Financial Report at 31 st December 2004

Financial Report at 31st December 2004 Mission statement Pursuing the satisfaction of our clients in the energy industry, we tackle each challenge ...
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Financial Report at 31st December 2004

Mission statement Pursuing the satisfaction of our clients in the energy industry, we tackle each challenge with safe, reliable and innovative solutions. We entrust our competent and multi-local teams to provide sustainable development for our company and the communities in which we operate. Our core values Commitment to safety, integrity, openness, flexibility, integration commitment, innovation, quality, competitiveness, teamwork, humility, internationalisation Saipem is present in the following countries: EUROPE: Italy, France, Belgium, Croatia, Germany, Ireland, Luxembourg, Netherlands, Norway, Portugal, Spain, Switzerland, Turkey, United Kingdom AMERICAS: Argentina, Brazil, Canada, Ecuador, Mexico, Peru, U.S.A., Venezuela C.S.I.: Astrakan, Azerbaijan, Georgia, Kazakhstan, Russia AFRICA: Algeria, Angola, Cameroon, Congo, Egypt, Gabon, Libya, Morocco, Nigeria, Sudan MIDDLE EAST: Abu Dhabi, Dubai, Iran, Oman, Qatar, Saudi Arabia, Sharjah FAR EAST AND OCEANIA: Australia, China, India, Indonesia, Malaysia, Singapore, Thailand

Saipem is a subsidiary of Eni S.p.A.

Financial Report

2004

contents

Saipem Group consolidated financial statement & associated documents 2 4 7 9 10 12 14 14 16 17 27 31 33 37 40 42

Letter to the Shareholders Board of Directors and Auditors of Saipem S.p.A. Saipem Group Structure Directors’ Report Saipem S.p.A. share performance Glossary Operating review New contracts and backlog Capital expenditure By sector: Offshore Construction Offshore Drilling Leased FPSO Onshore Construction Onshore Drilling Liquefied Natural Gas (L.N.G.) Maintenance Modification and Operation (M.M.O.)

44 Financial and economic results 44 Results of operations 50 Consolidated balance sheet and financial position

53 55 58 62 63 75

Research and Development Quality Assurance, Health & Safety and Environment Human Resources Information Technology Corporate Governance report Additional information

75 75 76 76 79

Buy-back of treasury shares Incentive schemes Significant events subsequent to year end Operations with related parties Management expectations (pre IFRS impact)

80 Introduction of the International Financial Reporting Standards 82 Reclassified balance sheet and income statement 85 Consolidated Financial Statements at 31st December 2004 86 Consolidated balance sheet and income statement 93 Notes to the Consolidated Financial Statements 135 Independent Auditors’ Report on the Consolidated Financial Statements

Shareholders’ Meeeting held on 29th April 2005 Notice of the Shareholders’ Meeting was published in the newspapers: Il sole 24 ore, Corriere della Sera and La Repubblica of 26th March 2005.

letter to the shareholders Messrs. Shareholders,

the results achieved in 2004 have once again put your Company at the top of its industry sector. In operational terms, projects were successfully accomplished in absolute safety; some having involved operations that attained records both in terms of loads lifted during dynamic positioning manoeuvres and pipelay in ultra-deep waters.

From left: Hugh James O’Donnell, Managing Director Pietro Franco Tali, Chairman & C.E.O. Jacques Yves Léost, Director of Saipem S.p.A. and Chairman of Saipem s.a.N

2 SAIPEM FINANCIAL REPORT 2004 LETTER TO THE SHAREHOLDERS

Another notable achievement was the recovery of 12,000 tons of crude oil from the wreck of the tanker “Prestige”, on behalf of Repsol, under commission from the Spanish Government, off the coast of Spain at depths of up to 4,000 metres. The successful completion of this project has drawn attention to the competencies of your Company across the industry at large and has helped to further strengthen Saipem’s cutting-edge image with regard to offshore operations in extreme conditions. Alongside operational successes, the company achieved positive financial results which helped counteract the impact of the euro appreciation against the US dollar; in 2004, this appreciation caused a drop in euro-equivalent revenues of approximately 450 million euros and had a negative impact on the operating income estimated at approximately 80 million euros. Specifically, revenues for 2004 totalled 4,306 million euros (4,231 million in 2003), operating income amounted to 290 million euros (303 million in 2003), net income, thanks to better than expected results posted in the management of financing and the improved performance of financial investments, reached 197 million euros (196 million in 2003). Net financial debt decreased by 87 million euros, with leverage falling from 0.70 at 31st December 2003 to 0.58 at 31st December 2004. The increase in the order backlog was particularly outstanding: in fact, despite the euro appreciation, the company managed to replenish contracts carried out during the year and to further boost the backlog, which, at the end of 2004, reached the record level of 5,306 million euros (5,255 million euros at the end of 2003). Revenues and contribution from operations for each business unit were as follows: the Offshore Construction sector accounted for 63% of revenues and 56% of overall contributions from operations (60% of revenues and 54% of contributions in 2003), this underpins the competitive positioning in terms of excellence your Company has achieved in this sector; Onshore Construction accounted for 14% of revenues and 12% of contributions from operations (18% of revenues and 17% of contributions in 2003); this reduction in volumes is attributed to the completion of important projects in Kazakhstan and Saudi Arabia, which were only partially compensated for by the full-scale operation of projects in North Africa and the Sakhalin II project in Russia; the Drilling sectors generated 10% of revenues and 21% of contributions from operations (11% of revenues and 19% of contributions in 2003), this growth in margin is due to increased efficiency in the operation of some vessels and higher day rates versus 2003; the following sectors Liquefied Natural Gas (LNG), Maintenance, Modification and Operation (MMO) and Leased FPSO accounted for the remaining 13% of revenues and 11% of contributions from operations (11% of revenues and 10% of contributions in 2003). Investments during the year went on maintenance and upgrades of existing vessels and equipment (107 million euros), the construction of project-specific vessels and equipment, mainly Kashagan offshore and Sakhalin onshore (56 million euros), the expansion of bases and yards in West Africa and the implementation of a construction yard in Kazakhstan (24 million euros). Also in 2004, the Company managed to further develop, both in terms of quality and quantity, the engineering and project management expertise in the highly competitive centres in Rijeka (Croatia), Chennai (India) and Jakarta (Indonesia); these, at the end of 2004, employed a total of 800 resources, equal to approximately 23% of the Group’s total of 3,500 engineers. Global spending by the oil industry in 2005 is expected to increase further, although by a lesser margin than in 2004, and should focus mainly on those geographical areas and market segments where your Company has a strong competitive position. The time lag that currently affects the award of new contracts is due largely to the problems the oil companies often encounter, both of a technological and political nature associated with the development of large virgin oil & gas field developments. The positive overall market trend and Saipem’s credibility and competitiveness, especially on complex projects in frontier areas, underpin expectations for 2005 to see the awarding of new contracts that will maintain the high level of backlog. The main cause for concern for 2005, as it was in 2004, is not the market trend but the course of the US dollar. The reasons why the euro’s appreciation has an adverse effect on Saipem’s profit levels are two-fold: firstly, it causes a reduction in the euro-equivalent contribution from USD-denominated contracts (translation effect); secondly, it affects the operating income as costs of the Milan and Paris operating centres as well as almost all 3 SAIPEM FINANCIAL REPORT 2004 LETTER TO THE SHAREHOLDERS

depreciation - a total of approximately 560 million(*) per annum - are denominated in euros. The combined effect of this phenomenon is expected to have a negative impact on operating income in the region of 38 million euros. Conversely, the substantial order backlog at the end of 2004 and the positive overall market trend underpin expectations for 2005 of further growth in volumes and, in those business sectors and in those areas where US competition is weakest, the possibility to gradually adjust prices to the new euro/US dollar exchange rate. In 2005, it is expected that the Group will repeat the record 2004 results, with potential for further improvement. Saipem’s strategy for 2005 will bear out the further strengthening of its presence in strategic areas with the completion and commissioning of the construction yard in Kurik, Kazakhstan, and continue the development of engineering competencies in low-cost areas. From January 2005, Saipem will produce the Consolidated Financial Statements in compliance with the new International Financial Reporting Standards (IFRS). Owing to the complexity of this matter, the impact of the IFRS’ introduction into Saipem’s accounting is still under review. The introduction of IAS 39 (relating to the recognition and measurement of financial instruments, namely hedging contracts) is particularly complex, due to the specific characteristics of the market in which Saipem operates and the strict requirements of IAS 39 with regard to classifications. The combination of both these aspects could result in some hedging contracts not being classified as specific hedging contracts as defined in IAS 39. Hence, for non-specific hedging contracts, revenues and costs would be accounted for utilising spot exchange rates, and hedges would be accounted at (their) fair value. Excluding the effects of IAS 39, which could lead to volatility in the company’s quarterly results, analyses carried out to date indicate that the introduction of IFRS will result in net equity at the beginning of the period showing a modest increase and consolidated net income increasing in relation to the discontinuance of Bouygues Offshore goodwill amortisation. The Board of Directors, bearing out the policy of distributing one third of consolidated net income, proposes to the Shareholders’ Meeting a dividend of 0.150 euro per ordinary share and 0.180 euro per savings share (2003: 0.148 euro and 0.178 euro respectively). On behalf of the Board of Directors

The Chairman Pietro Franco Tali (*) The discontinuance of the goodwill amortisation from Bouygues Offshore’s acquisition, in compliance with the new IFRS standards is expected to result in a reduction of euro-denominated structural costs from 600 million in 2004 to 560 million in 2005.

BOARD OF DIRECTORS

STATUTORY AUDITORS

Chairman and Chief Executive Officer Pietro Franco Tali

Chairman Gaetano Troina

Managing Director Hugh James O’Donnell

Statutory Auditors Paolo Andrea Colombo Fabio Venegoni

Directors Franco Bruni Francesco Gatti Roberto Jaquinto Jacques Yves Léost Marco Mangiagalli Marco Reboa Ian Wybrew-Bond

Alternate Statutory Auditors Lorenzo Caprio Bruno Maier INDEPENDENT AUDITORS PricewaterhouseCoopers S.p.A.

4 SAIPEM FINANCIAL REPORT 2004 LETTER TO THE SHAREHOLDERS

Saipem Group structure

7

8 SAIPEM FINANCIAL REPORT 2004

SAIPEM GROUP STRUCTURE

SAIPEM BILANCIO CONSOLIDATO

Directors’ report

9 SAIPEM FINANCIAL REPORT 2004

Saipem S.p.A. share performance

At 31st December 2004, Saipem S.p.A. ordinary shares were traded on the Milan Stock Exchange at 8.864 euros, a 37% increase versus the 2003 year-end quotation, against an average increase of the SPMIB index of 15% over the same period. In 2004, oil and gas prices were affected by, on the one hand, the growing demand fuelled by economic growth in China and India and on the other by the widespread uncertainty resulting from the continuation of the conflict in the Middle East and tensions in Russia, Africa and Venezuela; all these factors contributed to sustain energy stocks throughout the year. From a low of 6.161 euros in mid January, Saipem’s share price rose, almost without interruption, reaching an all-time high of 9.418 euros at the beginning of October. During the fourth quarter, the progressive depreciation of the US dollar and the relative weakening in oil prices contributed to buck the growing trend of Saipem’s shares. The volume of shares traded during the year exceeded 882 million, versus 586 million in 2003, with a total value of almost 7,000 million euros, almost doubling the 3,696 million euros of 2003. Savings shares, which represent a very limited number (189,766) and are convertible at par with ordinary shares, recorded a 25% increase versus the 2003 year-end quotation. Volumes traded were minimal. During the first few months of 2005, the recovery in energy prices and confirmation of growing investments by the oil companies have boosted Saipem‘s share performance. This, further sustained by the release of the company’s 2004 results, sent Saipem’s shares to a new all-time high of 10.446 euros on 4th March 2005.

10 SAIPEM FINANCIAL REPORT 2004 SHARE PERFORMANCE

Stock Exchange data and indices 31st December 2000

31st December 2001

31st December 2002

31st December 2003

31st December 2004

Share capital (in €)

227,363,591

440,270,300

440,697,000

440,713,700

441,177,500

Ordinary shares

439,689,282

440,056,032

440,482,732

440,499,432

440,987,734

548,018

214,268

214,268

214,268

189,766

2,611

2,417

2,821

2,847

3,909

Ordinary shares (€)

0.062

0.127

0.144

0.148

0.150

Savings shares (€)

0.077

0.157

0.174

0.178

0.180

Savings shares Market capitalisation (million €) Gross dividend per share

Price/earning ratio per share (*) Ordinary shares

32.63

14.39

14.88

14.68

19.84

Savings shares

31.92

13.94

16.72

15.86

19.57

Price/cash flow ratio per share (*) Ordinary shares

12.08

6.74

6.34

6.27

8.94

Savings shares

11.81

6.53

7.12

6.77

8.82

(*) figures pertain to the consolidated financial statements.

