recent upgrade, if any.
(b)
In the fourth quarter of 2005, we entered into agreements with clients to upgrade two of our Sedco 700-series semisubmersible rigs in our Other Floaters fleet, the Sedco 702 and Sedco 706, at a cost expected to be approximately $300 million for each rig. A rig is counted within the upgraded rig class and removed from the prior rig class when it enters the shipyard to begin upgrade work. The Sedco 706 upgrade is scheduled to commence in the third quarter of 2007.

Jackups (25)

The following table provides certain information regarding our Jackups fleet as of February 2, 2007:

       
Water
 
Drilling
     
   
Year Entered
  
Depth
  
Depth
      
   
Service/
  
Capacity
  
Capacity
      
Name
  
Upgraded(a)
  
(in feet)
  
(in feet)
  
Location
  
Trident IX
   
1982
    
400
    
21,000
    
Vietnam
  
Trident 17
    
1983
    
355
    
25,000
    
Vietnam
  
Trident 20
   
2000
    
350
    
25,000
    
Caspian Sea
  
Harvey H. Ward
   
1981
    
300
    
25,000
    
Malaysia
  
J. T. Angel
   
1982
    
300
    
25,000
    
Singapore
  
Roger W. Mowell
   
1982
    
300
    
25,000
    
Malaysia
  
Ron Tappmeyer
   
1978
    
300
    
25,000
    
India
  
D. R. Stewart
   
1980
    
300
    
25,000
    
Italy
  
Randolph Yost
   
1979
    
300
    
25,000
    
India
  
C. E. Thornton
   
1974
    
300
    
25,000
    
India
  
F. G. McClintock
   
1975
    
300
    
25,000
    
India
  
Shelf Explorer
   
1982
    
300
    
25,000
    
Malaysia
  
Transocean III
   
1978/1993
    
300
    
20,000
    
Egypt
  
Transocean Nordic
   
1984
    
300
    
25,000
    
India
  
Trident II
   
1977/1985
    
300
    
25,000
    
India
  
Trident IV
    
1980/1999
    
300
    
25,000
    
Nigeria
  
Trident VIII
   
1981
    
300
    
21,000
    
Nigeria
  
Trident XII
   
1982/1992
    
300
    
25,000
    
India
  
Trident XIV
   
1982/1994
    
300
    
20,000
    
Cameroon
  
Trident 15
   
1982
    
300
    
25,000
    
Thailand
  
Trident 16
   
1982
    
300
    
25,000
    
Thailand
  
George H. Galloway
   
1984
    
300
    
25,000
    
Italy
  
Transocean Comet
   
1980
    
250
    
20,000
    
Egypt
  
Transocean Mercury
   
1969/1998
    
250
    
20,000
    
Egypt
  
Trident VI
   
1981
    
220
    
21,000
    
Vietnam
  
______________________________
 
(a)
Dates shown are the original service date and the date of the most recent upgrade, if any.

Other Rigs

In addition to our floaters and jackups, we also own or operate several other types of rigs. These rigs include two drilling barges, a mobile offshore production unit and a coring drillship.

Markets

Our operations are geographically dispersed in oil and gas exploration and development areas throughout the world. Rigs can be moved from one region to another, but the cost of moving a rig and the availability of rig-moving vessels may cause the supply and demand balance to vary somewhat between regions. However, significant variations between regions do not tend to exist long-term because of rig mobility. Consequently, we operate in a single, global offshore drilling market. Because our drilling rigs are mobile assets and are able to be moved according to prevailing market conditions, we cannot predict the percentage of our revenues that will be derived from particular geographic or political areas in future periods.

In recent years, there has been increased emphasis by oil companies on exploring for hydrocarbons in deeper waters. This is, in part, because of technological developments that have made such exploration more feasible and cost-effective. For this reason, water-depth capability is a key component in determining rig suitability for a particular drilling project. Another distinguishing feature in some drilling market sectors is a rig’s ability to operate in harsh environments, including extreme marine and climatic conditions and temperatures.

- 9 -

The deepwater and mid-water market sectors are serviced by our semisubmersibles and drillships. While the use of the term “deepwater” as used in the drilling industry to denote a particular sector of the market can vary and continues to evolve with technological improvements, we generally view the deepwater market sector as that which begins in water depths of approximately 4,500 feet and extends to the maximum water depths in which rigs are capable of drilling, which is currently approximately 10,000 feet. We view the mid-water market sector as that which covers water depths of about 300 feet to approximately 4,500 feet.

The global jackup market sector begins at the outer limit of the transition zone and extends to water depths of about 300 feet. This sector has been developed to a significantly greater degree than the deepwater market sector because the shallower water depths have made it much more accessible than the deeper water market sectors.

The “transition zone” market sector is characterized by marshes, rivers, lakes, shallow bay and coastal water areas. We operate in this sector using our drilling barges located in Southeast Asia.

Operating Revenues and Long-Lived Assets by Country

Operating revenues and long-lived assets by country are as follows (in millions):

   
Years ended December 31,
  
   
2006
  
2005
  
2004
  
Operating Revenues
              
United States
  
$
806
  
$
648
  
$
856
  
United Kingdom
    
462
    
335
    
209
  
Nigeria
    
447
    
218
    
196
  
India
    
313
    
296
    
271
  
Brazil
    
308
    
265
    
278
  
Other Countries (a)
    
1,546
    
1,130
    
804
  
Total Operating Revenues
  
$
3,882
  
$
2,892
  
$
2,614
  

   
As of December 31,
  
   
2006
  
2005
  
Long-Lived Assets
          
United States
  
$
2,485
  
$
2,311
  
Nigeria
    
856
    
980
  
Brazil
    
535
    
762
  
United Kingdom
    
457
    
363
  
India
    
236
    
304
  
Other Countries (a)
    
2,757
    
2,028
  
Total Long-Lived Assets
  
$
7,326
  
$
6,748
  
______________________
(a)
Other Countries represents countries in which we operate that individually had operating revenues or long-lived assets representing less than 10 percent of total operating revenues earned or total long-lived assets for any of the periods presented.

Integrated Services

From time to time, we provide well and logistics services in addition to our normal drilling services through third party contractors and our employees. We refer to these other services as integrated services. The work generally consists of individual contractual agreements to meet specific client needs and may be provided on either a dayrate, cost plus or fixed price basis depending on the daily activity. As of February 28, 2007, we were performing such services in India. These integrated service revenues did not represent a material portion of our revenues for any period presented.

- 10 -

Drilling Contracts

Our contracts to provide offshore drilling services are individually negotiated and vary in their terms and provisions. We obtain most of our contracts through competitive bidding against other contractors. Drilling contracts generally provide for payment on a dayrate basis, with higher rates while the drilling unit is operating and lower rates for periods of mobilization or when drilling operations are interrupted or restricted by equipment breakdowns, adverse environmental conditions or other conditions beyond our control.

A dayrate drilling contract generally extends over a period of time covering either the drilling of a single well or group of wells or covering a stated term. These contracts typically can be terminated by the client under various circumstances such as the loss or destruction of the drilling unit or the suspension of drilling operations for a specified period of time as a result of a breakdown of major equipment. Many of these events are beyond our control. The contract term in some instances may be extended by the client exercising options for the drilling of additional wells or for an additional term. Our contracts also typically include a provision that allows the client to extend the contract to finish drilling a well-in-progress. In reaction to depressed market conditions, our clients may seek renegotiation of firm drilling contracts to reduce their obligations or may seek to suspend or terminate their contracts. Some drilling contracts permit the customer to terminate the contract at the customer's option without paying a termination fee. Suspension of drilling contracts results in the reduction in or loss of dayrate for the period of the suspension. If our customers cancel some of our significant contracts and we are unable to secure new contracts on substantially similar terms, or if contracts are suspended for an extended period of time, it could adversely affect our results of operations.

Significant Clients

We engage in offshore drilling for most of the leading international oil companies (or their affiliates), as well as for many government-controlled and independent oil companies. Our most significant clients in 2006 were Chevron, BP and Shell accounting for 14 percent, 11 percent and 11 percent, respectively, of our 2006 operating revenues. No other client accounted for 10 percent or more of our 2006 operating revenues. The loss of any of these significant clients could, at least in the short term, have a material adverse effect on our results of operations.

Regulation

Our operations are affected from time to time in varying degrees by governmental laws and regulations. The drilling industry is dependent on demand for services from the oil and gas exploration industry and, accordingly, is affected by changing tax and other laws generally relating to the energy business.

International contract drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the equipping and operation of drilling units, currency conversions and repatriation, oil and gas exploration and development, taxation of offshore earnings and earnings of expatriate personnel and use of local employees and suppliers by foreign contractors. Governments in some foreign countries are active in regulating and controlling the ownership of concessions and companies holding concessions, the exportation of oil and gas and other aspects of the oil and gas industries in their countries. In addition, government action, including initiatives by the Organization of Petroleum Exporting Countries (“OPEC”), may continue to cause oil price volatility. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil companies and may continue to do so.

In the U.S., regulations applicable to our operations include certain regulations controlling the discharge of materials into the environment and requiring the removal and cleanup of materials that may harm the environment or otherwise relating to the protection of the environment.

The U.S. Oil Pollution Act of 1990 (“OPA”) and related regulations impose a variety of requirements on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills. Few defenses exist to the liability imposed by OPA, and such liability could be substantial. Failure to comply with ongoing requirements or inadequate cooperation in a spill event could subject a responsible party to civil or criminal enforcement action.