Share prices on the Milan Stock Exchange

(€)

2000

2001

2002

2003

2004

maximum

7.19

7.60

7.66

7.31

9.42

minimum

3.21

4.16

4.68

5.24

6.16

average

5.43

6.22

6.41

6.30

7.93

year end

5.93

5.49

6.40

6.46

8.86

maximum

7.19

7.49

13.71

7.48

9.45

minimum

3.30

5.32

5.05

5.80

6.60

average

5.43

6.51

7.38

6.71

8.14

year end

5.80

5.32

7.19

6.98

8.74

Ordinary Shares

Savings Shares

11 SAIPEM FINANCIAL REPORT 2004 SHARE PERFORMANCE

glossary

FINANCIAL TERMS

Il glossario dei termini finanziari e delle attività petrolifere è consultabile sul sito internet dell’Eni all’indirizzo www.eni.it (pagina Notizie). Di seguito sono elencati quelli di uso più ricorrente.

Leverage: the degree to which the company is utilising borrowed money. It is the ratio between net financial debt and shareholders’ equity inclusive of minority interest. Contribution from operations: Operating Income before general and administrative expenses. ROACE: return on average capital employed. The ratio between net income before minority interest plus after-tax net financial expenses deriving from net financial debt, over average net capital employed.

OPERATIONAL TERMS

Conventional waters: depth of up to 500 metres. Deep waters: depths of over 500 metres. Buckle detection: System that utilises electromagnetic waves during pipelaying to signal collapse of or deformations to pipeline laid. Bundles: bundles of cables. Commissioning: series of processes and procedures undertaken in order to start operations of a gas pipeline, associated plants and equipment. Concrete coating: subsea pipelines are coated with reinforced concrete so as to ballast and protect them from damage and corrosion Deck: area of a vessel or platform where work equipment is located: process plant and equipment, accommodation modules and drilling units. Decommissioning: series of processes and procedures undertaken in order to end operations of a gas pipeline, associated plants and equipment. It may occur at the end of the life of the plant, following an accident, for technical or financial reasons, and/or on environmental or safety grounds. Dynamically Positioned Heavy Lift Vessel: Vessel equipped with a heavy-lift crane, capable of holding a precise position through the use of thrusters, thereby counteracting the force of the wind, sea, current, etc. EPC (Engineering, Procurement, and Construction): a type of contract typical of the onshore construction sector, comprising the provision of engineering services, procurement of materials and construction. The term ‘turnkey’ indicates that the system is delivered to the client ready for operations, i.e. already commissioned. EPIC (Engineering, Procurement, Installation, Construction): a type of contract typical of the offshore construction sector, which relates to the realisation of a complex project where the global or main contractor (usually a construction company or a consortium) provides the engineering services, procurement of materials,

12 SAIPEM FINANCIAL REPORT 2004 GLOSSARY

construction of the system and its infrastructure, transport to site, installation and commissioning/preparatory activities to the start up of operations. Facilities: auxiliary services, structures and installations required to support the main systems. Flare: tall metal structure used to burn off gas produced by the oil/gas separation in oil fields, when it is not possible to utilise it onsite or ship it elsewhere. Floatover: type of module installation onto offshore platforms that does not require lifting operations. A specialised vessel transporting the module uses a ballast system to position itself directly above the location where the module is to be installed; it then proceeds to de-ballast and lower the module into place. Once this has been completed the vessel backs off and the module is secured to the support structure. FPSO vessel: Floating Production, Storage and Offloading system comprising a large tanker equipped with a high-capacity production facility. This system, moored at the bow to maintain a geo-stationary position, is effectively a temporarily fixed platform that uses risers to connect the subsea wellheads to the on-board processing, storage and offloading systems. Hydrocracking (plant): installation for process separation of large oil molecules. Hydrotesting: Operation involving high pressure (higher than operational pressure) water being pumped into a pipeline to ensure that it is devoid of defects. Jacket: platform underside structure fixed to the seabed using piles. Jack-up: mobile self-lifting unit comprising a hull and retractable legs, used for offshore drilling operations J-laying: Method of pipelaying that utilises an almost vertical launch ramp, making the pipe configuration resemble a ‘J’. This configuration is suited to deep-water pipe laying. LNG: liquefied natural gas is obtained by cooling down natural gas to minus 160°C. at normal pressure Gas is liquefied to make it facilitate its transportation from the place of extraction to that of processing and/or utilisation. A tonne of LNG equates to 1,400 cubic metres of gas. Midstream: Sector comprising all those activities relating to the construction and management of the oil transport infrastructure. Mooring buoy: offshore mooring system. Offshore/Onshore: The term offshore indicates a portion of open sea and, by induction, the activities carried out in such area, while onshore refers to land operations. Pig: piece of equipment used to internally clean,

scrape and survey a pipeline. Piggy-backed pipeline: small-diameter pipeline, fixed on a larger pipeline, used to transport a product other than that of the main line. Pile: long and heavy steel pylon driven into the sea bed; a system of piles is used as foundation for anchoring a fixed platform or other offshore structures. Pipe-in-pipe: subsea pipeline system comprising two coaxial pipes, used to transport hot fluids (oil & gas). The inner pipe transports the fluid whereas the outer pipe carries the insulating material necessary to reduce heat loss to the sea. The outer pipe also protects the pipeline from the water pressure. Pre-commissioning: comprises pipeline washing out and drying. Pre-drilling template: support structure for a drilling platform. Pulling: minor operations on oil wells due to maintenance or marginal replacements. Riser: manifold connecting the subsea wellhead to the surface. ROV (Remotely operated vehicle): unmanned vehicle, piloted and powered via umbilical, used for subsea surveys and operations. S-laying: Method of pipelaying that utilises the elastic properties afforded by steel, making the pipe configuration resemble an ‘S’, with one end on the seabed and the other under tension onboard the ship. This configuration is suited to medium to shallow-water laying. Spar: floating production system, anchored to the seabed through a semi-rigid mooring system, comprising a vertical cylindrical hull supporting the platform structure. Spool: connection between a subsea pipeline and the platform riser, or between the terminations of two pipelines. SURF facilities: pipelines and equipment connecting the well or subsea system to a floating unit. Template: rigid and modular subsea structure where the oilfield well-heads are located. Tendons: pulling cables used on tension leg platforms used to ensure platform stability during operations. Tension leg platform (TLP): Fixed-type floating platform held in position by a system of tendons and anchored to ballast caissons located on the seabed. These platforms are used in ultra-deep waters. Tie-in: connection between a production line and a subsea wellhead or simply a connection between two pipeline sections. Topside: portion of platform above the jacket. Trunkline: oil pipeline connecting large storage facilities to the production facilities, refineries and/or onshore terminals.

Trenching: burying of offshore or onshore pipelines. Umbilical: Flexible connecting sheath, containing flexible pipes and cables. Upstream/Downstream: the term upstream relates to exploration and production operations. The term downstream relates to all those operations that follow exploration and production operations in the oil sector. Wellhead: fixed structure separating the well from the outside environment. Workover: major maintenance operation on a well or replacement of subsea equipment used to transport the oil to the surface.

13 SAIPEM FINANCIAL REPORT 2004 GLOSSARY

operating review

New contracts and backlog

New contracts by geographical areas

(million €)

Saipem Group – Contracts awarded to the Saipem Group in 2004 2003

%

Amount

%

817

19

1,289

29

Group companies

3,481

81

3,098

71

Total

4,298

100

4,387

100

Offshore Construction

2,536

59

2,738

62

247

6

107

2

11



22

1

Onshore Construction

862

20

596

14

Onshore Drilling

176

4

275

6

Liquefied Natural Gas

273

6

344

8

Maintenance Modification and Operation

193

5

305

7

4,298

100

4,387

100

50

1

131

3

Abroad

4,248

99

4,256

97

Total

4,298

100

4,387

100

Saipem S.p.A.

Offshore Drilling Leased FPSO

Total Italy (*) Kazakhstan and Azerbaijan are included under Russia

Eni Group

14 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

2004

Amount

255

6

452

10

Third Parties

4,043

94

3,935

90

Total

4,298

100

4,387

100

In 2004, the Saipem Group was awarded new contracts totalling 4,387 million euros (4,298 million euros in 2003). 62% of all contracts awarded are in the Offshore Construction sector, 14% in the Onshore Construction sector, 8% in the Liquefied Natural Gas sector, 7% in Maintenance, Modification and Operation, 6% in the Onshore Drilling sector, 2% in the Offshore Drilling sector and 1% in Leased FPSO. Overseas contracts represented 97% of the total backlog and contracts awarded to the Saipem Group by Eni Group Companies amount to 10% of the overall figure. Finally, contracts awarded to the parent company Saipem S.p.A. amounted to 29% of the overall total. Saipem Group - Backlog at 31st December 2004 2004

2003

(million €)

Amount

%

Amount

%

Saipem S.p.A.

1,406

27

1,489

28

Group Companies

3,819

73

3,817

72

Total

5,225

100

5,306

100

Offshore Construction

3,265

62

3,303

62

Offshore Drilling

499

10

317

6

Leased FPSO

142

3

117

2

Onshore Construction

776

15

763

15

Onshore Drilling

179

3

296

6

Liquefied Natural Gas

318

6

447

8

46

1

63

1

5,225

100

5,306

100

19



1



Abroad

5,206

100

5,305

100

Total

5,225

100

5,306

100

Maintenance Modification and Operation Total Italy

Eni Group

Backlog by geographical area

525

10

298

6

Third Parties

4,700

90

5,008

94

Total

5,225

100

5,306

100

(*) Kazakhstan and Azerbaijan are included under Russia

At year-end, the order backlog amounted to 5,306 million euros, an increase of 1.6% versus 2003. Breakdown of activities by sector is as follows: 62% in Offshore Construction, 15% in Onshore Construction, 8% in Liquefied Natural Gas, 6% in Offshore Drilling and Onshore Drilling, 2% in Leased FPSO and 1% in Maintenance, Modification and Operation. The parent company, Saipem S.p.A. accounts for 28% of the total order backlog. Almost all orders are on behalf of overseas clients, whilst orders from Eni Group companies represent 6% of the overall figure.

15 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

Capital expenditure Capital expenditure amounted to 187 million euros (262 million in 2003), whilst the acquisition of company interests amounted to 12 million euros. Investments on vessels and equipment consisted mainly of maintenance and upgrading of the existing asset base for the Offshore and Onshore Construction and Drilling, Liquefied Natural Gas and Maintenance Modification and Operation sectors (107 million euros); the construction and purchase of project-specific equipment (56 million euros) and capex to strengthen the operating bases/yards in Kazakhstan and West Africa (24 million euros). The following table provides a breakdown of capital expenditure: (million €)

BREAKDOWN BY COMPANY Saipem S.p.A.

2003

2004

44

34

Other Group Companies

228

165

Total

272

199

Offshore Construction

87

98

Offshore Drilling

73

48

Leased FPSO

55



Onshore Construction

BREAKDOWN BY BUSINESS UNIT

29

22

Onshore Drilling

6

11

Liquefied Natural Gas

5

6

Maintenance, Modification and Operation

4

2

Other

13

12

Total

272

199

10

12

207

187

BREAKDOWN BY NATURE Acquisition of company interests Technical FPSO

55



Total

272

199

Details of capital expenditure for the individual business sectors are provided in the following paragraphs. “Other” capital expenditure refers to investments carried out at Head office and other premises and is mainly attributable to the implementation of the new group-wide integrated IT system SAP R3i at subsidiary companies and upgrades to IT hardware. Analysis by business sector:

16 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

offshore construction

2000

2001

2002

2003

2004

Subsea pipelines laid (km) - Italy

73

146

58



28

- Abroad

203

635

1,740

1,409

1,606

Total km

276

781

1,798

1,409

1,634

Structures installed (tons) - Italy

17,793

3,908

2,400



1,082

- Abroad

39,294

69,120

53,560

118,211

171,582

Total tons

57,087

73,028

55,960

118,211

172,664

General overview The Saipem Group possesses a strong, technologically advanced fleet in addition to a comprehensive spread of engineering excellence and project management expertise. Saipem’s distinctive capabilities and competences, together with a long-standing presence in strategic frontier markets comprise an industrial model that is particularly well suited to EPIC (Engineering, Procurement, Installation and Construction) projects. Amongst the semi-submersible vessels equipped with the most advanced state-of-theart technologies, Saipem 7000 is the most important, thanks to its dynamic positioning system, 14,000 ton lifting capacity and its capability to lay subsea pipelines in ultra-deep waters using the “J-lay” system, which can handle a suspended load of up to 1,450 tons during pipelay operations. Other vessels include Castoro Sei, capable of laying large diameter subsea pipelines, the Field Development Ship a special purpose vessel used in the development of deep water fields, equipped with a dynamic positioning system and a 600 ton lifting capacity crane, in addition to a vertical pipelay system able to work in water depths of up to 2,000 metres and the vessel Saipem 3000, capable of laying flexible pipelines, installing umbilicals and mooring systems in deep waters and installing subsea structures of up to 2,000 tons. Saipem also boasts a strong position in the subsea market, operating highly sophisticated and technologically advanced vehicles, such as subsea ROVs (Remotely Operated Vehicles), i.e. purpose-equipped robots, able to carry out complex deepwater pipeline interventions. Group companies operating in the Offshore Construction sectors, in addition to the 17 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

parent company, are: Saipem s.a., its directly controlled companies Saibos Construções Maritimas, Bos Congo, Petromar, StarGulf, PT Sofresid Indonesia and its associated companies Bos Shelf e Offshore Design Engineering. Also: Saipem U.K., Saipem Inc., Saipem (Malaysia), Saipem Asia, PT Saipem Indonesia, Saipem Luxembourg, Saipem (Portugal) Comércio Marítimo Lda, Sonsub, Intermare Sarda, Saipem Contracting (Nigeria), Saipem Energy International S.p.A., ERS Equipment Rental & Services, Saipem Mediterranean Services, and Moss Maritime.

Market conditions Throughout 2004, the sustained growth in global spending by the oil companies resulted in a steady improvement in the offshore construction market and gave rise to positive medium-term prospects. Expenditure in ultra-deep water developments and intensive exploitation of gas reserves in hard-to-access areas will positively affect the floating production units as well as the subsea development systems. The large-diameter pipelay sector is experiencing a medium-term expansion cycle: however, in 2004 the segment showed a slight contraction mainly due to the retrenchment of activities in the North Sea. Asia Pacific and the Middle East were the geographical areas that, in 2004, accounted for over 50% of the global trunkline laying activity, a significant increase over the previous year. Operations in the Gulf of Mexico and the Mediterranean fell, whilst West Africa proved to be a marginal market. The small-diameter pipelay sector grew moderately in 2004, thanks to the positive trend in Asia Pacific, Latin America, the Mediterranean and the Middle East, compensating for the contraction experienced in the Gulf of Mexico, which nevertheless proved to be the most important area at global level. The platform market in 2004 showed growth in the medium to large jack-up sector, the most buoyant geographical area in production terms being once again the Asia Pacific region. Conversely, the low jack-up segment declined during 2004, mainly due to a reduction in levels of operation in the Gulf of Mexico. Floating production systems (FPSO, TLP, Spar and semi-submersibles) experienced a strong trend throughout 2004, mainly due to thriving operations in the Gulf of Mexico and West Africa. Latin America, despite initial political-institutional uncertainties, showed strong levels of activity, equal to those experienced in the Asia Pacific region. The subsea installation compartment went through a contraction phase in 2004; however, it is expected to recover soon. Deep-water activities, carried out almost exclusively in Brazil, the Gulf of Mexico and West Africa, increased significantly, bearing out the long-term growth trend. The Brazilian offshore market seems to have plateaued at the levels of the last few years. In 2004, West Africa – the region showing the greatest potential – has recorded a temporary downturn versus the previous year, whilst the area of the Gulf of Mexico maintained high levels of activity. This region is expected to undergo a progressive re-distribution of subsea operations from shallow to deep waters, which should offset the decline of traditional segments. With regard to shallow water activities, the market has shown a slight downturn. The North Sea saw a decline in the number of installations in marginal fields. However, this area still represents more than half of the global market. The current growth in Asia Pacific is the beginning of a fast-paced development, which, given the modest size of this market, should not attract a high volume of spending.

18 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

New contracts The most significant contracts awarded to the Group during 2004 were: - on behalf of Dolphin Energy Ltd, three EPIC-type contracts in Qatar, comprising engineering, procurement, transport and installation of a gas export pipeline linking Ras Laffan to the onshore terminal of Taweelah, all associated facilities at Taweelah and two subsea pipelines connecting the platform well-heads to the onshore terminal at Ras Laffan; - on behalf of AGIP KCO, the Kashagan Trunkline and Production Flowlines project in Kazakhstan, as part of the Kashagan Field Development in the Kazakh waters of the Caspian Sea. The Contract comprises engineering, procurement of materials, coating, laying and commissioning of pipelines, fibreoptic cables and umbilicals. The pipe is to be supplied by the client; - on behalf of AGIP KCO, the Kashagan Piles and Flares project in Kazakhstan, as part of the Kashagan Field Development in the Kazakh waters of the Caspian Sea. The contract comprises construction, assembly, transport and installation of piles and flares in addition to sixteen barges to accommodate plant modules; the scope of work also includes the procurement, fabrication and installation of associated mooring and protection structures; - on behalf of Total Exploration & Production Angola, the EPIC-type contract Rosa in Angola, comprising engineering, procurement, construction, installation and commissioning of subsea pipelines, umbilicals and risers at water depths of approximately 1,400 metres. The works will enable the linking of the Rosa field to the FPSO unit in the Girassol field; - on behalf of AIOC (Azerbaijan International Operating Company), two contracts as part of the Phase 3 development of the Azeri-Chirag-Gunashli field in Azerbaijan, comprising construction of a template, two jackets and associated piles in addition to transport and installation of two platforms comprising two jackets, two topsides and one template; - on behalf of AKOP (Aker Kvaerner Offshore Partners), the Frigg and MCP-01 Decommissioning project, comprising the removal and transport of seven platforms located on the Frigg and MCP-01 gas fields in the North Sea; - on behalf of Hong Kong Electric Company Ltd, the EPIC-type Lamma project in China, comprising engineering, procurement, transport and installation of a subsea gas export pipeline linking the Guangdong regassification terminal in China to Lamma island off the coast of Hong Kong. The contract was awarded to a consortium comprising Metal One and Jan De Nul, with Saipem being the lead partner; - on behalf of BBL Company (a partnership comprising Gasunie, E.ON Ruhrgas and Fluxys) the EPIC-type contract BBL in the North Sea, for the laying of a subsea pipeline from Balgzand in Holland to Bacton in Great Britain; - on behalf of Norsk Hydro, the Ormen Lange project in the Norwegian sector of the North Sea, comprising transport and installation of two subsea pipelines at depths of approximately 900 metres; - on behalf of CNR International (Côte d’Ivoire) s.a.r.l., the EPIC-type Espoir contract in the Ivory Coast, comprising engineering, procurement, construction, commissioning, transport and installation of a wellhead and associated facilities, in 19 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

addition to three flowlines and associated flexible risers, connecting spools and necessary pipelines; - on behalf of Repsol YPF (Yacimientos Petroliferos Fiscales), which was appointed by the Spanish Government, the contract for the recovery of the crude oil trapped in the tanks of the tanker “Prestige”, which sank off the coast of Galicia, Spain; - on behalf of PT T Public Company Ltd, an EPIC-type project for the Third Transmission Pipeline for an Offshore Platform System in Thailand, comprising engineering, procurement, construction, transport and installation of production facilities (jacket, tripods, flare booms, topsides). The contract was awarded to a consortium with Sembawang Singapore; - on behalf of InAgip d.o.o., the Ika, Ida and Ivana Gas Fields Platforms and Pipelines project, comprising installation of six jackets and seven decks in addition to transport and installation of various interconnecting pipelines and spools; - on behalf of ConocoPhillips UK, the Saturn Development project in the British sector of the North Sea, comprising the laying of a gas subsea pipeline and a piggybacked pipeline; - on behalf of Eni S.p.A. Gas & Power, the Sircos project, comprising engineering, procurement, construction and testing of a system for the repair of subsea pipelines in ultra-deep waters; - on behalf of IOOC (Iranian Offshore Oil Company) the EPIC-type project SirriQueshm in Iran, comprising engineering, procurement and installation of a subsea pipeline. The contract was awarded to the consortium comprising Gulmar Offshore Middle East and the Iranian company PIDEC (Petrolchemical Design and Engineering Company).

Capital expenditure The most significant investments in this sector are: - works carried out at the operative bases in West Africa: specifically, the expansion and refurbishment of the Romoulomeni Yard situated in the Niger delta in Nigeria to enable it to carry out fabrication of modules for offshore platforms and to be used as logistical bases to support local operations; also, works have progressed on the construction of the new Soyo yard, in Angola, due to carry out fabrication of structures and modules for contracts currently under execution; - works are progressing on the construction of a new operating base in Kurik on the shores of the Caspian Sea, in Kazakhstan, due to be used for the fabrication of offshore structures and as a logistical base for operations in the area; - upgrading and maintenance works to the main vessels of the fleet.

Work performed Activities in 2004 consisted in the laying of approximately 1,634 km of pipelines and the installation of 172,664 tons of plant and equipment. Main projects included: In Libya, Saipem carried out the following operations: 20 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

- engineering and procurement activities of materials for the EPIC project NC41 Platform (Sabratha) on behalf of Eni Gas B.V. were completed. The following operations were also accomplished: project management, the fabrication of the jacket, accommodation deck and the flare stack, whose installation was carried out towards the end of 2004; hook-up and commisioning works on the platform are on going. The contract, executed by a consortium comprising Saipem S.p.A. (leader) and Hyundai Heavy Industries, includes assistance with platform operations for the initial six months; - engineering and procurement activities for materials on the EPIC project NC41 Sealines (Bahr Essalam) on behalf of Eni Gas B.V. were completed. Operations involving the pipelines and pre-fabrication of the subsea valves have also been completed; furthermore the construction of mooring facilities to the shore and laying of pipelines has been finalised utilising the semi-submersible pipelay vessel Castoro Sei; tie-in operations of spools connecting the sealines to the distribution points and the Sabratha platforms are currently ongoing; - installation and commissioning of a subsea gas trunkline has been completed for the Green Stream (LGTS) project, on behalf of Greenstream B.V., for the transport of gas from Libya (Mellitha) to Sicily (Gela). Following pre-commissioning operations and additional pipeline stabilisation works, the subsea trunkline has been handed over to the client and started operations in September 2004; - engineering and procurement activities for materials on the EPIC project NC41 Subsea on behalf of Eni Gas B.V. were completed. The following operations also reached completion: project management, construction, transport and installation, utilising the vessel Saipem 7000 and the derrick lay barge BOS 355; the test and commissioning phases are currently ongoing; - the following works have been carried out on the Bouri Field DP-4 Rig A Removal project on behalf of Agip Oil: decommissioning and removal of one of the two drilling rigs and associated modules from the DP-4 platform; operations were carried out utilising the vessel Saipem 7000. Also in the Mediterranean Sea, Saipem carried out the following works: - installation works were completed on the single-leg gas production platform, Naide, as well as the inter-connecting pipeline to the existing Cervia platform in Italian waters, as part of the new general agreement “Accordo Quadro 2004-2007” on behalf of Eni S.p.A. Exploration & Production; - installation works started on the Ika, Ida and Ivana Gas Field project, on behalf of InAgip, in Croatian waters, comprising the installation of six jackets and seven decks, in addition to transport and installation of various connecting spools and pipelines. In Spain, the following works were carried out: - with regard to the Prestige project, on behalf of Repsol YPF (Yacimientos Petroliferos Fiscales) which was appointed by the Spanish Government, operations were completed successfully, recovering all the crude oil contained in the tanks of the wreck “Prestige”, which sank in waters of 3,800 metres off the coast of Galicia, Spain; - engineering and procurement activities have begun on the Aquaduct Palma de Mallorca project, on behalf of FCC Construccion, comprising the installation of a subsea pipeline due to transport potable water.