The U.S. Outer Continental Shelf Lands Act (“OCSLA”) authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the outer continental shelf. Included among these are regulations that require the preparation of spill contingency plans and establish air quality standards for certain pollutants, including particulate matter, volatile organic compounds, sulfur dioxide, carbon monoxide and nitrogen oxides. Specific design and operational standards may apply to outer continental shelf vessels, rigs, platforms, vehicles and structures. Violations of environmental related lease conditions or regulations issued pursuant to OCSLA can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and canceling leases. Such enforcement liabilities can result from either governmental or citizen prosecution.

- 11 -

The U.S. Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), also known as the “Superfund” law, imposes liability without regard to fault or the legality of the original conduct on some classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of a facility where a release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at a particular site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. It is not uncommon for third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

Many of the other countries in whose waters we are presently operating or may operate in the future have regulations covering the discharge of oil and other contaminants in connection with drilling operations.

Governmental authorities in the U.S. are also reviewing various regulations relating to rig mooring requirements, particularly in the aftermath of the hurricane activity in 2005 in the Gulf of Mexico. We and the drilling industry are working with the pertinent authorities as part of this process.

Although significant capital expenditures may be required to comply with various governmental laws and regulations, such compliance to date has not materially adversely affected our earnings or competitive position.

Employees

We require highly skilled personnel to operate our drilling units. As a result, we conduct extensive personnel recruiting, training and safety programs. At January 31, 2007, we had approximately 10,700 employees and we also utilized approximately 1,800 persons through contract labor providers. As of such date, approximately 15 percent of our employees and contract labor worldwide worked under collective bargaining agreements, most of whom worked in the U.K., Nigeria and Norway. Of these represented individuals, 60 percent are working under agreements that are subject to salary negotiation in 2007. These negotiations could result in higher personnel expenses, other increased costs or increased operating restrictions.

Available Information

Our website address is www.deepwater.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Form 10-K. We make available on this website under “Investor Relations-SEC Filings,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the Securities and Exchange Commission (“SEC”). The SEC also maintains a website at www.sec.gov  that contains reports, proxy statements and other information regarding SEC registrants, including us.

You may also find information related to our corporate governance, board committees and company code of ethics at our website. Among the information you can find there is the following:

 
·
Corporate Governance Guidelines;
 
·
Audit Committee Charter;
 
·
Corporate Governance Committee Charter;
 
·
Executive Compensation Committee Charter;
 
·
Finance and Benefits Committee Charter; and
 
·
Code of Ethics.
 
We intend to satisfy the requirement under Item 5.05 of Form 8-K to disclose any amendments to our Code of Ethics and any waiver from a provision of our Code of Ethics by posting such information in the Corporate Governance section of our website at www.deepwater.com.

- 12 -

ITEM 1A.
Risk Factors

Our business depends on the level of activity in the offshore oil and gas industry, which is significantly affected by volatile oil and gas prices and other factors.

Our business depends on the level of activity in oil and gas exploration, development and production in market sectors worldwide, with the U.S. and international offshore areas being our primary market sectors. Oil and gas prices and market expectations of potential changes in these prices significantly affect this level of activity. However, higher commodity prices do not necessarily translate into increased drilling activity since our customers' expectations of future commodity prices typically drive demand for our rigs. Also, increased competition for our customers’ drilling budgets could come from, among other areas, land-based energy markets in Africa, Russia, other former Soviet Union States, the Middle East and Alaska. The availability of quality drilling prospects, exploration success, relative production costs, the stage of reservoir development and political and regulatory environments also affect our customers’ drilling campaigns. Worldwide military, political and economic events have contributed to oil and gas price volatility and are likely to do so in the future. Oil and gas prices are extremely volatile and are affected by numerous factors, including the following:

 
·
worldwide demand for oil and gas,

 
·
the ability of OPEC to set and maintain production levels and pricing,

 
·
the level of production in non-OPEC countries,

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

 
·
advances in exploration and development technology, and

 
·
the worldwide military and political environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in the Middle East or other geographic areas or further acts of terrorism in the United States, or elsewhere.

Our industry is highly competitive and cyclical, with intense price competition.

The offshore contract drilling industry is highly competitive with numerous industry participants, none of which has a dominant market share. Drilling contracts are traditionally awarded on a competitive bid basis. Intense price competition is often the primary factor in determining which qualified contractor is awarded a job, although rig availability and the quality and technical capability of service and equipment may also be considered. Mergers among oil and natural gas exploration and production companies have reduced the number of available customers.

Our industry has historically been cyclical and is impacted by oil and gas price levels and volatility. There have been periods of high demand, short rig supply and high dayrates, followed by periods of low demand, excess rig supply and low dayrates. Changes in commodity prices can have a dramatic effect on rig demand, and periods of excess rig supply intensify the competition in the industry and often result in rigs being idle for long periods of time. We may be required to idle rigs or enter into lower rate contracts in response to market conditions in the future.

During prior periods of high utilization and dayrates, industry participants have increased the supply of rigs by ordering the construction of new units. This has typically resulted in an oversupply of drilling units and has caused a subsequent decline in utilization and dayrates, sometimes for extended periods of time. There are numerous high-specification rigs and jackups under contract for construction and mid-water semisubmersibles that are being upgraded to enhance their operating capability. The entry into service of these new and upgraded units will increase supply and could curtail a further strengthening of dayrates, or reduce them, in the affected markets or result in a softening of the affected markets as rigs are absorbed into the active fleet. Any further increase in construction of new drilling units would likely exacerbate the negative impact on utilization and dayrates. Lower utilization and dayrates in one or more of the regions in which we operate could adversely affect our revenues and profitability. Prolonged periods of low utilization and dayrates could also result in the recognition of impairment charges on certain classes of our drilling rigs or our goodwill balance if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these rigs, or the goodwill balance, may not be recoverable.

- 13 -
 
Our business involves numerous operating hazards.

Our operations are subject to the usual hazards inherent in the drilling of oil and gas wells, such as blowouts, reservoir damage, loss of production, loss of well control, punch-throughs, craterings, fires and natural disasters such as hurricanes and tropical storms. The occurrence of these events could result in the suspension of drilling operations, damage to or destruction of the equipment involved and injury or death to rig personnel. We may also be subject to personal injury and other claims of rig personnel as a result of our drilling operations. Operations also may be suspended because of machinery breakdowns, abnormal drilling conditions, and failure of subcontractors to perform or supply goods or services or personnel shortages. In addition, offshore drilling operations are subject to perils peculiar to marine operations, including capsizing, grounding, collision and loss or damage from severe weather. Damage to the environment could also result from our operations, particularly through oil spillage or extensive uncontrolled fires. We may also be subject to property, environmental and other damage claims by oil and gas companies. Our insurance policies and contractual rights to indemnity may not adequately cover losses, and we do not have insurance coverage or rights to indemnity for all risks.

Consistent with standard industry practice, our clients generally assume, and indemnify us against, well control and subsurface risks under dayrate contracts. These risks are those associated with the loss of control of a well, such as blowout or cratering, the cost to regain control or redrill the well and associated pollution. However, there can be no assurance that these clients will necessarily be financially able to indemnify us against all these risks. Also, we may be effectively prevented from enforcing these indemnities because of the nature of our relationship with some of our larger clients.

We have historically maintained broad insurance coverages, including coverages for property damage, occupational injury and illness, and general and marine third-party liabilities. Property damage insurance covers against marine and other perils, including losses due to capsizing, grounding, collision, fire, lightning, hurricanes, wind, storms, action of waves, punch-throughs, cratering, blowouts, explosion and war risks. We currently insure all of our offshore drilling equipment for general and third party liabilities, occupational and illness risks, and property damage. We also generally insure all of our offshore drilling rigs against property damage but the amount of such insurance may be less than the fair market value, replacement cost and net carrying value for financial reporting purposes.

In accordance with industry practices, we believe we are adequately insured for normal risks in our operations; however, such insurance coverage would not in all situations provide sufficient funds to protect us from all liabilities that could result from our drilling operations. Our coverage includes annual aggregate limits on losses due to hurricanes. As a result, we retain the risk through self-insurance for any losses in excess of these limits. We do not carry insurance for loss of revenue and certain other claims may not be reimbursed by insurance carriers. Such lack of reimbursement may cause us to incur substantial costs. In addition, we could decide to retain substantially more risk through self-insurance.
 
Failure to retain key personnel could hurt our operations.

We require highly skilled personnel to operate and provide technical services and support for our drilling units. As demand for drilling services and the size of the worldwide industry fleet increases, we have begun to see shortages of qualified personnel in the industry, creating upward pressure on wages and possibly higher turnover. If turnover increases, we could see a reduction in the experience level of our personnel, which could lead to higher downtime and more operating incidents, which in turn could decrease revenues and increase costs. We are increasing efforts in our recruitment, training, development and retention programs as required to meet our anticipated personnel needs.
 
Our labor costs and the operating restrictions under which we operate could increase as a result of collective bargaining negotiations and changes in labor laws and regulations.
 
On January 31, 2007, approximately 15 percent of our employees and contracted labor worldwide worked under collective bargaining agreements, most of whom worked in the U.K., Nigeria and Norway. Of these represented individuals, approximately 60 percent are working under agreements that are subject to salary negotiation in 2007. These negotiations could result in higher personnel expenses, other increased costs or increased operating restrictions.  Additionally, the unions in the U.K. are seeking an interpretation of the Offshore Working Directive, which was recently extended to include U.K. offshore workers, that could result in higher labor costs and undermine our ability to obtain a sufficient number of skilled workers in the U.K. 
 
Our shipyard projects are subject to delays and cost overruns.