21 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

In the Far East, the following works were carried out: - the EPIC project ‘Peciko Phase 4’ on behalf of TOTAL Indonesie has been completed. The offshore scope of works comprised the installation of two platforms, in addition to the laying and trenching of seven subsea pipelines, totalling 57 kilometres in length. Offshore operations have been carried out by the derrick lay barge Castoro II, the trench barge Castoro 10 and the dynamically positioned derrick and pipelay vessel Saipem 3000 off the coast of East Kalimantan (Indonesia); - the Peciko Repair project on behalf of TOTAL Indonesie has been completed. Offshore works entailed the replacement of two pipelines, approximately 25 kilometres in total, and have been carried out by the derrick lay barge Castoro II and the trench barge Castoro 10; - pipelay activities have reached completion on the TTM Pipeline project on behalf of T.T.M. (Trans Thai-Malaysia) Ltd. in Thailand, which comprised the laying of a subsea pipeline and pre-commissioning activities utilising the semi-submersible pipelay vessel Semac 1, the derrick lay barge Castoro II and the trench barge Castoro 10; - engineering, survey and trenching activities were completed as part of the BayuDarwin Pipeline project in Australia on behalf of Conoco Phillips Pipeline Australia Pty Ltd; transport and installation operations for a subsea pipeline are currently ongoing; these are being carried out by the semi-submersible pipelay vessel Semac 1; - the Bass Gas Yolla project was completed in Australia on behalf of Clough Engineering Ltd. / Origin Energy; it comprised the transport and installation of a flowline in the Yolla field, situated between Australia and Tasmania; - project management, engineering and procurement activities have been completed on the Bongkot Field Development Phase 3 project in Thailand on behalf of PTT Exploration and Production Public Company Ltd., comprising engineering, procurement, construction, transport and installation of various subsea pipelines and associated facilities; - the project team was mobilised and procurement and installation engineering activities are progressing for the EPIC-type Lamma project in China on behalf of Hong Kong Electric Company Ltd. Offshore works will be carried out by the trench barge Castoro 10. In West Africa, the following works were carried out: - activities in Nigeria have been completed on the Okpoho project on behalf of Agip Energy Natural Resources Ltd, which comprised engineering, provisioning, construction and commissioning of an offshore platform. The first phase of the project involving the construction of the platform was carried out by Intermare Sarda S.p.A. and Saipem Contracting (Nigeria) Ltd.; installation was performed by Saibos Construções Marítimas Lda., utilising the derrick pipelay vessel Castoro Otto; - installation activities for Part A and engineering and procurement for Part B have been completed for the EPIC-type project Kizomba-A and B in Angola on behalf of Exxon-Mobil. The project aims at developing two subsea fields by laying flowlines, installing risers, minor lines and umbilicals at depths of up to 1,000/1,250 metres. For this project, newly-developed engineering concepts patented by Saibos involving deepwater risers, will be utilised for the first time. The project is being carried out by the specialised FDS vessel, which towards the end of the year started installation of several pipe-in-pipe lines; 22 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

- engineering, procurement and construction of platform modules are progressing as part of the EPIC-type project East Area EPC2 on behalf of Exxon Mobil in Nigeria; the project comprises engineering, procurement, construction and installation of three platforms, in addition to the laying of subsea pipelines. The project will be carried out utilising the derrick pipelay vessel Castoro Otto and the work lay barge Saibos 230; - construction operations are currently on going on the EPIC-type project Amenam 2 in Nigeria on behalf of TotalFinaElf, comprising engineering and construction of a platform and its installation utilising the ‘float-over’ method. The contract will be performed in joint venture with Technip-Coflexip; - completion of the hull fabrication in a Singaporean shipyard, as part of the EPICtype project Erha, on behalf of Exxon Mobil, involving the engineering, procurement, construction, transport and commissioning of an FPSO installation on the Erha field in Nigeria; - construction and installation of the jacket and other structures for the EPIC-type project Yoho in Nigeria, on behalf of Mobil Producing Nigeria Unlimited, involving project management, engineering, procurement, construction, transport, installation and commissioning of the Yoho platform; installation was carried out utilising the derrick pipelay vessel Castoro Otto; construction of the platform module is currently ongoing; - engineering and procurement for the EPIC-type Dalia project on behalf of TotalFinaElf in Angola, comprising engineering, procurement, construction and assembly of the topsides for the FPSO system due to operate in the Dalia field. The contract was awarded in joint venture with Technip, Stolt Offshore and the Korean companies Samsung HI and DSME; - project management and engineering activities are currently ongoing for the EPICtype West Espoir project on behalf of CNR International (Cote d’Ivoire) s.a.r.l in the Ivory Coast; the project comprises engineering, procurement, construction, commissioning, transport and installation of a wellhead and associated facilities, in addition to three flowlines and risers, connecting spools and trunklines; - project management and engineering activities are underway on the EPIC-type Rosa Surf project on behalf of Total Exploration & Production Angola, in Angola, comprising engineering, procurement, construction, installation and commissioning of subsea pipelines, umbilicals and risers at water depths of approximately 1,400 metres. These works will allow for the tie-back of the Rosa field to the Girassol FPSO. In the North Sea, Saipem carried out the following works utilising the vessel Saipem 7000: - the Clair project on behalf of BP in the British sector, involving installation of a platform; - the Troll TPK, Visund and Snorre Crane projects on behalf of Statoil, comprised transport and installation of various modules onto existing platforms; - jacket installation was completed on the Dan Maersk project on behalf of Maersk Oil, in the Danish sector; the project comprises the transport and installation of a platform - the initial stages of the Buzzard Platform project were completed on behalf of Nexen in the British sector; the project comprises the transport and installation of 23 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

three jackets, two decks, a wellhead deck and two connecting gangways; - the initial stages of the Brent Decommissioning project were completed on behalf of Shell in the British sector; the project comprises the removal of the tower, flare and other facilities from the Brent platform. In the North Sea, the following works were carried out utilising the vessel Castoro Sei: - the initial stages of the Buzzard Sealine project on behalf of Nexen, in the British sector, comprising the construction of subsea structures for a twin pipeline system; - engineering works for the Rhum project on behalf of BP Exploration Operating Company, in the British sector, comprising the laying of a subsea pipeline due to transport gas from the Rhum field to the Bruce platform; - the initial stages of the Saturn Development project on behalf of ConocoPhillips Uk, in the British sector of the North Sea, comprising the laying of a gas pipeline and a piggy-backed pipeline. In Russia, the following works were carried out: - project management, engineering and concrete pipe coating operations are currently ongoing as part of the EPIC-type Sakhalin II Pipelines project on behalf of Sakhalin Energy Investment Company Ltd. (SEIC), comprising engineering, procurement, installation and construction of a pipeline system connecting the Lunskoye and Pitun-Astkhskoye platforms to the island of Sakhalin; the onshore approach was completed by utilising the derrick lay barge Castoro II; - project management and engineering work began for the Sakhalin II Topsides project on behalf of Samsung Heavy Industries, comprising the transport and installation of topsides for the Lunskoye and Piltun-Astkhskoye B platforms, the latter being the largest platform ever installed with the float-over method. On behalf of A.I.O.C. (Azerbaijan International Operating Company), activities involving the construction, transport and installation of various structures as part of the development of the Azeri-Chirag-Gunashli field, comprising three separate contracts and involving the construction of six jackets, three templates and piles in addition to transport and installation of five drilling templates (one of which was installed in 2003), four drilling platforms (one of which was installed in 2003) and two production platforms. On behalf of Eni Iran B.V. pre-commissioning and hydrotesting activities have been completed as part of the South Pars 4&5 project, in Iran. The project comprised construction and installation of two 100 km subsea pipelines linking the gas production platforms “SPD-5” and “SPD-6” to the onshore Gas Plant located in Assaluyeh. The contract was performed by the consortium formed by Saipem S.p.A. (leader) and the Iranian company Sadaf. On behalf of IOOC (Iranian Offshore Oil Company), installation activities have been completed and commissioning operations are currently ongoing on the Sirri - Kish Pipeline project in Iran. These projects comprise procurement, pipelay and commissioning of two pipelines transporting gas from the island of Sirri to those of Kish and Queshm. The contract is being performed by a consortium formed by Saipem S.p.A., Gulmar Offshore Middle East and the Iranian company PIDEC (Petrochemical Design and Engineering Company). On behalf of OXY Qatar (Occidental Petroleum Qatar), engineering works have been completed for the installation of the Sembawang PS-1K platform off the coast of 24 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

Qatar. On behalf of Dolphin Energy Ltd, preparatory activities are ongoing as part of the EPIC-type Dolphin project in Qatar, comprising engineering, procurement, transport and installation of a gas export pipeline linking Ras Laffan to the onshore terminal of Taweelah, all associated facilities at Taweelah and two subsea pipelines connecting the platform wellheads to the onshore terminal at Ras Laffan. On behalf of Exxon Mobil Canada, project management and engineering activities for the jacket have been completed; these pertain to the EPIC-type Sable Compression Platform project in Canada, comprising engineering, procurement, construction and installation of a compression platform and associated facilities; procurement activities are ongoing, as well as the jacket construction and installation engineering. The contract is being carried out in partnership with Daewoo Shipbuilding and Marine Engineering. On behalf of Conoco Inc., all activities relating to the second phase of the Magnolia Deepwater project have been completed in the Gulf of Mexico; the project involved construction, transport and installation of eight piles, in addition to transport and installation of tendons and facilities for the Tension Leg Platform at water depths of up to 1,400 metres. The project utilised the vessel Saipem 7000 and derrick pipelay ship Saipem 3000.

25 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

Offshore Construction fleet at 31st December 2004 Saipem 7000

Semi-submersible Pipelay and D.P. Derrick vessel capable of lifting structures of up to 14,000 tons and of “J-laying” pipelines at depths of up to 3,000 metres. Saibos FDS Multi-purpose mono-hull dynamically positioned crane and pipelay (J-lay) vessel utilised for the development of deepwater fields at depths of up to 2,100 metres, capable of launching 22” diameter pipe in “J-lay” configuration and lifting structures of up to 600 tons. Castoro Sei Semi-submersible pipelay vessel capable of laying large diameter pipe at depths of up to 1,000 metres. Castoro Otto Mono-hull derrick pipelay ship capable of laying pipes of up to 60” diameter and lifting structures of up to 2,200 tons. Saipem 3000 Mono-hull derrick pipelay ship capable of laying rigid and flexible pipes in deep waters and lifting structures of up to 2,000 tons. Bar Protector Dynamically positioned dive support vessel used for deep-water diving operations and works on platforms. Semac1 (Bar 420) Semi-submersible pipelay vessel capable of laying large diameter pipes in deep waters. Castoro II Derrick lay barge capable of laying pipe of up to 60” diameter and lifting structures of up to 1,000 tons. Castoro 10 Trench barge capable of burying pipes of up to 60” diameter and laying pipes in shallow waters. Bos 355 Derrick lay barge capable of laying pipe up to 45” diameter and lifting structures of up to 600 tons. Crawler Derrick lay barge capable of laying pipe up to 60” diameter and lifting structures of up to 540 tons. Saibos 230 Work barge equipped with a mobile crane for piling, marine terminals and fixed platforms Castoro XI Heavy-duty cargo barge. Castoro 9 Launch cargo barge, for structures of up to 5,000 tons. S42 Launch cargo barge, for structures of up to 8,000 tons. S44 Launch cargo barge, for structures of up to 30,000 tons. S45 Launch cargo barge, for structures of up to 20,000 tons. Bos 600 Launch cargo barge, for structures of up to 30,000 tons. Saibos 103 Lightweight cargo barge.

26 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

offshore drilling

2000

2001

2002

2003

2004

metres drilled - Italy

6,647









- Abroad

89,425

106,797

124,761

128,839

130,420

Total

96,072

106,797

124,761

128,839

130,420

wells drilled - Italy

4









- Abroad

46

36

50

56

59

Total

50

36

50

56

59

General overview In 2004, the Group has operated in the Offshore Drilling sector in West and North Africa, the Persian Gulf, Norway, Peru and India. Amongst the Group’s fleet, the following vessels are of particular interest: Saipem 10000, capable of working at depths of up to 3,000 metres using its dynamic positioning system; Scarabeo 7, a semisubmersible vessel capable of operating at depths of up to 1,500 metres and Scarabeo 5, a fourth generation semi-submersible vessel, capable of working at depths of over 1,800 metres and drilling to a depth of 9,000 metres. Besides Saipem S.p.A., other Group companies operating in this sector are: Saipem Nigeria, with headquarters in Lagos, presiding over the strategic area of West Africa; Petrex, operating in South America; Saudi Arabian Saipem Ltd., operating in the Persian Gulf; and Saipem (Portugal) Comércio Marítimo Lda.. Also in this Sector operates Sonsub which supports operations by providing its remotely operated vehicles (ROVs).