We have committed to three deepwater newbuild rig projects and two Sedco 700-series rig upgrades, and we are discussing other potential newbuild opportunities with several clients. We also have a variety of other more limited shipyard projects at any given time. Our shipyard projects are subject to the risks of delay or cost overruns inherent in any such construction project resulting from numerous factors, including the following:

 
·
shipyard unavailability;
 
 
·
shortages of equipment, materials or skilled labor;
 
 
·
unscheduled delays in the delivery of ordered materials and equipment;
 
 
·
engineering problems, including those relating to the commissioning of newly designed equipment;

 
·
work stoppages;
 
 
·
client acceptance delays;
 
 
·
weather interference or storm damage;
 
 
·
unanticipated cost increases; and
 
 
·
difficulty in obtaining necessary permits or approvals.
 
These factors may contribute to cost variations and delays in the delivery of our upgraded and newbuild units and other rigs undergoing shipyard projects. Delays in the delivery of these units would result in delay in contract commencement, resulting in a loss of revenue to us, and may also cause our customer to terminate or shorten the term of the drilling contract for the rig pursuant to applicable late delivery clauses. In the event of termination of one of these contracts, we may not be able to secure a replacement contract on as favorable terms.
 
- 14 -
 
A loss of a major tax dispute or a successful tax challenge to our structure could result in a significant loss or in a higher tax rate on our worldwide earnings or both.
 
We are a Cayman Islands company and also operate through various subsidiaries around the world. Our income tax returns are subject to review and examination in the various jurisdictions in which we operate. We accrue for income tax contingencies that we believe are probable exposures and our income taxes are based upon how we are structured in countries around the world. If any country, including the U.S. and Norway, successfully challenges our income tax filings based on our operational structure there, or if we otherwise lose a material dispute, our effective tax rate on our worldwide earnings could increase substantially and our financial results could be materially adversely affected. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook-Tax Matters” and “—Critical Accounting Estimates-Income Taxes.”
 
A change in tax laws, or their interpretation, of any country in which we operate could result in a higher tax rate on our worldwide earnings.

We operate worldwide through our various subsidiaries. Consequently, we are subject to changing tax laws and policies in the jurisdictions in which we operate, which could include laws or policies directed toward companies organized in jurisdictions with low tax rates. A material change in the tax laws or policies, or their interpretation, of any country in which we have significant operations could result in a higher effective tax rate on our worldwide earnings. In addition, our income tax returns are subject to review and examination in various jurisdictions in which we operate. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook-Tax Matters” and “—Critical Accounting Estimates-Income Taxes.”
 
Our non-U.S. operations involve additional risks not associated with our U.S. operations.

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

 
·
terrorist acts, war and civil disturbances;
 
·
expropriation or nationalization of equipment; and
 
·
the inability to repatriate income or capital.

We are protected to a substantial extent against loss of capital assets, but generally not loss of revenue, from most of these risks through insurance, indemnity provisions in our drilling contracts, or both. The necessity of insurance coverage for risks associated with political unrest, expropriation and environmental remediation for operating areas not covered under our existing insurance policies is evaluated on an individual contract basis. Although we maintain insurance in the areas in which we operate, pollution and environmental risks generally are not totally insurable. If a significant accident or other event occurs and is not fully covered by insurance or an enforceable or recoverable indemnity from a client, it could adversely affect our consolidated financial position, results of operations or cash flows. Moreover, no assurance can be made that we will be able to maintain adequate insurance in the future at rates we consider reasonable or be able to obtain insurance against certain risks, particularly in light of the instability and developments in the insurance markets following the terrorist attacks of September 11, 2001. As of February 28, 2007, all areas in which we were operating were covered by existing insurance policies.
 
Many governments favor or effectively require the awarding of drilling contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These practices may adversely affect our ability to compete.

Our non-U.S. contract drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the equipment and operation of drilling units, currency conversions and repatriation, oil and gas exploration and development and taxation of offshore earnings and earnings of expatriate personnel. Governments in some foreign countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exploration for oil and gas and other aspects of the oil and gas industries in their countries. In addition, government action, including initiatives by OPEC, may continue to cause oil or gas price volatility. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil companies and may continue to do so.

Another risk inherent in our operations is the possibility of currency exchange losses where revenues are received and expenses are paid in nonconvertible currencies. We may also incur losses as a result of an inability to collect revenues because of a shortage of convertible currency available in the country of operation.
 
- 15 -

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

We do not expect operating and maintenance costs to necessarily fluctuate in proportion to changes in operating revenues. Operating revenues may fluctuate as a function of changes in dayrate. However, costs for operating a rig are generally fixed or only semi-variable regardless of the dayrate being earned. In addition, should our rigs incur idle time between contracts, we typically do not de-man those rigs because we will use the crew to prepare the rig for its next contract. During times of reduced activity, reductions in costs may not be immediate as portions of the crew may be required to prepare our rigs for stacking, after which time the crew members are assigned to active rigs or dismissed. In addition, as our rigs are mobilized from one geographic location to another, the labor and other operating and maintenance costs can vary significantly. In general, labor costs increase primarily due to higher salary levels and inflation. Equipment maintenance expenses fluctuate depending upon the type of activity the unit is performing and the age and condition of the equipment. Contract preparation expenses vary based on the scope and length of contract preparation required and the duration of the firm contractual period over which such expenditures are amortized.

Our drilling contracts may be terminated due to a number of events.

Our customers may terminate or suspend some of our term drilling contracts without paying a termination fee under various circumstances such as the loss or destruction of the drilling unit, downtime or impaired performance caused by equipment or operational issues, some of which are beyond our control, or sustained periods of downtime due to force majeure events. Suspension of drilling contracts results in loss of the dayrate for the period of the suspension. If our customers cancel some of our significant contracts and we are unable to secure new contracts on substantially similar terms, it could adversely affect our results of operations. In reaction to depressed market conditions, our customers may also seek renegotiation of firm drilling contracts to reduce their obligations.
 
Public health threats could have a material adverse effect on our operations and our financial results.

Public health threats, such as the bird flu, Severe Acute Respiratory Syndrome (“SARS”), and other highly communicable diseases, outbreaks of which have already occurred in various parts of the world in which we operate, could adversely impact our operations, the operations of our clients and the global economy including the worldwide demand for oil and natural gas and the level of demand for our services. Any quarantine of personnel or inability to access our offices or rigs could adversely affect our operations. Travel restrictions or operational problems in any part of the world in which we operate, or any reduction in the demand for drilling services caused by public health threats in the future, may materially impact operations and adversely affect our financial results.

Compliance with or breach of environmental laws can be costly and could limit our operations.

Our operations are subject to regulations controlling the discharge of materials into the environment, requiring removal and cleanup of materials that may harm the environment or otherwise relating to the protection of the environment. For example, as an operator of mobile offshore drilling units in navigable U.S. waters and some offshore areas, we may be liable for damages and costs incurred in connection with oil spills related to those operations. Laws and regulations protecting the environment have become more stringent in recent years, and may in some cases impose strict liability, rendering a person liable for environmental damage without regard to negligence. These laws and regulations may expose us to liability for the conduct of or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed. The application of these requirements or the adoption of new requirements could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

- 16 -

We have generally been able to obtain some degree of contractual indemnification pursuant to which our clients agree to protect and indemnify us against liability for pollution, well and environmental damages; however, there is no assurance that we can obtain such indemnities in all of our contracts or that, in the event of extensive pollution and environmental damages, our clients will have the financial capability to fulfill their contractual obligations to us. Also, these indemnities may not be enforceable in all instances. In addition, we may be effectively prevented from enforcing these indemnities because of the nature of our relationship with some of our larger clients.

World political events could affect the markets for drilling services.

World political events have resulted in military action in Afghanistan and Iraq and terrorist attacks and related unrest. Military action by the U.S. or other nations could escalate and further acts of terrorism may occur in the U.S. or elsewhere. Such acts of terrorism could be directed against companies such as ours. Such developments have caused instability in the world's financial and insurance markets in the past. In addition, these developments could lead to increased volatility in prices for crude oil and natural gas and could affect the markets for drilling services. Insurance premiums have increased and could rise further and coverages may be unavailable in the future.

U.S. government regulations may effectively preclude us from actively engaging in business activities in certain countries. These regulations could be amended to cover countries where we currently operate or where we may wish to operate in the future.

ITEM 1B.
Unresolved Staff Comments

None.

ITEM 2.
Properties 

The description of our property included under “Item 1. Business” is incorporated by reference herein.

We maintain offices, land bases and other facilities worldwide, including our principal executive offices in Houston, Texas and regional operational offices in the U.S., France and Singapore. Our remaining offices and bases are located in various countries in North America, South America, the Caribbean, Europe, Africa, Russia, the Middle East, India, the Far East and Australia. We lease most of these facilities.