Market overview In 2004, the Offshore Drilling sector experienced a gradual but progressive increase in the demand and vessel utilisation rates, following the weakness experienced in recent years. The last quarter 2004, in particular, saw the most substantial recovery, which extended not only to the most conventional market segments but also to almost all geographical areas. Demand remained weak in the North Sea and the Gulf of Mexico, if compared to the levels of activities recorded in recent years. The most dynamic areas overall were Asia Pacific, thanks to the development of a new 27 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

drilling technique in deep-waters, the Mediterranean-Caspian area and the Middle East. The jack-up segment recorded positive utilisation rates from the first six-months of 2004, improving further in the second part of the year, almost reaching the record levels of 2001. The semi-submersible segment experienced a positive trend, which strengthened in the second half of the year, driven by activities in Latin America and Asia Pacific. Finally, the lacklustre drillship market recorded weaker performance versus the other segments, with the exception of the last-generation vessels; the more conventional segments improved only in the last quarter of the year. Strong increases were recorded in West Africa and Asia Pacific.

New contracts The most significant contracts awarded during 2004 include: - on behalf of Saudi Aramco, the three-year charter of the jack-up Perro Negro 5 in Saudi Arabia; - on behalf of Saudi Aramco, the three-year charter of the jack-up Perro Negro 2 in Saudi Arabia; - on behalf of Addax, the eighteen-month charter, plus an option for an additional six-months, of the semi-submersible platform Scarabeo 3 in Nigeria; - on behalf of Petrobel, the two-year charter of the jack-up Perro Negro 4 in Egypt; - on behalf of Total, the extension of the charter contract for an additional fifteen months of the 5820 rig in Libya; - on behalf of Eni Congo S.A., the one-year contract for maintenance and workover services in Congo.

Capital expenditure The most significant items of capital expenditure within the Offshore Drilling sector were: - upgrade works to the semi-submersible platform Scarabeo 3 to enable it to carry out a project in Nigeria on behalf of Addax; - structural repairs to the semi-submersible platform Scarabeo 4; - upgrade works to the jack-up Perro Negro 3 to enable it to carry out a project in India on behalf of GSPC (Gujarat State Petroleum Company); - upgrade works to the jack-up Perro Negro 5 to enable it to carry out a project in Saudi Arabia on behalf of Saudi Aramco; - investments carried out to the fleet, to ensure compliance with international regulations and to customise vessels to client specific requirements.

Work performed Activities in 2004 consisted in the drilling of 59 wells, totalling approximately 130,420 metres drilled. During the first half of the year, the deep-water drillship Saipem 10000 completed operations in Nigeria on behalf of NAE (Nigerian Agip Exploration Ltd) on the ABO field, it was transferred to Congo where it drilled a well on behalf of TotalFinaElf and was then moved to Morocco to carry out drilling operations on behalf of Vanco. During the second half of the year, it operated in Congo on behalf of TotalFinaElf, drilled two wells in Nigeria on behalf of NAE (Nigerian Agip Exploration Ltd) and on behalf of TotalFinaElf; towards the end of the year, it was transferred to Togo to carry out drilling operations on behalf of Hunt Oil Company.

28 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

The semi-submersible platform Scarabeo 3, having undergone structural repairs at the beginning of the year in Cameroon, began drilling operations off the Nigerian coast on behalf of Addax, as part of an eighteen-month long contract. The semi-submersible platform Scarabeo 4 was idle for the entire year, partly because it underwent structural repairs and partly due to inactivity. The semi-submersible platform Scarabeo 5 continued to carry out HP/HT (high pressure /high temperature) operations in Norwegian waters on behalf of Statoil, as part of a three-year long contract. The semi-submersible platform Scarabeo 6, having undergone client-specific upgrade works at the beginning of the year, began drilling operations in Egypt as part of a newly-acquired eighteen-month long contract on behalf of Burullus Gas Company. The semi-submersible platform Scarabeo 7 continued operations on the Erha field in Nigeria, as part of a three-year contract on behalf of Exxon Mobil Nigeria. The jack-up Perro Negro 2 continued drilling activities in the Persian Gulf on behalf of Saudi Aramco. The contract was extended for a further three years from May 2005. The jack-up Perro Negro 3, having completed upgrade works in the United Arab Emirates, was transferred to Indian waters to perform drilling and workover operations on behalf of GSPC (Gujarat State Petroleum Company). The jack-up Perro Negro 4 continued to perform workover operations on behalf of Petrobel in the Gulf of Suez. The contract was extended for a further two years from November 2004. The jack-up Perro Negro 5, having undergone maintenance works in Cameroon, was transferred to the Sharjah base, where it was upgraded in order to carry out a contract in Saudi Arabia on behalf of Saudi Aramco as part of a three-year contract due to begin in March 2005. The self-lift platform Shahid Rajaie, owned by NIDC (National Iranian Drilling Contractor) but managed by Saipem, continued drilling operations in Iranian waters on behalf of Eni Iran B.V. The package 5820 installation continued operations on behalf of TotalFinaElf, as part of a one-year contract, with two options for a further year each, in Libyan waters. In Congo, workover and maintenance works continued on the fixed platforms owned by Eni Congo S.A. In Libya, maintenance operations are continuing on the fixed platforms DP3 and DP4 on behalf of Agip Oil Libya. The platforms and the three drillings rigs are owned by the client. In Peru, two rigs, leased on behalf of Petrotech, carried out 87 workover and pulling operations.

29 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

Asset

Days under contract

Utilisation of vessels

Semi-submersible platform Scarabeo 3

246

a

Semi-submersible platform Scarabeo 4



b

Utilisation of vessels was as follows:

Semi-submersible platform Scarabeo 5 (*)

366

Semi-submersible platform Scarabeo 6

331

c

Semi-submersible platform Scarabeo 7

366

Drill-ship Saipem 10000

366

Jack-up Perro Negro 2

366

Jack-up Perro Negro 3

154

a

Jack-up Perro Negro 4

352

c

Jack-up Perro Negro 5



d

(*) Leased by Saipem S.p.A. a = for the remaining days (to 366), the vessel underwent upgrading works in readiness for a new contract. b = the vessel underwent structural repairs (182 days) and was idle for the remaining period (184 days). c = for the remaining days (to 366), the vessel underwent structural repairs. d = for the remaining days (to 366), the vessel underwent upgrading works in readiness for a new contract (122 days) and was idle for the remaining period (244 days).

30 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

leased FPSO

Overview With the acquisition of Moss Maritime and Saipem s.a., the Saipem Group significantly strengthened its design expertise in the floating production sector and its ability to manage turnkey projects. The fleet comprises FPSO Firenze and FPSO Mystras, a vessel that started operations at the beginning of 2004. FPSO Jamestown was sold to third parties on 23rd June 2004 as it was no longer viable to operations. All initiatives have being developed in joint venture with Single Buoy Moorings. In addition to Saipem S.p.A., companies operating in the Leased FPSO sector are: FPSO Firenze Produção De Petróleo Lda., FPSO - Mystras Produção De Petróleo Lda. Furthermore, the following companies provide support in respect of engineering, procurement and project management: Moss Maritime AS, Saipem s.a. and Saipem Energy International S.p.A.

Market overview The leased FPSO market, following a slowdown in the first half 2004, showed signs of recovery in demand during the second half of the year, which was moderate at first but grew steadily towards the last few months of the year, raising expectation for a positive 2005. West Africa, Brazil and Asia Pacific proved to be the areas of greatest interest to operators. The North Sea, although an area confirmed as being in decline (as it was no new installations in 2004) showed signs of a limited recovery in terms of tenders for new projects.

Capital expenditure Activities on the conversion of the tanker Mystras, acquired in 2002, into an FPSO unit were completed. At the end of 2003, the FPSO was moved to the Okono/Okpoho field in Nigeria, where it started operations in January 2004.

31 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

Work performed FPSO - Firenze Produção de Petróleo Lda. The FPSO - Firenze operated continuously throughout the year on the Aquila 2 and 3 wells, in the southern part of the Adriatic Sea (Italy) at depths of 850 metres. FPSO - Mystras Produção de Petróleo Lda. The FPSO Mystras operated continuously throughout the year in Nigeria on the Okono/Okpoho fields, at depths ranging from 60 to 130 metres. As part of the Prestige project on behalf of Repsol YPF (Yacimientos Petroliferos Fiscales), detailed under “work performed” in the Offshore Construction sector, oil and water separation activities were carried out in a purposely modified tank.

32 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

onshore construction

- ABROAD

Pipeline laid (km) Industrial plant (tons)

2000

2001

2002

2003

483

552

687

612

2004

465

13,000

18,120

30,060

23,930

15,888

General overview The Group’s strengths in the Onshore Construction sector are its construction capabilities allied to its engineering and project management competencies, which allow the Group to focus on challenging projects such as the laying of large diameter pipelines and the construction of upstream plants in difficult areas. The regions in which the Group has a long-term presence and operates consistently are the Arabian Peninsula, Nigeria, Russia and Algeria. The Group is also still engaged in Kazakhstan, where it operates in joint venture with another international contractor. Moreover, the Group operates in Oman and France. In addition to the parent company (individually or in association with other international operators), the following subsidiaries carry out onshore construction activities: Saipem s.a. and its direct subsidiaries Saipem Contracting Algeria, Sofresid Engineering, SIPS and associated companies Starstroi and Lipardiz Construçao de Estruturas Maritimas Lda. Saipem Contracting Nigeria, Saudi Arabian Saipem and Katran-K also operate in this sector.

Market overview The Onshore Construction sector is generally going through a positive phase. Natural gas developments have speeded up the award of projects in the upstream market, mainly in the Middle East and North Africa, but also in West Africa and the Caspian Sea. The Midstream market has also shown encouraging signs , especially in the following areas: Central Asia, the Far East and the Middle East. The downstream market, which had been negatively affected by excess capacity in the last few years, is going through a positive phase, with market fundamentals showing recovery in important petrochemical compartments. This sector in Asia (in particular India and China) has benefited by widespread economic growth and specifically by an increase in energy demand. The refinery segment recorded high margins in 2004. Downstream prospects are also particularly attractive in the Middle East, in particular in Saudi Arabia and Qatar. 33 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

New contracts The most significant contracts awarded in 2004 were: - on behalf of NAOC, the EPC-type “GTS – 4” project in Nigeria, comprising engineering, provisioning and construction of a pipeline linking Rumuji (30 km north-east of Port Harcourt) to the N-LNG terminal on Bonny Island; - on behalf of Shell Petroleum Development Company of Nigeria Ltd, the EPC-type contract Soku in Nigeria, comprising engineering, procurement and construction of facilities to increase the capacity of an existing gas treatment plant; - on behalf of TotalFinaElf, the EPC-type “OSBL Refinery” project in France, comprising engineering, procurement, construction and commissioning of all auxiliary services related to the new hydro-cracking plant for a refinery in Normandy, France; - on behalf of Oman Refinery Company, the EPC-type “Mina Al Fahal” project in Oman, comprising engineering, procurement, construction and commissioning of a pipeline and associated facilities, in addition to fibre-optic cabling for the whole line. The contract was awarded to the joint venture CCC (Consolidated Contractors Company), led by Saipem; - on behalf of Maroc Phosphore, the “Ammonia” project in Morocco, comprising the construction of two storage tanks.

Capital expenditure Capital expenditure in the Onshore Construction sector focused on the acquisition and upgrading of plant and equipment necessary for the execution of projects in Nigeria and Russia.