ITEM 3.
Legal Proceedings

Several of our subsidiaries have been named, along with numerous unaffiliated defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi involving over 700 persons that allege personal injury arising out of asbestos exposure in the course of their employment by some of these defendants between 1965 and 1986. The complaints also name as defendants certain of TODCO's subsidiaries to whom we may owe indemnity. Further, the complaints name other unaffiliated defendant companies, including companies that allegedly manufactured drilling related products containing asbestos. The complaints allege that the defendant drilling contractors used those asbestos-containing products in offshore drilling operations, land based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability, and claims authorized under the Jones Act. The plaintiffs generally seek awards of unspecified compensatory and punitive damages. We have not yet been able to conduct extensive discovery nor determine the number of plaintiffs that were employed by our subsidiaries or otherwise have any connection with our drilling operations. We intend to defend ourselves vigorously and, based on the limited information available to us at this time, we do not expect the liability, if any, resulting from these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In 1990 and 1991, two of our subsidiaries were served with various assessments collectively valued at approximately $10 million from the municipality of Rio de Janeiro, Brazil to collect a municipal tax on services. We believe that neither subsidiary is liable for the taxes and have contested the assessments in the Brazilian administrative and court systems. We have received several adverse rulings by various courts with respect to a June 1991 assessment, which is valued at approximately $9 million. We are continuing to challenge the assessment and filed a writ of mandamus to stay execution of a related tax foreclosure proceeding. The government is currently attempting to enforce the judgment on this assessment and the amount claimed is approximately $24 million, which exceeds the amount we believe is at issue. We received a favorable ruling in connection with a disputed August 1990 assessment, and the government has lost what is expected to be its final appeal with respect to that ruling. We also are awaiting a ruling from the Taxpayer's Council in connection with an October 1990 assessment. If our defenses are ultimately unsuccessful, we believe that the Brazilian government-controlled oil company, Petrobras, has a contractual obligation to reimburse us for municipal tax payments. We do not expect the liability, if any, resulting from these assessments to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

- 17 -

The Indian Customs Department, Mumbai alleged in July 1999 that the initial entry into India in 1988 and other subsequent movements of the Trident II jackup rig operated by the subsidiary constituted imports and exports for which proper customs procedures were not followed and sought payment of customs duties of approximately $31 million based on an alleged 1998 rig value of $49 million, plus interest and penalties, and confiscation of the rig. In January 2000, the Customs Department found that we had imported the rig improperly and intentionally concealed the import from the authorities, and directed us to pay certain other fees and penalties, in addition to the amount of customs duties owed. We appealed the Customs Department ruling and an appellate tribunal granted our request that the confiscation be stayed pending the appeal. The appellate tribunal also found that the rig was originally imported without proper documentation or payment of duties and sustained our valuation of the rig at the time of import as $13 million and ruled that subsequent movements of the rig were not liable to import documentation or duties, thus limiting our exposure as to custom duties to approximately $6 million. The Supreme Court of India has affirmed the appellate ruling but the Customs Department has not agreed with our interpretation of that order. We are contesting their interpretation. We and our customer agreed to pursue and obtained the issuance of the required importation documentation from the Ministry of Petroleum that, if accepted by the Customs Department, would reduce the duty to nil. The Customs Department did not accept the documentation or agree to refund the duties already paid. We are pursuing our remedies against the Customs Department and our customer. We do not expect the liability, if any, resulting from this matter to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

One of our subsidiaries is involved in an action with respect to customs penalties relating to the Sedco 710 semisubmersible drilling rig. Prior to our merger with Sedco Forex, this drilling rig, which was working for Petrobras in Brazil at the time, had been admitted into the country on a temporary basis under authority granted to a Schlumberger entity. Prior to the Sedco Forex merger, the drilling contract was moved to an entity that would become one of our subsidiaries. In early 2000, the drilling contract was extended for another year. On January 10, 2000, the temporary import permit granted to the Schlumberger entity expired, and renewal filings were not made until later that January. In April 2000, the Brazilian customs authorities cancelled the import permit. The Schlumberger entity filed an action in the Brazilian federal court of Campos for the purpose of extending the temporary admission. Other proceedings were also initiated in order to secure the transfer of the temporary admission to our subsidiary. Ultimately, the court permitted the transfer to our entity but has not ruled that the temporary admission could be extended without the payment of a financial penalty. During the first quarter of 2004, the customs office renewed its efforts to collect a penalty and issued a second assessment for this penalty but has now done so against our subsidiary. The assessment is for approximately $71 million. We believe that the amount of the assessment, even if it were appropriate, should only be approximately $7 million and should in any event be assessed against the Schlumberger entity. We and Schlumberger are contesting our respective assessments. We have put Schlumberger on notice that we consider any assessment to be the responsibility of Schlumberger. We do not expect the liability, if any, resulting from this matter to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We had a dispute with TODCO concerning payment to us under the tax sharing agreement that we entered into with TODCO for the tax benefit that TODCO derives from exercises of options to purchase our ordinary shares held by employees of TODCO. During the fourth quarter of 2006, an arbitration proceeding that was initiated in January 2006 concluded. We were seeking payment of the amount of tax benefits derived from exercises of options to purchase our ordinary shares by employees of TODCO who were not on the payroll of TODCO at the time of exercise and a declaration that TODCO pay us for the benefit derived from such exercises in the future. In November 2006, we reached a negotiated settlement with TODCO. As a result of the settlement, we entered into an amended and restated tax sharing agreement with TODCO. Under the terms of the amended and restated agreement, TODCO will pay us for 55 percent of the value of the tax deductions arising from the exercise of options to purchase our ordinary shares by current and former employees and directors of TODCO. This payment rate applies retroactively to amounts previously accrued by TODCO and to future payments. Under the terms of the amended and restated agreement, TODCO will also receive a $3 million federal tax benefit for use of certain state and foreign tax assets. The amended and restated agreement also provides that the change of control provision contained in the agreement no longer applies to option deductions. However, if TODCO uses the option deductions after a change of control, it would be required to pay us for 55 percent of the value of those deductions. As a result of the settlement, we recognized other income of $51 million, net of tax, in the fourth quarter of 2006 that had previously been deferred pending resolution of the dispute.

- 18 -

In the third quarter of 2006, we received tax assessments of approximately $100 million from the state tax authorities of Rio de Janeiro in Brazil against one of our Brazilian subsidiaries for customs taxes on equipment imported into the state in connection with our operations. The assessments resulted from a preliminary finding by these authorities that our subsidiary’s record keeping practices were deficient. We continue to review documents related to the assessments, and while our review is not complete, we currently believe that the substantial majority of these assessments are without merit. We filed an initial response with the Rio de Janeiro tax authorities on September 9, 2006 refuting these additional tax assessments. While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect it to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We are involved in various tax matters as described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Outlook—Tax Matters." We are also involved in a number of other lawsuits, including a labor dispute involving Hull Blyth workers in Angola previously reported that is not material to us, all of which have arisen in the ordinary course of our business. We do not expect the liability, if any, resulting from these other matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows. We cannot predict with certainty the outcome or effect of any of the litigation matters specifically described above or of any such other pending or threatened litigation. There can be no assurance that our beliefs or expectations as to the outcome or effect of any lawsuit or other litigation matter will prove correct and the eventual outcome of these matters could materially differ from management's current estimates.

ITEM 4.
Submission of Matters to a Vote of Security Holders 

The Company did not submit any matter to a vote of its security holders during the fourth quarter of 2006.

Executive Officers of the Registrant

   
Age as of
Officer
Office
February 28, 2007
Robert L. Long
Chief Executive Officer
61
Jean P. Cahuzac
President
53
Steven L. Newman
Executive Vice President and Chief Operating Officer
42
Eric B. Brown
Senior Vice President, General Counsel and Corporate Secretary
55
Gregory L. Cauthen
Senior Vice President and Chief Financial Officer
49
David J. Mullen
Senior Vice President, Marketing and Planning
49
David A. Tonnel
Vice President and Controller
37

The officers of the Company are elected annually by the board of directors. There is no family relationship between any of the above-named executive officers.

Robert L. Long is Chief Executive Officer and a member of the board of directors of the Company. Mr. Long served as President and Chief Executive Officer of the Company and a member of the board of directors from October 2002 to October 2006, at which time he relinquished the position of President. Mr. Long served as President of the Company from December 2001 to October 2002. Mr. Long served as Chief Financial Officer of the Company from August 1996 until December 2001. Mr. Long served as Senior Vice President of the Company from May 1990 until the time of the Sedco Forex merger, at which time he assumed the position of Executive Vice President. Mr. Long also served as Treasurer of the Company from September 1997 until March 2001. Mr. Long has been employed by the Company since 1976 and was elected Vice President in 1987.

Jean P. Cahuzac is President of the Company. Mr. Cahuzac served as Executive Vice President and Chief Operating Officer of the Company from October 2002 to October 2006, at which time he assumed his current position. Mr. Cahuzac served as Executive Vice President, Operations of the Company from February 2001 until October 2002. Mr. Cahuzac served as President of Sedco Forex from January 1999 until the time of the Sedco Forex merger, at which time he assumed the positions of Executive Vice President and President, Europe, Middle East and Africa with the Company. Mr. Cahuzac served as Vice President-Operations Manager of Sedco Forex from May 1998 to January 1999, Region Manager-Europe, Africa and CIS of Sedco Forex from September 1994 to May 1998 and Vice President/General Manager-North Sea Region of Sedco Forex from February 1994 to September 1994. He had been employed by Schlumberger Limited since 1979.

Steven L. Newman is Executive Vice President and Chief Operating Officer of the Company. Mr. Newman served as Senior Vice President of Human Resources and Information Process Solutions from May 2006 to October 2006, at which time he assumed his current position. He served as Senior Vice President of Human Resources, Information Process Solutions and Treasury from March 2005 to May 2006. Mr. Newman served as Vice President of Performance and Technology of the Company from August 2003 until March 2005. Mr. Newman served as Region Manager, Asia Australia from May 2001 until August 2003. From December 2000 to May 2001, Mr. Newman served as Region Operations Manager of the Africa-Mediterranean Region of the Company. From April 1999 to December 2000, Mr. Newman served in various operational and marketing roles in the Africa-Mediterranean and U.K. region offices. Mr. Newman has been employed by the Company since 1994.

- 19 -

Eric B. Brown is Senior Vice President, General Counsel and Corporate Secretary of the Company. Mr. Brown served as Vice President and General Counsel of the Company since February 1995 and Corporate Secretary of the Company since September 1995. He assumed the position of Senior Vice President in February 2001. Prior to assuming his duties with the Company, Mr. Brown served as General Counsel of Coastal Gas Marketing Company.

Gregory L. Cauthen is Senior Vice President and Chief Financial Officer of the Company. He was also Treasurer of the Company until July 2003. Mr. Cauthen served as Vice President, Chief Financial Officer and Treasurer from December 2001 until he was elected in July 2002 as Senior Vice President. Mr. Cauthen served as Vice President, Finance from March 2001 to December 2001. Prior to joining the Company, he served as President and Chief Executive Officer of WebCaskets.com, Inc., a provider of death care services, from June 2000 until February 2001. Prior to June 2000, he was employed at Service Corporation International, a provider of death care services, where he served as Senior Vice President, Financial Services from July 1998 to August 1999, Vice President, Treasurer from July 1995 to July 1998, was assigned to various special projects from August 1999 to May 2000 and had been employed in various other positions since February 1991.

David J. Mullen is Senior Vice President, Marketing and Planning of the Company. Mr. Mullen served as Vice President of the Company's North and South America Unit from January 2005 to October 2006, when he assumed his present position.  From May 2001 to January 2005, Mr. Mullen was President of Schlumberger Oilfield Services for North and South America, and Mr. Mullen served as the Company’s Vice President of Human Resources from January 2000 to May 2001.  Prior to joining the Company at the time of our merger with Sedco Forex, Mr. Mullen served in a variety of roles with Schlumberger Limited, where he had been employed since 1983.

David A. Tonnel is Vice President and Controller of the Company. Mr. Tonnel served as Assistant Controller of the Company from May 2003 to February 2005, at which time he assumed his current position. Mr. Tonnel served as Finance Manager, Asia Australia Region from October 2000 to May 2003 and as Controller, Nigeria from April 1999 to October 2000. Mr. Tonnel joined the Company in 1996 after working for Ernst & Young in France as Senior Auditor.

- 20 -

PART II

ITEM 5.
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Our ordinary shares are listed on the New York Stock Exchange (the “NYSE”) under the symbol “RIG.” The following table sets forth the high and low sales prices of our ordinary shares for the periods indicated as reported on the NYSE Composite Tape.

       
Price
  
       
High
  
Low
  
               
2005
    
First Quarter
  
$
51.97
  
$
39.79
  
   
Second Quarter
    
58.19
    
43.16
  
     
Third Quarter
    
63.11
    
53.52
  
     
Fourth Quarter
    
70.93
    
52.34
  
     
 
              
2006
    
First Quarter
  
$
84.29
  
$
70.05
  
     
Second Quarter
    
90.16
    
70.75
  
     
Third Quarter
    
81.63
    
64.52
  
     
Fourth Quarter
    
84.23
    
65.57
  

On February 23, 2007, the last reported sales price of our ordinary shares on the NYSE Composite Tape was $78.75 per share. On such date, there were 12,434 holders of record of our ordinary shares and 292,967,692 ordinary shares outstanding.

We did not declare or pay a cash dividend in either of the two most recent fiscal years. Any future declaration and payment of any cash dividends will (i) depend on our results of operations, financial condition, cash requirements and other relevant factors, (ii) be subject to the discretion of the board of directors, (iii) be subject to restrictions contained in our revolving credit agreement and other debt covenants and (iv) be payable only out of our profits or share premium account in accordance with Cayman Islands law.

There is currently no reciprocal tax treaty between the Cayman Islands and the United States. Under current Cayman Islands law, there is no withholding tax on dividends.

We are a Cayman Islands exempted company. Our authorized share capital is $13,000,000, divided into 800,000,000 ordinary shares, par value $0.01, and 50,000,000 preference shares, par value $0.10, of which shares may be designated and created as shares of any other classes or series of shares with the respective rights and restrictions determined by action of our board of directors. On February 28, 2007, no preference shares were outstanding.

The holders of ordinary shares are entitled to one vote per share other than on the election of directors.

With respect to the election of directors, each holder of ordinary shares entitled to vote at the election has the right to vote, in person or by proxy, the number of shares held by him for as many persons as there are directors to be elected and for whose election that holder has a right to vote. The directors are divided into three classes, with only one class being up for election each year. Although our articles of association contemplate that directors are elected by a plurality of the votes cast in the election, we have adopted a majority vote policy in the election of directors as part of our Corporate Governance Guidelines. This policy provides that the board may nominate only those candidates for director who has submitted an irrevocable letter of resignation which would be effective upon and only in the event that (1) such nominee fails to receive a sufficient number of votes from shareholders in an uncontested election and (2) the board accepts the resignation. If a nominee who has submitted such a letter of resignation does not receive more votes cast for than against the nominee’s election, the Corporate Governance Committee must promptly review the letter of resignation and recommend to the board whether to accept the tendered resignation or reject it. The board must then act on the Corporate Governance Committee’s recommendation within 90 days following the certification of the shareholder vote. The board must promptly disclose its decision regarding whether or not to accept the nominee’s resignation letter in a Form 8-K furnished to the SEC or other broadly disseminated means of communication. Cumulative voting for the election of directors is prohibited by our articles of association.

- 21 -

There are no limitations imposed by Cayman Islands law or our articles of association on the right of nonresident shareholders to hold or vote their ordinary shares.

The rights attached to any separate class or series of shares, unless otherwise provided by the terms of the shares of that class or series, may be varied only with the consent in writing of the holders of all of the issued shares of that class or series or by a special resolution passed at a separate general meeting of holders of the shares of that class or series. The necessary quorum for that meeting is the presence of holders of at least a majority of the shares of that class or series. Each holder of shares of the class or series present, in person or by proxy, will have one vote for each share of the class or series of which he is the holder. Outstanding shares will not be deemed to be varied by the creation or issuance of additional shares that rank in any respect prior to or equivalent with those shares.

Under Cayman Islands law, some matters, like altering the memorandum or articles of association, changing the name of a company, voluntarily winding up a company or resolving to be registered by way of continuation in a jurisdiction outside the Cayman Islands, require approval of shareholders by a special resolution. A special resolution is a resolution (i) passed by the holders of two-thirds of the shares voted at a general meeting or (ii) approved in writing by all shareholders entitled to vote at a general meeting of the company.

The presence of shareholders, in person or by proxy, holding at least a majority of the issued shares generally entitled to vote at a meeting, is a quorum for the transaction of most business. However, different quorums are required in some cases to approve a change in our articles of association.

Our board of directors is authorized, without obtaining any vote or consent of the holders of any class or series of shares unless expressly provided by the terms of issue of that class or series, to provide from time to time for the issuance of classes or series of preference shares and to establish the characteristics of each class or series, including the number of shares, designations, relative voting rights, dividend rights, liquidation and other rights, redemption, repurchase or exchange rights and any other preferences and relative, participating, optional or other rights and limitations not inconsistent with applicable law.

Our articles of association contain provisions that could prevent or delay an acquisition of our Company by means of a tender offer, proxy contest or otherwise.

The foregoing description is a summary. This summary is not complete and is subject to the complete text of our memorandum and articles of association. For more information regarding our ordinary shares and our preference shares, see our Current Report on Form 8-K dated May 14, 1999 and our memorandum and articles of association. Our memorandum and articles of association are filed as exhibits to this annual report.

Issuer Purchases of Equity Securities
  
                 
 
Period
  
Total Number of Shares Purchased (1)
  
Average Price Paid Per Share
  
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
  
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
(in millions)
  
October 2006
    
3,482,442
  
$
71.81
    
3,482,313
  
$
1,000
  
November 2006
    
—
    
—
    
—
    
1,000
  
December 2006
    
1,375
    
80.72
    
—
    
1,000
  
Total
    
3,483,817
  
$
71.82
    
3,482,313
  
$
1,000
  
_________________
(1)
Total number of shares purchased in the fourth quarter of 2006 includes 1,504 shares withheld by us in satisfaction of withholding taxes due upon the vesting of restricted shares granted to our employees under our Long-Term Incentive Plan to pay withholding taxes due upon vesting of a restricted share award.

(2)
In May 2006, our board of directors authorized an increase in the amount of ordinary shares which may be repurchased pursuant to our share repurchase program from $2.0 billion, which was previously authorized and announced in October 2005, to $4.0 billion. The shares may be repurchased from time to time in open market or private transactions. The repurchase program does not have an established expiration date and may be suspended or discontinued at any time. Under the program, repurchased shares are retired and returned to unissued status. From inception through December 31, 2006, we have repurchased a total of 41.7 million of our ordinary shares at a total cost of $3.0 billion.

- 22 -

ITEM 6.
Selected Financial Data

The selected financial data as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 has been derived from the audited consolidated financial statements included elsewhere herein. The selected financial data as of December 31, 2004, 2003 and 2002, and for the years ended December 31, 2003 and 2002 has been derived from audited consolidated financial statements not included herein. The following data should be read in conjunction with “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the notes thereto included under “Item 8. Financial Statements and Supplementary Data.”

We consolidated TODCO in our financial statements as a business segment through December 16, 2004 and that portion of TODCO that we did not own was reported as minority interest in our consolidated statements of operations and balance sheet. Our ownership and voting interest in TODCO declined to approximately 22 percent on that date and we no longer consolidated TODCO in our financial statements but accounted for our remaining investment using the equity method of accounting.

In May 2005 and June 2005, respectively, we completed a public offering and a sale of TODCO common stock pursuant to Rule 144 under the Securities Act of 1933, as amended (respectively referred to as the “May Offering” and the “June Sale”). After the May Offering, we accounted for our remaining investment using the cost method of accounting. As a result of the June Sale, we no longer own any shares of TODCO’s common stock.