Work performed Onshore Construction activities comprised the laying of 465 km of pipe of various diameters and installation of 15,888 tons of equipment. The most important works are detailed as follows by geographical area. In Kazakhstan, with regard to the Karachaganak project on behalf of Karachaganak Petroleum Operating B.V. in joint venture with Consolidated Contractors Int. Co., following the completion of the 24” pipeline, totalling 650 km, construction and commissioning activities for one of the two plants for the treatment/compression of gas/condensate were also performed successfully. Furthermore, pipelaying of gathering and flowlines as well as the commissioning and client support activities have also been completed. In Saudi Arabia, on behalf of Saudi Aramco, the EPC-type AY-1 P/L Conversion project has been successfully completed. The project comprised the conversion of the AY-1 pipeline from an oil to a gas line. On behalf of Saudi Aramco, construction activities have been completed for the Rabigh project, which comprised engineering, procurement and construction of a pipeline. In Nigeria, on behalf of NAOC: - the plant expansion was completed as part of the NLNG Phase 3 Obiafu/Obrikon project and operations have got underway at the Irri Station. The scope of works comprises the expansion of the existing gas plant and the construction of a flow station; - engineering activities have been completed on the Okpai Power Plant project, 34 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

whilst civil, mechanical and electro-instrumentation works as well as material procurement activities are underway; - the IDU Ob/Ob project was successfully completed; it comprised the installation of a pipeline. Final connections and commissioning are currently underway; - the EPC-type GTS – 4 project is progressing; it comprises engineering, procurement and construction of a pipeline linking Rumuji (30 km north-east of Port Harcourt) to the N-LNG terminal on Bonny island. The pipeline will cross the Niger delta; - civil works are progressing in various areas. Also in Nigeria, on behalf of Shell Petroleum Development Company of Nigeria Ltd: - engineering and procurement have begun on the Soku Debottlenecking project, whose scope of works comprises engineering, procurement and construction of a pipeline; - all activities associated to the Cawthorne Channel project have been completed; the project comprised the laying of a 74-kilometre pipeline in marshland utilising purposely-engineered lay-barges. In Algeria, under the EPIC-type OZ2 (Arzew Pump Stations) project, on behalf of Sonatrach, in joint venture with Amec Spie Capag, construction of the seven pumping stations has been successfully completed. Pre-commissioning, commissioning operations as well as client support activities are currently ongoing. Also in Algeria, with regard to the ROD project on behalf of BHP/Sonatrach, comprising the construction of an oil treatment plant and a 300-km pipeline network, all operational activities have been completed and pre-commissioning, commissioning operations as well as client support activities are currently underway. In France, mobilisation operations for the engineering team have started, as have all preparatory operations for the site associated with the OSBL project on behalf of TotalFinaElf, comprising engineering, procurement, construction and commissioning of a refinery. In Russia, engineering and design activities for the Sakhalin II project on behalf of Sakhalin Energy Ltd have been completed and construction has begun. The project comprises offshore and onshore pipelay operations and installation of compression and pumping stations, in addition to a terminal.

35 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

number

Onshore Construction equipment at 31st December 2004

Cranes from 10 to 150 tons Backhoes

153

Pay welders

79

Pay and wheeled loaders

57 55

Motor graders and compactor rollers

42

Various wheeled tractors Pipe bending machinery

11 106 33

Cars – off road vehicles - trucks – buses

741

Trailers – semi-trailers – dollies

104

Pipe boring/pushing machines Motorised and electric welding machines Water pumps and air compressors Power generators Accommodation facilities (beds) (*) (*) includes the camp in Kazakhstan

OPERATING REVIEW

2

Dozers – tracked loaders Rock drills

36

81

Sidebooms

Trenchers

SAIPEM FINANCIAL REPORT 2004

115

3 1,093 253 251 4,470

onshore drilling

2000

2001

2002

2003

2004

metres drilled - Italy

16,536

18,581

10,693

15,724

8,851

- Abroad

130,050

171,102

337,347

370,252

446,562

Total mt

146,586

189,683

348,040

385,976

455,413

wells drilled - Italy

4

3

5

3

5

- Abroad

40

52

95

116

145

Total

44

55

100

119

150

General overview In the Onshore Drilling sector, the Group operates in Italy, Algeria, Egypt, Nigeria, Saudi Arabia, Kazakhstan, Russia, Peru and Venezuela through the parent company as well as Saipem Nigeria, Petrex S.A., Saudi Arabian Saipem, Saipem Perfurações e Construções Petrolíferas América Do Sul, Sadco (an Indian company jointly owned and managed with Aban Drilling Co.) and SaiPar (jointly owned and managed with Parker Drilling Co. And operating in Kazakhstan). The SaiTre consortium comprising Saipem S.p.A. (51%) and Trevi S.p.A. (49%) was put into liquidation on 25th February 2004. From the date the company was put into liquidation, the highly innovative and technologically advanced drilling installations have been managed by Saipem S.p.A. and have operated in Egypt and Venezuela.

Market overview In 2004, the sector continued the positive trend which had started in 2003 and is expected to last throughout 2005, albeit with lower growth rates. Strong levels of activity were recorded both North and South America, Argentina and Venezuela in particular. Modest increases were also experienced in the Asia Pacific region and the Middle East, whilst drilling operations in North Africa were largely unchanged versus the previous year. The only area that showed a downturn was Europe, confirming the trend of recent years.

37 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

New contracts The most significant contracts awarded to the Group in 2004 include: - on behalf of Agip KCO, drilling activities due to last approximately five years in the D Block of the Kashagan field in Kazakhstan, to be carried out by two rigs owned by the Client; - on behalf of Saudi Aramco, the three-year charter of two rigs in Saudi Arabia - on behalf of Eni Dacion B.V., the twenty eight-month charter of the G200 installation in Venezuela; - on behalf of PDVSA, the charter of two rigs, of sixteen and twelve months respectively, in Venezuela; - on behalf of Petrobras Peru, the three-year charter of four rigs in Peru; - on behalf of Occidental Peru, the one-year lease of a rig in Peru; - on behalf of Gulf Keystone, the one-year charter of a rig in Algeria; - on behalf of First Calgary Petroleum, the one-year charter of a rig in Algeria. - on behalf of Pluspetrol, the one-year charter of nine rigs in Peru.

Capital expenditure Capital expenditure in the Onshore Drilling sector related to upgrading works and maintenance activities on rigs and installations, necessary to ensure continuous operational efficiency for newly acquired projects.

Work performed Activities in 2004 comprised the drilling of 150 wells, totalling approximately 455,413 metres drilled. In Italy onshore drilling operations were performed on behalf of Eni E & P utilising three rigs, two of which were used for drilling deep wells and one for drilling medium/deep wells. In particular: - one high-depth drilling rig completed drilling operations of a well in the Po Valley and was subsequently transferred to another well in the same area; - one high-depth drilling rig is operating in Val d’Agri; - one medium/high-depth drilling rig completed operations in the Pescara district and has already started drilling activities in Emilia Romagna. Eight rigs have been operating in Saudi Arabia as part of a three-year contract with an option of an additional year on behalf of Saudi Aramco. The contract relating to two of these rigs was extended for a further three years from February and April 2005 respectively. In Algeria, a medium-depth drilling rig has completed operations as part of a two-year contract on behalf of BHP and performed the drilling of two wells on behalf of Repsol, before beginning operations on behalf of Cepsa; another medium-depth rig continued performing works on behalf of Groupement Sonatrach-Agip. A medium/high-depth drilling rig was transferred from Nigeria and carried out operations on behalf of Burlington Resources and, towards the end of the year, started works on behalf of Repsol as part of a one-year contract. In Egypt, a medium-depth drilling rig carried out operations on behalf of Petrobel as part of a contract that reached completion at the end of 2004. Furthermore, an innovative installation started drilling operations on behalf of Agiba, as part of an 38 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

eighteen-month contract. In Nigeria, a medium/high-depth rig successfully completed operations on behalf of NAOC and was transferred to Algeria, where it is being equipped to carry out operations due to start in 2005 on behalf of Gulf Keyston. In South America, the following activities were carried out: - a high-depth drilling rig drilled three wells on behalf of Pluspetrol in the area of Teniente Lopez (Peru); - a high-depth drilling rig performed drilling of an exploration well on behalf of Occidental in the Situche area (Peru); - a drilling rig drilled an exploration well on behalf of Olympic in the area of Piura (Peru); - a rig performed drilling operations on eighteen wells on behalf of Petrobras Peru in the Talara area (Peru); - two rigs performed drilling operations on thirteen and three wells respectively on behalf of PDVSA in the Bare area (Venezuela); - a newly developed hydraulic plant performed the drilling of twenty six wells on behalf of Eni Dación B.V. in the area of Dación (Venezuela). With regard to onshore workover and pulling operations, the following activities were performed: - 60 pulling and workover operations were carried out in the Trompetero area (Peru) on behalf of Pluspetrol; - a total of 67 pulling and workover operations were carried out in the area of Teniente Lopez (Peru) on behalf of Pluspetrol; - 734 pulling and workover operations were carried out in the Talara area (Peru) on behalf of Petrobras Peru; - 42 workover operations were carried out in the area of Dación (Venezuela) on behalf of Eni Dación B.V.; - 23 pulling operations were carried out in the Oritupano area (Venezuela) on behalf of Petrobras Venezuela; - 18 pulling operations were carried out in the Bare area (Venezuela) on behalf of PDVSA. In Kazakhstan, workover operations continued on behalf of Karachaganak Petroleum Operating (K.P.O.) in the province of Uralsk. In 2004, two rigs were utilised: one chartered from the local company Kazburgas and one owned by the US company Parker. A medium-depth rig owned by Saipem S.p.A. completed drilling operations on behalf of Maersk Oil and was transferred to a new well for operations on behalf of Emir Oil. Another medium-depth rig was transferred from Russia to start drilling operations on behalf of KKM Operating Company.

Utilisation of equipment Onshore drilling activities amounted to an average rig utilisation of 78% (81% in the same period 2003). The geographical breakdown is as follows: 11 rigs operated in Peru, 8 in Saudi Arabia, 6 in Venezuela, 3 in Italy, 3 in Algeria, 2 in Egypt, 2 in Kazakhstan and 1 in Nigeria. Additionally, five third-party rigs have been operating in Peru and one third-party rig operated in joint venture with SaiPar in Kazakhstan. Finally, 1 rig has been operated jointly with third parties in Kazakhstan.

39 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

liquefied natural gas (L.N.G.)

General overview The Saipem Group has developed a strong presence in this sector, following the acquisition of Saipem s.a., which operates in this sector through its controlled companies: Technigaz, world leader in EPC projects, Guangdon Contractor, Hazira Cryogenic Engineering and Construction Management and Hazira Marine Engineering and Construction Management; and through its associated companies GTT (Gaz Transport et Technigaz), leader, with Moss Maritime, in the LNG transport segment thanks to innovative and highly advanced technology, Societé pour la realisation du Port de Tanger Méditerranée and Servicios De Construcciones Caucedo. Operational activities are focused mainly in the Mediterranean area in addition to two particularly challenging and demanding projects currently underway in India and China.

Market overview In 2004, the LNG sector has undergone rapid growth, whose drivers have been both the increased production of natural gas at global level, which, in turn, generated the requirement for its transport and distribution from remote areas to market, and strong reduction in costs affecting all steps of the production process made possible by technological innovation. During the year, the supply was pressurised by the sustained growth in demand and problems to installations which have resulted in limited capacity. In the Atlantic, demand grew mostly in Spain and the United States. Specifically in the US, analysts expect rapid growth in the LNG quota over all other energy sources, following a 2003 ruling by the Federal Energ y Regulatory Commission (FERC), which, after approximately 20 years, is to grant authorisation for the construction of new regassification terminals. In the Pacific, a reduction in Japanese imports was offset by the increased demand from Korea and Taiwan. Strong demand has positively affected investments not only in new projects but also existing LNG plants. Projects for the expansion of capacity are being carried out in the Middle East, Asia Pacific, North and West Africa. With regard to gas transport capacity, orders in terms of assets have been particularly high in 2004, with even better prospects expected in the short to medium term.

New contracts The most significant contracts awarded to the Group during the year were: - on behalf of Gaz de France, the EPC-type “Fos Cavaou” project in France comprising engineering, procurement and construction of all facilities for a regassification terminal, including three storage tanks and maritime works. The contract was awarded to the joint venture comprising the French engineering company 40 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

Sofregaz; - on behalf of Fluxys, the EPC-type project Zeebrugge LNG Terminal in Belgium, comprising engineering, procurement and construction of facilities for the extension of a regassification terminal, including the storage tank and regassification structures. The contract was awarded in consortium with the Belgian construction companies CFE and Fontec.

Capital expenditure Investments in 2004 pertain to studies and patents aimed at maintaining a competitive advantage as well as identifying new technological solutions for the execution of projects. Moreover, preparatory activities are underway on plant and equipment to enable them to carry out projects awarded during the year.

Work performed In Spain, activities on the Bilbao project have been successfully completed, on behalf of BBG (Bahia de Bizkaia Gas). The project comprised the construction and installation of two tanks for LNG storage. Also in Spain, activities on the following projects are ongoing: - the Huelva project on behalf of Enagas, for the construction and installation of two LNG storage tanks. The first tank was completed and started operations during 2004; - the Cartagena project on behalf of Enagas comprising the construction and installation of an LNG storage tank. In India, the Hazira project on behalf of Shell Global Solutions for the engineering and construction of an LNG import terminal is reaching completion. In the Dominican Republic, construction activities on a container terminal have been completed on behalf of Caucedo Investments Inc., as part of the Caucedo project. In Egypt, on behalf of KJT (Kellog, JGC, Tecnicas Reunidas), activities on the Damietta project have been successfully completed. The project entailed the construction and installation of two cryogenic tanks for the storage of liquefied gas. In Morocco, on behalf of ASTM (Agence Spéciale Tanger Méditerranée), activities are ongoing on the Tanger Port project, involving excavation and redevelopment works in the port of Tangiers. In China, on behalf of the joint venture CNOOC/BP and other Chinese partners, engineering and procurement activities have been completed and the construction of a re-gassification terminal has started as part of the Guangdong project. In France, on behalf of Gaz de France, the EPC-type Fos Cavaou project is ongoing; it comprises engineering, procurement and construction of all facilities for a regassification terminal, including three storage tanks and maritime works. In Belgium, activities have started on the EPC-type project Zeebrugge, comprising engineering, procurement and construction of facilities for the extension of a regassification terminal, including the storage tank and regassification structures.