   
Years ended December 31,
  
   
2006
 
2005
  
2004
  
2003
  
2002
  
   
(In millions, except per share data)
  
Statement of Operations
                      
Operating revenues
  
$
3,882
  
$
2,892
  
$
2,614
  
$
2,434
  
$
2,674
  
Operating income (loss)
    
1,641
    
720
    
328
    
240
    
(2,310
)
                                 
Income (loss) before cumulative effect of changes in accounting principles
    
1,385
    
716
    
152
    
18
    
(2,368
)
Cumulative effect of changes in accounting principles.
    
−
    
−
    
−
    
1
    
(1,364
)
Net income (loss)
    
1,385
    
716
    
152
    
19
    
(3,732
)
Basic earnings (loss) per share
                                
Income (loss) before cumulative effect of changes in accounting principles per share
  
$
4.42
  
$
2.19
  
$
0.47
  
$
0.06
  
$
(7.42
)
Cumulative effect of changes in accounting principles
    
−
    
−
    
−
    
−
    
(4.27
)
Net income (loss)
  
$
4.42
  
$
2.19
  
$
0.47
  
$
0.06
  
$
(11.69
)
Diluted earnings (loss) per share
                                
Income (loss) before cumulative effect of changes in accounting principles per share
  
$
4.28
  
$
2.13
  
$
0.47
  
$
0.06
  
$
(7.42
)
Cumulative effect of changes in accounting principles
    
−
    
−
    
−
    
−
    
(4.27
)
Net income (loss)
  
$
4.28
  
$
2.13
  
$
0.47
  
$
0.06
  
$
(11.69
)
                                 
Balance Sheet Data (at end of period)
                                
Total assets
  
$
11,476
  
$
10,457
  
$
10,758
  
$
11,663
  
$
12,665
  
Long-term debt
    
3,200
    
1,197
    
2,462
    
3,612
    
3,630
  
Total shareholders’ equity
    
6,836
    
7,982
    
7,393
    
7,193
    
7,141
  
Dividends per share
    
−
    
−
    
−
    
−
  
$
0.06
  
                                 
Other Financial Data
                               
Cash provided by operating activities
  
$
1,237
  
$
864
  
$
600
  
$
525
  
$
939
  
Cash provided by (used in) investing activities
    
(415
)
  
169
    
551
    
(445
)
  
(45
)
Cash used in financing activities
    
(800
)
  
(1,039
)
  
(1,174
)
  
(820
)
  
(533
)
Capital expenditures
    
876
    
182
    
127
    
494
    
141
  
Operating margin
    
42
%
  
25
%
  
13
%
  
10
%
  
N/M
  
_________________________
“N/M” means not meaningful due to loss on impairments of long-lived assets.

- 23 -

ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the information contained in “Item 1. Business,” “Item 1A. Risk Factors” and the audited consolidated financial statements and the notes thereto included under “Item 8. Financial Statements and Supplementary Data” elsewhere in this annual report.

Overview 

Transocean Inc. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. As of February 2, 2007, we owned, had partial ownership interests in or operated 82 mobile offshore drilling units. As of this date, our fleet included 33 High-Specification semisubmersibles and drillships (“High-Specification Floaters”), 20 Other Floaters, 25 Jackups and four Other Rigs. We also have three High-Specification Floaters under construction.

Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world. Our primary business is to contract these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. We specialize in technically demanding segments of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. We also provide additional services, including integrated services.

Key measures of our total company results of operations and financial condition are as follows:

   
Years ended December 31,
      
   
2006
  
2005
  
Change
  
   
(In millions, except average daily revenue and percentages)
  
Average daily revenue (a)(b)
  
$
142,100
  
$
105,100
  
$
37,000
  
Utilization (b)(c)
    
84
%
  
79
%
  
N/A
  
Statement of Operations
                   
Operating revenue
  
$
3,882
  
$
2,892
  
$
990
  
Operating and maintenance expense
    
2,155
    
1,720
    
435
  
Operating income
    
1,641
    
720
    
921
  
Net income
    
1,385
    
716
    
669
  
Balance Sheet Data (at end of period)
                    
Cash and Cash Equivalents
    
467
    
445
    
22
  
Total Assets
    
11,476
    
10,457
    
1,019
  
Total Debt
    
3,295
    
1,597
    
1,698
  
______________________
“N/A” means not applicable.

(a)
Average daily revenue is defined as contract drilling revenue earned per revenue earning day. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations.
(b)
Excludes a drillship engaged in scientific geological coring activities, the Joides Resolution, that is owned by a joint venture in which we have a 50 percent interest and is accounted for under the equity method of accounting.
(c)
Utilization is the total actual number of revenue earning days as a percentage of the total number of calendar days in the period.

We continue to experience strong demand for all of our asset classes, which has resulted in high utilization and historically high dayrates. We are seeing leading dayrates at or near record levels for most rig classes and customer interest for multi-year contracts. Interest in high-specification floaters remains particularly strong.

A shortage of qualified personnel in our industry is driving up compensation costs and suppliers are increasing prices as their backlogs grow. These labor and vendor cost increases, while meaningful, are not expected to be significant in comparison with our expected increase in revenue for 2007 and beyond.

Our revenues for the year ended December 31, 2006 increased from the prior year period as a result of increased activity and higher dayrates. Our operating and maintenance expenses for the year increased primarily as a result of higher labor and rig maintenance costs in connection with such increased activity as well as inflationary cost increases (see “—Outlook”). In addition, our financial results for the year ended December 31, 2006 included the recognition of gains from the sales of eight rigs and other income recognized under the TODCO tax sharing agreement. Total debt increased from the end of the prior year period as a result of our issuance of the Floating Rate Notes and borrowings under the Term Credit Facility. See “—Liquidity and Capital Resources-Sources and Uses of Liquidity.”

- 24 -

We operate in one business segment which consists of floaters, jackups and other rigs used in support of offshore drilling activities and offshore support services on a worldwide basis. Our fleet operates in a single, global market for the provision of contract drilling services. The location of our rigs and the allocation of resources to build or upgrade rigs are determined by the activities and needs of our customers.

Significant Events

Contract Backlog—We have been successful in building contract backlog in 2006 within all of our asset classes. Our contract backlog at December 31, 2006 was approximately $20.2 billion, an 85 percent increase compared to our contract backlog at December 31, 2005. See “—Outlook−Drilling Market” and “—Performance and Other Key Indicators.”

Construction and Upgrade Programs—During 2006, we were awarded drilling contracts requiring the construction of three enhanced Enterprise-class drillships. The newbuilds are expected to commence operations during the second quarter of 2009, mid-2009 and the first quarter of 2010. See “—Outlook−Drilling Market.”

During 2005, we entered into agreements with clients to upgrade two of our Sedco 700-series semisubmersible rigs in our Other Floaters fleet, the Sedco 702 and the Sedco 706, at a cost expected to be approximately $300 million for each rig. The upgraded rigs will be dynamically positioned and have a water depth drilling capacity of up to 6,000 to 6,500 feet. The Sedco 702 entered the shipyard for the upgrade in early 2006. We expect the upgrade to be completed in approximately the fourth quarter of 2007. The Sedco 706 upgrade is scheduled to commence in the third quarter of 2007. We expect the upgrade to be completed in approximately the fourth quarter of 2008.

Hurricane Damage—In the third quarter of 2005, two of our semisubmersible rigs, the Deepwater Nautilus and the Transocean Marianas, sustained damage during hurricanes Katrina and Rita. During hurricane Katrina, the Deepwater Nautilus sustained damage to its mooring system and lost approximately 3,200 feet of marine riser and a portion of its subsea well control system. The rig was undergoing repairs during hurricane Rita and was set adrift following the failure of a tow line utilized by a towing vessel. Also during hurricane Rita, the Transocean Marianas sustained damage to its mooring system, was forced off its drilling location and was grounded in shallow water. The Deepwater Nautilus was out of service for 24 days in 2005 and 70 days in 2006. The Transocean Marianas was out of service for 95 days in 2005 and 72 days in 2006. Both rigs returned to service in the third quarter of 2006. Operating income in 2006 was negatively impacted by approximately $50 million due to lost revenue and higher operating and maintenance costs on the Deepwater Nautilus and the Transocean Marianas. In addition, we spent approximately $25 million on capital expenditures in 2006 to replace damaged equipment.

Asset Dispositions—During 2006, we sold three of our Other Floaters (Peregrine III, Transocean Explorer and Transocean Wildcat), three of our tender rigs (W.D. Kent, Searex IX and Searex X), a swamp barge (Searex XII) and a platform rig. We received net proceeds from these sales of $464 million and recognized gains on the sales of $411 million. See “—Liquidity and Capital Resources-Capital Expenditures and Dispositions.”

In January 2007, we completed the sale of our membership interest in Transocean CGR LLC (owner of the tender rig Charley Graves) for net proceeds of $33 million and we expect to recognize a gain on the sale of $23 million in the first quarter of 2007.

Term Credit Facility—In August 2006, we entered into a two-year, $1.0 billion term credit facility under the Term Credit Agreement dated August 30, 2006 (“Term Credit Facility”). See “—Liquidity and Capital Resources-Sources and Uses of Cash.”

Floating Rate Notes—In September 2006, we issued $1.0 billion aggregate principal amount of floating rate notes, due September 2008 (“Floating Rate Notes”). See “—Liquidity and Capital Resources-Sources and Uses of Liquidity.”

Repurchase of Ordinary Shares—During 2006, we repurchased and retired 35.7 million of our ordinary shares at a total cost of $2.6 billion. See “—Liquidity and Capital Resources-Sources and Uses of Liquidity.”

In 2007, we repurchased approximately 5.2 million of our ordinary shares at a total cost of approximately $400 million. See “—Liquidity and Capital Resources-Sources and Uses of Liquidity.”

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Tax Matters—In April 2006, we received notice from the Norwegian tax authorities regarding their intent to propose adjustments to taxable income for the tax years 1999, 2001 and 2002. These proposed assessments could result in an increase in tax of approximately $260 million plus interest, and the authorities further indicated they intend to impose penalties, which could range from 15 to 60 percent of the assessments. The anticipated assessments relate to restructuring transactions undertaken in 2001 and 2002. See “—Outlook−Tax Matters.”

TODCO Settlement—In November 2006, we reached a negotiated settlement with TODCO, our former subsidiary, arising out of the tax sharing agreement that we entered into with TODCO in connection with TODCO’s initial public offering in 2004. As a result of the settlement, we entered into an amended and restated tax sharing agreement with TODCO. Under the terms of the amended and restated agreement, TODCO will pay us for 55 percent of the value of the tax deductions arising from the exercise of options to purchase our ordinary shares by current and former employees and directors of TODCO. This payment rate applies retroactively to amounts previously accrued by TODCO and to future payments. Under the terms of the amended and restated agreement, TODCO will also receive a $3 million federal tax benefit for use of certain state and foreign tax assets. The amended and restated agreement also provides that the change of control provision contained in the agreement no longer applies to option deductions. However, if TODCO uses the option deductions after a change of control, it would be required to pay us for 55 percent of the value of those deductions. As a result of the settlement, we recognized income of $51 million, net of tax, in the fourth quarter of 2006 that had previously been deferred pending resolution of the dispute.

Outlook

Drilling Market—Demand for offshore drilling capacity continues to outpace supply. Our High-Specification Floater fleet is fully committed in 2007 and has very little time available in 2008. We have only four rigs remaining in our Other Floater fleet that have any available uncommitted time left in 2007 and only seven rigs remaining in this fleet that have any available uncommitted time left in 2008. We have four jackup rigs that have uncommitted time left in 2007, but 19 rigs (68 percent of our Jackup fleet) have uncommitted time left in 2008. Dayrates for new contracts for both floaters and jackups continue to be strong. Our contract backlog at January 31, 2007 was approximately $20.8 billion, up from approximately $20.2 billion at October 31, 2006.
 
During 2006, we were awarded drilling contracts with durations ranging from three to five years for three newbuild deepwater rigs, and we continue to pursue other potential newbuild opportunities with multi-year contract durations. In March 2006, we were awarded a five-year drilling contract for an enhanced Enterprise-class drillship, to be named the Discoverer Clear Leader. We estimate total capital expenditure for the construction of this rig to be approximately $630 million, excluding capitalized interest, but including approximately $30 million for additional equipment requested by the client for which the client has agreed to an increased dayrate. We currently expect this rig to begin operations in the U.S. Gulf of Mexico in the second quarter of 2009, after construction in South Korea followed by sea trials, mobilization to the U.S. Gulf of Mexico and customer acceptance.

In June 2006, we were awarded a four-year drilling contract for another enhanced Enterprise-class drillship. We estimate total capital expenditure for the construction of this rig to be approximately $630 million, excluding capitalized interest, but including approximately $11 million for additional equipment requested by the client for which the client has agreed to an increased dayrate. We currently expect this rig to begin operations in the U.S. Gulf of Mexico in mid-2009, after construction in South Korea followed by sea trials, mobilization to the U.S. Gulf of Mexico and customer acceptance.

In August 2006, we were awarded a drilling contract for a third enhanced Enterprise-class drillship, to be named the Discoverer Inspiration. We estimate total capital expenditure for the construction of this rig to be approximately $670 million, excluding capitalized interest, but including approximately $40 million for equipment that was not included in the original costs of the other two enhanced Enterprise-class drillships. The client may elect by September 2007 to shorten the term of the contract from five years to three years. We currently expect this rig to begin operations in the U.S. Gulf of Mexico in the first quarter of 2010, after construction in South Korea followed by sea trials, mobilization to the U.S. Gulf of Mexico and customer acceptance.

We have been successful in building contract backlog within our High-Specification Floaters fleet with 25 of our 37 current and future High-Specification Floaters, including the three newbuilds and the two Sedco 700-series rig upgrades, contracted into or beyond 2010 as of February 2, 2007. These 25 units also include 9 of our 13 current Fifth-Generation Deepwater Floaters. Our total contract backlog of approximately $20.8 billion as of January 31, 2007 includes an estimated $14.9 billion of backlog represented by our High-Specification Floaters. We continue to believe that the long-term outlook for deepwater capable rigs is favorable. In 2006 we saw successful drilling efforts in the lower tertiary trend of the U.S. Gulf of Mexico; the discovery of light oil and non-associated gas in the deepwaters of Brazil; continued exploration success in the deepwaters offshore India; a discovery in the deepwaters of the South China Sea; and the drilling of the first well in the ultra deepwaters of the Orphan Basin in Canada. These events, coupled with continued exploration success in the deepwaters of West Africa, the opening of additional deepwater acreage in the U.S. Gulf of Mexico and the announced plans of Pemex for its first tender for ultra deepwater drilling in Mexican waters support our optimistic outlook for the deepwater drilling market sector. As of February 2, 2007, none of our High-Specification Floater fleet contract days are uncommitted for the remainder of 2007, while approximately three percent, 17 percent and 55 percent are uncommitted in 2008, 2009 and 2010, respectively.

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Our Other Floaters fleet, comprised of 19 semisubmersible rigs, excluding the Sedco 706, is largely committed to contracts that extend through 2007, and we continue to see customer demand for multi-year contracts for these units. We completed the reactivations of the previously idle Transocean Winner and Transocean Prospect in August 2006 and September 2006, respectively, both of which are supported by multi-year contracts. We also completed the reactivation of the C. Kirk Rhein, Jr., which has been awarded a two-year contract in India at a $340,000 dayrate and commenced operations in February 2007. The sale of the Transocean Explorer was completed in the second quarter of 2006, and the sale of the Transocean Wildcat was completed in the fourth quarter of 2006. As of February 2, 2007, nine percent of our Other Floater fleet contract days are uncommitted for the remainder of 2007, while approximately 35 percent, 69 percent and 85 percent are uncommitted in 2008, 2009 and 2010, respectively.

Our outlook for activity for the Jackup market sector also remains strong. We were recently awarded a three year contract for the Trident 17 at a dayrate of $185,000. We expect to remain at or near full utilization for our Jackup fleet in 2007. We believe that Asia, India, the Middle East and West Africa will remain sources of strong demand for jackup rigs in the near to intermediate term. As of February 2, 2007, five percent of our Jackup fleet contract days are uncommitted for the remainder of 2007, while approximately 36 percent, 64 percent and 87 percent are uncommitted in 2008, 2009 and 2010, respectively.

The aggregate amount of out-of-service time we incur in 2007 is expected to decrease substantially compared to the amount we incurred in 2006, primarily because we completed the reactivations of the Transocean Winner and Transocean Prospect in the third quarter of 2006 and the C. Kirk Rhein, Jr. in February 2007. However, the reduction in out-of-service time resulting from the completed reactivations is expected to be at least partially offset by an increase in out-of-service time that we expect to incur in connection with the continued upgrades of the Sedco 702 and Sedco 706 to deepwater capabilities. Excluding reactivations and upgrades, we expect the amount of out-of-service time we incur in 2007 because of shipyard and mobilization will be generally in line with the amount of out-of-service time we incurred in 2006 because of shipyard and mobilization.

We expect our revenues to continue to increase in 2007 due largely to commencement of new contracts with higher dayrates. The reactivation of the C. Kirk Rhein, Jr. and the scheduled commencement of the Sedco 702 contract at the end of the rig’s deepwater upgrade shipyard project are also expected to increase our revenues in 2007. We also expect the anticipated commencement of six integrated services contracts in the early part of 2007 to increase our integrated services revenue for 2007.

We expect industry inflation in 2007 to continue to increase our operating and maintenance costs including our shipyard and major maintenance program expenditures. We expect our operating and maintenance costs in 2007 to further increase as a result of the six integrated services contracts discussed above. These increases are expected to be at least partially offset by lower shipyard and mobilization expenses, as we expect our 2007 out-of-service time to decrease by approximately 15 percent compared to 2006, chiefly due to the completed reactivations of the Transocean Prospect, Transocean Winner and C. Kirk Rhein, Jr. Finally, we plan to invest in a number of recruitment, retention and personnel development initiatives in connection with the manning of the crews of the two deepwater upgrades and three newbuild rigs and our efforts to mitigate expected personnel attrition.

We expect that a number of fixed-price contract options will be exercised by our customers in 2007, which would preclude us from taking full advantage of any increased market rates for rigs subject to these contract options. We have five existing contracts with fixed-priced or capped options for dayrates that we believe are less than current market dayrates. Well-in-progress or similar provisions in our existing contracts may delay the start of higher dayrates in subsequent contracts, and some of the delays have been and could be significant.

Our operations are geographically dispersed in oil and gas exploration and development areas throughout the world. Rigs can be moved from one region to another, but the cost of moving a rig and the availability of rig-moving vessels may cause the supply and demand balance to vary somewhat between regions. However, significant variations between regions do not tend to persist long-term because of rig mobility. Consequently, we operate in a single, global offshore drilling market.
 