41 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

maintenance modification and operation (M.M.O.)

General overview The Saipem Group has only recently started operating in this sector, which completes the range of services offered to oil companies. In this sector, Saipem s.a. currently provides services mainly in Western Europe and Russia, in petrochemical plants and refineries, and in West Africa in upstream oil infrastructure. Operations are carried out through the companies Camom and Petromar. Also operating in this sector is Energy Maintenance Services S.p.A.; a company jointly owned and managed with Eni E&P, which focuses on maintenance activities for all industrial plants of Eni E&P in Italy.

Market overview In 2004, this sector has shown moderate growth, especially in the upstream segment. The most promising areas in this sector are West and North Africa as well as the Caspian Sea. Within the downstream market, the leading oil companies are bearing out the trend to increasingly resort to outsourcing, which tends to result in increased activities especially in industrialised countries.

New contracts The most important contracts awarded to the Group in 2004 include: - on behalf of TotalFinaElf, the extension of contracts for operations in France; - on behalf of Shell, the extension of contracts for operations in Nigeria; - on behalf of CPC (Caspian Pipeline Consortium), two five-year contracts for general maintenance activities in Russia and Kazakhstan; - on behalf of Eni E&P, maintenance of upstream installations in Italy.

Capital expenditure Capital expenditure relates to the purchase of machinery and equipment required to carry out operational activities.

Work performed In 2004, activities have progressed in Europe, in particular in Italy in the oil & gas upstream sector on behalf of Eni E&P and in France on behalf of TotalFinaElf. In West Africa, major maintenance interventions have been carried out on behalf of TotalFinaElf Angola. 42 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

In Russia and Kazakhstan, activities on behalf of Caspian Pipeline Consortium are continuing and maintenance activities have started on the Sakhalin project on behalf of SEIC.

43 SAIPEM FINANCIAL REPORT 2004 OPERATING REVIEW

financial and economic results

Results of operations (million €)

Saipem Group - Reclassified income statement Operating revenues Other revenues and income Purchases, services and other costs Payroll and related costs Contribution from operations Amortisation, depreciation and write-downs Depreciation of purchase cost allocated to Saipem s.a. equipment

2002 (*)

2003

2004

3,149

4,231

4,306

16

11

10

(1,987)

(2,977)

(3,046)

(621)

(704)

(740)

557

561

530

(234)

(216)

(197)

(1)

(1)

(1)

Saipem s.a. Goodwill amortisation

(20)

(41)

(42)

Operating income

302

303

290

Financial expenses, net

(48)

(53)

(42)

5

16

19

259

266

267

Income from investments Income before extraordinary items & income taxes Extraordinary expenses, net

(3)

(3)

-

Income before income taxes

256

263

267

Income taxes

(62)

(67)

(67)

Net income before minority interest

194

196

200

Minority interest Net income

(3) 191

196

(3) 197

(*) Includes Saipem s.a. (formerly Bouygues Offshore) figures from the third quarter

The comparison with the results of 2003 must recognise that approximately 70% of Saipem’s revenues are denominated in US dollars. The appreciation of the Euro against the US currency has therefore caused a reduction in euro-equivalent revenues for 2004 of approximately 450 million euros. The negative impact on the operating income, estimated at approximately 80 million euros, was largely offset by increased volumes, cost efficiencies and price improvements. In nominal terms, operating revenues for 2004 recorded a 1.8% increase versus 2003, due to an increase (+6%) in the Offshore Construction sector, particularly in the Mediterranean and West Africa, whose effects have been partially diminished by reduced activities in the Onshore Construction sector (-17.9%), following the completion of major projects in Kazakhstan and Saudi Arabia. Contribution from operations amounted to 530 million euros, a decrease of 5.5% versus 2003. The 1% reduction in profit levels (13.3% in 2003 versus 12.3% in 2004) is due to the aforementioned appreciation of the euro over the US Dollar. Depreciation and amortisation of tangible and intangible assets amounted to 240 million euros, a decrease of 18 million euros versus the previous year. 44 SAIPEM FINANCIAL REPORT 2004 FINANCIAL AND ECONOMIC RESULTS

This is due to the fact that, in 2003, important projects reached completion that had required project-specific investment on equipment. Consequently, operating income stood at 290 million euros, a decrease of 13 million euros versus the previous year. Net financial expenses decreased by 11 million euros versus 2003, due mainly to reduced medium term debt versus the previous year. Income from investments amounted to 19 million euros, an increase of 3 million over the previous year, is mainly attributed to positive results by companies consolidated using the net equity method. Income before extraordinary items and income taxes amounted to 267 million euros, in line with the previous year. Income taxes amounted to 67 million euros, unchanged versus 2003, showing a slight reduction in the tax rate (25% in 2004, 25.4% in 2003). Net income for the year reached 197 million euros, an increase of 1 million euros over the record result of 2003. The net income per share equates to 0.45 euros (0.44 euros the previous year). (million €)

Operating income and costs by destination Operating revenues Production costs

2002 (*)

2003

2004

3,149

4,231

4,306

(2,637)

(3,658)

(3,747)

Idle/downtime costs

(48)

(78)

(78)

Cost of sales

(56)

(66)

(66)

(6)

(9)

(9)

2

(2)

Research and development costs Other operating income (expenses), net Contribution from operations General and administrative expenses Operating income

-

404

418

406

(102)

(115)

(116)

302

303

290

(*) Includes Saipem s.a. (formerly Bouygues Offshore) figures from the third quarter

In 2004, the Saipem Group achieved operating revenues, as previously stated, of 4,306 million euros, an increase of 75 million euros versus the previous year. Production costs, which include direct costs of sales and depreciation of assets and equipment, amounted to 3,747 million euros (3,658 million euros in 2003), an increase of 2.4%, in line with the increase in operations. Idle/downtime costs, amounting to 78 million euros, are in line with the previous year’s. Cost of sales and research and development costs, amounting to 66 and 9 million euros respectively, are unchanged versus the previous year. Other operating income (expenses) show a positive variation of 2 million euros. Contribution from operations decreased by 2.9%, reaching 406 million euros. General and administrative expenses amounted to 116 million euros, an increase of 1 million euros versus 2003, which is attributed to the increase in the size of the Group.

45 SAIPEM FINANCIAL REPORT 2004 FINANCIAL AND ECONOMIC RESULTS

Analysis by business sector:

Offshore Construction (million €)

Operating revenues Cost of sales, net of cost of materials

2002 (*)

2003

2004

1,686

2,547

2,700

(1,066)

(1,808)

(1,874)

Cost of materials

(283)

(398)

(493)

Depreciation and amortisation

(105)

(93)

(86)

Contribution from operations

232

248

247

Depreciation of purchase cost allocated to Saipem s.a. equipment

(1)

(1)

(1)

Saipem s.a. goodwill amortisation

(10)

(21)

(20)

Contribution from operations, net

221

226

226

(*) Includes Saipem s.a. (formerly Bouygues Offshore) figures from the third quarter

Operating revenues for 2004 amounted to 2,700 million euros, a 6.0% increase versus 2003, mainly due to full-scale operations of EPIC-type projects in West and North Africa. Cost of sales, amounting to 1,874 million euros, increased by 3.7%. This variance from the corresponding shift in revenues, is attributed to the different allocation of costs within EPIC-type projects, and, to a lesser degree, to decreased utilisation of the fleet and the selling expenses. Cost of materials rose by 23.9%, in line with greater volumes and stages of operations currently under execution. Depreciation and amortisation fell by 8 million euros versus 2003, due to the reduction in depreciation of project-specific equipment. Contribution from operations for 2004 amounted to 247 million euros, equal to 9.1% of revenues, versus 248 million euros, equal to 9.7% of revenues in 2003. This slight decrease in margin is attributable mainly to the US Dollar depreciation almost entirely offset by greater volumes generated during the year. Contribution from operations, net of goodwill amortisation, stood at 226 million euros, equal to 8.4% of revenues.

Offshore Drilling (million €)

2002

2003

345

298

289

Cost of sales

(220)

(204)

(181)

Depreciation and amortisation

(42)

(37)

(42)

83

57

66

Operating revenues

Contribution from operations

2004

Operating revenues for 2004 showed a 3% downturn versus 2003, attributable to the US dollar devaluation and the temporary suspension of operations by the semisubmersible platform Scarabeo 4, the jack-ups Perro Negro 3 and Perro Negro 5, which underwent project specific upgrades and structural repairs. This inactivity was only partially compensated for by the full scale operations of the semi-submersible platforms Scarabeo 5, Scarabeo 6 and Scarabeo 7. The decrease in cost of sales of 23 million euros, equal to -11.3% versus 2003, is attributable to the fall in activities. This variance from the corresponding shift in revenues, is attributed to the recovery of efficiency made possible by the improvements carried out on the assets. 46 SAIPEM FINANCIAL REPORT 2004 FINANCIAL AND ECONOMIC RESULTS

The 5 million euro increase in depreciation and amortisation is due to the full-scale operations of vessels, which; in 2003, had been inactive during periods of investment. Contribution from operations in 2004 increased by 9 million euros versus 2003, with a margin on revenue rising from 19.1% to 22.8%. The increase in profitability is attributed to improved rates versus 2003 and the recovery of operational efficiency by several assets.

Leased FPSO (million €)

Operating revenues

2002

2003

2004

33

39

47

Cost of sales

(10)

(18)

(26)

Depreciation and amortisation

(15)

(12)

(10)

Contribution from operations

8

9

11

In 2004, operating revenues increased by 20.5% versus 2003, as a result of operations relating to the project for the recovery of crude oil from the wrecked tanker “Prestige”. Contribution from operations amounted to 11 million euros, equal to 23.4% of revenues, versus 9 million euros, equal to 23.1% of revenues for 2003.

Onshore Construction (million €)

Operating revenues

2002 (*)

2003

2004

651

742

609

Cost of sales, net of cost of materials

(367)

(449)

(387)

Cost of materials

(196)

(178)

(142)

Depreciation and amortisation

(30)

(37)

(22)

Contribution from operations

58

78

58

Saipem s.a. goodwill amortisation

(4)

(8)

(9)

Contribution from operations, net

54

70

49

(*) Includes Saipem s.a. (formerly Bouygues Offshore) figures from the third quarter

Revenues for 2004 were 133 million euros lower than those attained in 2003 (-17.9%) following the almost total completion of large projects in Kazakhstan and Saudi Arabia, which were only partially compensated for by the full-scale operations of projects in North Africa and the Sakhalin II project in Russia. The fall in volumes resulted in cost of sales decreasing by 13.8%, and cost of materials decreasing by 20.2%. Moreover, depreciation and amortisation fell by 14 million euros (-31.1%) due to the decreased amortisation of equipment associated to projects completed in 2003. In 2004, contribution from operations amounted to 58 million euros, equal to 9.5% of revenues, versus 78 million euros, equal to 10.5% of revenues for 2003. The higher level of margin attained in 2003 was due to contingencies released in the final stages of projects. Contribution from operations, net of goodwill amortisation, stood at 49 million euros, with margin at 8% of revenues.

47 SAIPEM FINANCIAL REPORT 2004 FINANCIAL AND ECONOMIC RESULTS

Onshore Drilling (million €)

Operating revenues Cost of sales

2002

2003

2004

220

192

158

(170)

(149)

(120)

Depreciation and amortisation

(26)

(20)

(18)

Contribution from operations

24

23

20

Operating revenues for 2004 show a 17.7% reduction versus those for 2003, largely due to the reduced levels of activity in West and North Africa as well as the appreciation of the euro against the US Dollar. In 2004, contribution from operations fell by 3 million euros versus the previous year, whilst the percentage on revenues increased from 12% to 12.7%. This increase in margin is attributed to improved efficiency on the rigs operating in Latin America and Saudi Arabia.