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Insurance Matters—We renewed our insurance coverages for 12 months effective May 1, 2006. We currently maintain a $10 million per occurrence insurance deductible on hull and machinery, a $10 million per occurrence deductible on personal injury liability and a $5 million per occurrence deductible on third party property damage. In addition to the per occurrence deductibles described above, we also have aggregate deductibles that are applied to any occurrence in excess of the per occurrence deductible until the aggregate deductible is exhausted. Such aggregate deductibles are $20 million in the case of our hull and machinery coverage and $25 million in the case of our personal injury liability and third party property damage coverage. Additionally, for our personal injury and third-party damage liabilities, we have retained $20 million of the risk that exceeds our deductible amount. Our coverage includes an annual aggregate limit on losses due to hurricanes in the U.S Gulf of Mexico of $250 million, except in the case of a total loss of a rig, where the annual limit is approximately $300 million in aggregate. At present, the insured value of our drilling rig fleet is $13.0 billion in aggregate. We also carry $930 million of third-party liability coverage inclusive of the personal injury liability and third party property liability deductibles and retention amounts described above. We do not carry insurance for loss of revenue. As a result of these limits, we retain the risk through self-insurance for any losses in excess of these amounts. Most of our insurance programs are up for renewal in the second quarter of 2007. We could decide to retain substantially more risk through self-insurance.

Tax Matters—We are a Cayman Islands company. We operate through our various subsidiaries in a number of countries throughout the world. Consequently, we are subject to changes in tax laws, treaties and regulations in and between the countries in which we operate. A material change in these tax laws, treaties or regulations in any of the countries in which we operate could result in a higher or lower effective tax rate on our worldwide earnings.

Our income tax returns are subject to review and examination in the various jurisdictions in which we operate. We are currently contesting various tax assessments. We accrue for income tax contingencies that we believe are probable exposures.

In February 2007, we entered into a settlement agreement with the U.S. Internal Revenue Service (“IRS”) regarding our U.S. federal income tax returns for 2001 through 2003. The IRS agreed to settle all issues for this period. This settlement resulted in no cash tax payment. During 2006, we settled disputes with tax authorities in several jurisdictions and the statute of limitations for income tax contingencies for certain issues expired. As a result of the resolution of these matters, we recognized a current tax benefit of approximately $30 million.

Our 2004 and 2005 U.S. federal income tax returns are currently under examination by the IRS. We believe our returns are materially correct as filed, and we intend to vigorously defend against any proposed changes. While we cannot predict or provide assurance as to the final outcome, we do not expect the ultimate settlement of any liability resulting from any examination to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In April 2006, we received notice from the Norwegian tax authorities regarding their intent to propose adjustments to taxable income for the tax years 1999, 2001 and 2002. These proposed assessments could result in an increase in tax of approximately $260 million, plus interest and the authorities further indicated they intend to impose penalties, which could range from 15 to 60 percent of the assessments. The anticipated assessments relate to restructuring transactions undertaken in 2001 and 2002. The Norwegian tax authorities initiated inquiries in September 2004 related to the restructuring transactions and a separate dividend payment made during 2001. In February 2005, we filed a response to these inquiries. In March 2005, pursuant to court orders, the Norwegian tax authorities took action to obtain additional information regarding these transactions. We have continued to respond to information requests from the Norwegian authorities and filed a formal protest to the proposed assessment in June 2006. We also believe the Norwegian authorities are contemplating a tax assessment of approximately $104 million on the dividend, plus interest and a penalty, which could range from 15 to 60 percent of the assessment. Norwegian civil tax and criminal authorities continue to investigate the restructuring transactions and dividend. We plan to vigorously contest any assertions by the Norwegian authorities in connection with the restructuring transactions or dividend. While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect it to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In addition, other tax authorities are examining our tax returns in various jurisdictions. While we cannot predict or provide assurance as to the final outcome of these other existing or future assessments, we do not expect the ultimate settlement of any liability resulting from these existing or future assessments to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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GlobalSantaFe Patent Infringement—In February 2007, we reached an agreement with a competitor, GlobalSantaFe Corporation (“GlobalSantaFe”), relating to their infringement of our offshore dual activity drilling technology patents. We had commenced a patent infringement action in U.S. federal court against GlobalSantaFe, and in August 2006, the jury found in our favor. Through the court action, the validity and enforceability of the dual activity patents were upheld and we were awarded royalty damages and granted a permanent injunction against further infringement by GlobalSantaFe. GlobalSantaFe had two infringing drilling rigs operating in the Gulf of Mexico, the semisubmersible rigs Development Driller I and Development Driller II.

The agreement now reached with GlobalSantaFe will permit them to utilize our dual activity drilling technology on those two rigs currently working in the Gulf of Mexico and also on their Development Driller III rig after delivery from the shipyard in Singapore. In exchange for this right, GlobalSantaFe has agreed to discontinue any further proceedings disputing our dual activity patents and has agreed to pay $4 million for each of these three rigs as a building fee and approximately $3 million in royalties in aggregate for use to date by its two operating rigs, for a combined payment of approximately $15 million. GlobalSantaFe has further agreed to pay a license fee going forward of three percent of revenues received on the three Development Driller rigs when operating in an area where we have dual activity patent rights and five percent of revenues on any other rigs which GlobalSantaFe may acquire which incorporate the dual activity technology when operating in an area where we have patent rights. We have not granted any rights to build any additional rigs incorporating the dual activity technology and any such construction would be subject to further negotiation or litigation.

Performance and Other Key Indicators

Contract Backlog—The following table reflects our contract backlog and associated average contractual dayrates at the periods ended December 31, 2006 and 2005 and reflects firm commitments only, typically represented by signed drilling contracts. Backlog is indicative of the full contractual dayrate. The amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors including shipyard and maintenance projects, other downtime and other factors that result in lower applicable dayrates than the full contractual operating dayrate, as well as the ability of our customers to terminate contracts under certain circumstances. Our contract backlog is calculated by multiplying the contracted operating dayrate by the number of days remaining in the firm contract period, excluding revenues for mobilization, demobilization and contract preparation and such amounts are not expected to be significant to our contract drilling revenues. The contract backlog average dayrate is defined as the contracted operating dayrate to be earned per revenue earning day in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations and over the firm contract period.

   
December 31, 2006
  
December 31, 2005
  
   
(In millions)
  
Contract Backlog
          
High-Specification Floaters 
  
$
14,354
  
$
8,330
  
Other Floaters 
    
3,770
    
1,643
  
Jackups 
    
2,037
    
808
  
Other Rigs 
    
65
    
132
  
Total 
  
$
20,226
  
$
10,913
  


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The following table reflects the amount and the average dayrate of our contract backlog by year as of December 31, 2006.

   
For the years ending December 31,
  
   
Total
  
2007
  
2008
  
2009
  
2010
  
Thereafter
  
   
(In millions, except average dayrates)
  
Contract Backlog
                          
High-Specification Floaters 
  
$
14,354
  
$
2,880
  
$
3,560
  
$
3,348
  
$
2,359
  
$
2,207
  
Other Floaters 
    
3,770
    
1,439
    
1,259
    
616
    
285
    
171
  
Jackups 
    
2,037
    
874
    
636
    
395
    
109
    
23
  
Other Rigs 
    
65
    
27
    
24
    
14
    
-
    
-
  
Total 
  
$
20,226
  
$
5,220
  
$
5,479
  
$
4,373
  
$
2,753
  
$
2,401
  

Average Dayrates
  
Total
  
2007
  
2008
  
2009
  
2010
  
Thereafter
  
High-Specification Floaters 
  
$
348,000
  
$
272,000
  
$
336,000
  
$
369,000
  
$
398,000
  
$
439,000
  
Other Floaters 
  
$
274,000
  
$
239,000
  
$
294,000
  
$
297,000
  
$
303,000
  
$
390,000
  
Jackups 
  
$
122,000
  
$
112,000
  
$
131,000
  
$
137,000
  
$
127,000
  
$
100,000
  
Other Rigs 
  
$
35,000
  
$
35,000
  
$
34,000
  
$
35,000
    
-
    
-
  
Total 
  
$
275,000
  
$
207,000
  
$
268,000
  
$
303,000
  
$
356,000
  
$
422,000
  

Fleet Utilization and Average Daily Revenue—The following table shows our average daily revenue and utilization for each of the three months ended December 31, 2006, September 30, 2006 and December 31, 2005. Average daily revenue is defined as contract drilling revenue earned per revenue earning day in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations. Utilization in the table below is defined as the total actual number of revenue earning days in the period as a percentage of the total number of calendar days in the period for all drilling rigs in our fleet.

   
Three months ended
  
   
December 31, 2006
  
September 30, 2006
  
December 31, 2005
  
Average Daily Revenue
              
High-Specification Floaters
              
Fifth-Generation Deepwater Floaters 
  
$
275,300
  
$
246,000
  
$
215,800
  
Other Deepwater Floaters 
  
$
230,400
  
$
222,300
  
$
138,800
  
Other High-Specification Floaters 
  
$
187,400
  
$
181,500
  
$
161,700
  
Total High-Specification Floaters 
  
$
243,600
  
$
226,700
  
$
174,100
  
Other Floaters 
  
$
178,400
  
$
136,800
  
$
98,500
  
Jackups 
  
$
97,000
  
$
83,400
  
$
64,900
  
Other Rigs 
  
$
48,200
  
$
52,400
  
$
48,500
  
Total Drilling Fleet 
  
$
171,700
  
$
146,900
  
$
113,300
  
     
Utilization
   
High-Specification Floaters
    
Fifth-Generation Deepwater Floaters
    
92
%
  
88
%
  
86
%
Other Deepwater Floaters
    
78
%
  
75
%
  
79
%
Other High-Specification Floaters
    
97
%
  
93
%
  
100
%
Total High-Specification Floaters 
    
86
%
  
82
%
  
84
%
Other Floaters 
    
90
%
  
86
%
  
71
%
Jackups 
    
89
%
  
96
%
  
89
%
Other Rigs