Liquefied Natural Gas (L.N.G.) (million €)

2002 (*)

2003

2004

Operating revenues

110

205

215

Cost of sales

(86)

(163)

(178)

Depreciation and amortisation

(9)

(10)

(9)

Contribution from operations

15

32

28

Saipem s.a. goodwill amortisation

(4)

(8)

(9)

Contribution from operations, net

11

24

19

(*) Includes Saipem s.a. (formerly Bouygues Offshore) figures from the third quarter

Operations carried out mainly in India, China and Spain enabled the company to achieve revenues of 215 million euros in 2004, a 4.9% increase versus the previous year. In 2004, contribution from operations, net of goodwill amortisation, amounted to 19 million euros, with margin equal to 8.8% of revenues, versus 24 million euros, equal to 11.7% of revenues, in 2003. This decrease in margin can be mainly attributed to recently acquired projects being in their initial stages.

Maintenance Modification and Operation (M.M.O.) (million €)

2002 (*)

2003

Operating revenues

104

208

288

Cost of sales

(98)

(192)

(264)

(1)

(3)

(5) 19

Depreciation and amortisation Contribution from operations

5

13

Saipem s.a. goodwill amortisation

(2)

(4)

(4)

Contribution from operations, net

3

9

15

(*) Includes Saipem s.a. (formerly Bouygues Offshore) figures from the third quarter

48 SAIPEM FINANCIAL REPORT 2004 FINANCIAL AND ECONOMIC RESULTS

2004

Operational activities, carried out mainly in France, Italy, West Africa and Russia, achieved revenues for the year of 288 million euros, an 80 million euro increase versus 2003, due mainly to activities carried out in Italy from the second half of 2003. In 2004, contribution from operations, net of goodwill amortisation, amounted to 15 million euros, with margin equal to 5.2% of revenues

49 SAIPEM FINANCIAL REPORT 2004 FINANCIAL AND ECONOMIC RESULTS

Consolidated balance sheet and financial position (million €)

Saipem Group - Reclassified consolidated balance sheet 31st December 2003

31st December 2004

1,694

1,688

Net tangible fixed assets Net intangible fixed assets Tangible and intangible assets, net - Offshore Construction - Offshore Drilling - Leased FPSO - Onshore Construction - Onshore Drilling

851

805

2,545

2,493

1,127

1,115

656

661

89

74

244

233

95

87

193

181

- M.M.O.

85

78

- Other

56

64

- L.N.G.

Financial investments

26

17

Non-current assets

2,571

2,510

Net current assets

(196)

(113)

(31)

(34)

Capital employed

2,344

2,363

Shareholders’ equity

1,368

1,488

Employees’ severance pay

Minority interest in net equity Net debt Cover

23

9

953

866

2,344

2,363

Non-current assets at 31st December 2004 stood at 2,510 million euros, a decrease of 61 million euros versus the end of 2003. This reduction is attributed to the combination of investments on plant and equipment of 187 million euros (262 million in 2003), acquisition of company holdings of 12 million euros, depreciation and amortisation of 240 million euros, disposals of 7 million euros and the translation effect on financial statements denominated in foreign currencies of 13 million euros. Net current assets at the end of 2004 increased by 83 million euros, going from minus 196 million at the end of 2003 to minus 113 million euros at 31st December 2004; this increase was due to the particularly positive situation resulting from advance payments received on contracts awarded to the Saipem Group at the end of 2003. As a result of the above, capital employed increased by 19 million euros, reaching 2,363 million euros at 31st December 2004, versus 2,344 million at the end of 2003. Shareholders’ equity, inclusive of minority interest, rose by 106 million euros, to 1,497 million euros at 31st December 2004, versus 1,391 million euros at the end of 2003. This increase is due to higher consolidated income for the period net of the translation effect of financial statements in currencies other than euros, and of dividends distributed by the parent company (65 million euros). The increase in shareholders’ equity greater than the increase in net capital employed, determined a decrease in net debt, which, at 31st December 2004, stood at 866 million euros, versus 953 million at 31st December 2003; a reduction of 87 million euros.

50 SAIPEM FINANCIAL REPORT 2004 FINANCIAL AND ECONOMIC RESULTS

(million €)

Breakdown of net financial debt 31.12.2003

31.12.2004

Payables to banks due after one year

302

282

Payables to other financial institutions due after one year

276

205

Net medium/long term financial debt Accounts c/o bank, post and Eni Group finance companies

578

487

(546)

(590)

Cash in hand and cash equivalents

(3)

(5)

Other receivables due within one year

(9)

(5)

Payables to banks due within one year

109

Payables to other financial institutions due within one year

824

101 878

Net short term financial debt

375

379

Net financial debt

953

866

(million €)

Saipem Group - Reclassified statement of cash flow and variation in net debt

Group net income Third party income

2003

2004

196

197



3

245

228

Adjustments to reconcile cash generated from operating income before changes in working capital: Depreciation, amortisation and other non monetary items Net gains on sales of assets Dividends, interests, extraordinary income/expenses and income taxes

(6)

(3)

87

93

Cash generated from operating income before variation in working capital

522

518

Variation in working capital relating to operations

163

(136)

Dividends, interests, extraordinary income/expenses and income taxes received (paid)

(81)

(22)

Net cash flow from operations Investments in tangible and intangible fixed assets Investments in acquisitions of consolidated companies Disposals Other investments and disposals Free cash flow Net investments related to financing activities

604

360

(262)

(187)

(10)

(12)

12

7

5

4

349

172

3

4

52

(33)

Buy-back of treasury shares

(13)

(10)

Cash flow from share capital and reserves

(63)

(65)

Variations in consolidation area and exchange rate differentials on cash and equivalents

(29)

(22)

Net cash flow

299

46

Free cash Flow

349

172

Variation in financial debt

Variations in consolidation area

(4)



Buy-back of treasury shares

(13)

(10)

Cash flow from share capital and reserves

(63)

(65)

26

(10)

295

87

Exchange rate differentials and other variation concerning net financial debt Variation in net debt

Net cash flow from operations, amounting to 360 million euros, entirely financed net investments in tangible and intangible fixed assets and acquisition of company interests, generating a free cash flow of 172 million euros. Cash flow from share capital and reserves showed a negative balance of 65 million euros, as a result of the payment of dividends; the buy-back of treasury shares for allocation to the Stock Grant and Stock Option Schemes generated a negative cash flow of 10 million euros. The effect on net financial debt, deriving from the translation 51 SAIPEM FINANCIAL REPORT 2004 FINANCIAL AND ECONOMIC RESULTS

of financial statements in foreign currencies, amounted to 4 million euros, whilst the reimbursement of third party interest amounted to 14 million euros. Therefore, the effect of the aforementioned variations resulted in a net financial debt reduction of 87 million euros. In particular: Cash generated from operating income before variation in working capital (+518 million euros) derives from: - net income of 200 million euros; - depreciation and write-downs of tangible fixed assets (+240 million euros), a variation in employee termination benefits (+3 million euros) and in provision for contingencies (+ 2 million euros); conversely, revaluation of holdings valued with the net equity method had a negative effect (-17 million euros); - net gains on sales of assets (-3 million euros); - net financial expenses (+26 million euros); income taxes (+67 million euros). The increase in working capital related to operations (136 million euros) has been analysed in the notes to the consolidated balance sheet and financial position. Dividends, interest, extraordinary income/expenses and income tax paid during the year (22 million euros) comprise net interests and financial expenses (-12 million euros), payment of tax (-31 million euros) and receipt of dividends (+21 million euros). Investments in tangible and intangible assets amounted to 187 million euros, whilst acquisitions of consolidated companies amounted to 12 million euros and comprised the buy-back of the remaining shares of Saipem s.a. following the exercise of preexisting Stock Options allocations. Details of investments by sectors are as follows: Offshore Construction (98 million euros), Offshore Drilling (48 million euros), Onshore Construction 22 million euros), Onshore Drilling (11 million euros), L.N.G. (6 million euros) and M.M.O. (2 million euros). Capital expenditure on infrastructure, of both Head Office and Group premises, amounted to 12 million euros. Additional information concerning capital expenditure can be found in the ‘Operating Review’ section at the beginning of this report. Cash flow generated by disposals (11 million euros) involved the sale of the FPSO Jamestown and assets from the Offshore and Onshore Construction sectors that were deemed surplus to operational requirements. Furthermore, during the second half of 2004, the entire holding in Sieco S.p.A. was sold to Eni S.p.A.

52 SAIPEM FINANCIAL REPORT 2004 FINANCIAL AND ECONOMIC RESULTS

research and development

Activities during the year continued to focus on the development of distinctive solutions in the most technologically-oriented market sectors, with particular emphasis on ‘frontier’ projects, where feasibility is always a critical factor. Meanwhile, Saipem is still pursuing projects aimed at optimising production processes from its two main bases: Paris, where research activities are focused towards projects with high engineering content aimed at meeting external clients’ requirements; and Milan, which fulfils its corporate role in addition to activities towards the internal client. Projects carried out in the period involved a total financial outlay amounting to 11 million euros, of which 9 million were posted to the income statement, while 2 million, used for prototype development, were capitalised to increase the value of the relevant tangible fixed assets. Salient events for the year involved the following activities:

General activities The Technology Plan for the years 2005-2008 was issued. Activities relating to the Knowledge Management focused on the evaluation of the new semantic search engine (also to be used in Technology Monitoring) and activities on the Know-How recovery project. With regard to the cooperation with the technological development activities pursued by the Paris office, a programme was defined, which aims at sharing the resources in order to further improve cultural integration. The support of Eurogia activities is progressing (carried out mainly by the Paris office); Eurogia emanates from Eurogif as part of the Eureka programme and aims to develop highly technological projects in the oil & gas sector of interest to the European Union. The programme for a master’s degree in electro-acoustics was defined together with Eni Corporate University, the Italian Merchant Navy and the University of Pisa as well as suppliers and users of subsea acoustic systems. During the year, fourteen new patent applications were lodged (6 by the Milan office and 8 by the Paris office).

Technology involving assets, operations and integrated projects During 2004, the prototype phase was launched on the development of a conceptually innovative welding system based on renewed hardware architecture (in both mechanical and electronic terms). Following preliminary tests, the engineering stage was launched on the optimisation of pipeline trenching and burying techniques as well as tie-in techniques in ultra53 SAIPEM FINANCIAL REPORT 2004 RESEARCH AND DEVELOPMENT

shallow waters (one of the technological targets of the Sakhalin project). A new alternative solution was developed for the Sakhalin II project that would allow for pipelaying and trenching in winter; this, in order to protect the grey whales that inhabit the area. The first phase of the project focused on the review of processes based on the TRIZ method (Teoriya Resheniya Izobreatatelskikh Zadatch) for S-laying was successfully completed; it attained its goal of improving current production output and also succeeded in developing technological solutions for main sub-processes (welding, non-destructive tests and joint coating), which will be analysed in depth with a view to implementation. With regard to drilling, technical studies and support activities for operations and commercial tenders are continuing; in particular the “Transit with Hanging Riser” study was completed, enabling the understanding of the riser’s static and dynamic behaviour thanks to the implementation of a finite element module to be utilised during future analysis of non-standard operations and/or particularly challenging riser utilisation methods. Also, research is progressing on subsea support activities in challenging environments (deep waters and/or poor visibility) utilising virtual reality and special sonar technology; moreover, an advisory system for heavy lifting operations is under evaluation. With regard to Onshore Construction, Saipem is participating in the strategic project Eni TAP (TAP= high pressure transport) with contributions from the Milan and Paris offices.

Technologies for oil field development and LNG transport The company continued to focus on advancing ultra-deep water technology aimed at improving deep water field development so that Saipem can prepare to enter the ultra deep water market. Major projects include production flowlines and associated thermal insulation technology in addition to new riser systems. Particular emphasis is placed on linking small oil fields to existing production facilities (development of satellite fields). Activities are progressing on the development of offshore LNG systems, both in terms of production and terminal facilities. Two solutions are currently under consideration: one relates to shallow water installations and is based on concrete structures; the other targets deep waters and is based on an FSRU or LNG FPSO. Moreover, the company pursued the qualification of technological solution related to the cryogenic field. With regard to LNG onshore storage, a cryogenic cave was successfully constructed and tested in Korea based on Technigaz membranes, demonstrating the technical feasibility of this new concept. Saipem is also active in the sector of renewable energy sources, with developments aimed at achieving cost reduction for offshore wind farm installations, focusing specifically on their support structures and installation methods. Finally, studies are also ongoing to determine the feasibility of harnessing wave energy and sea currents.

54 SAIPEM FINANCIAL REPORT 2004 RESEARCH AND DEVELOPMENT

quality assurance, health & safety and the environment

When carrying out its business operation, Saipem is committed to safeguarding the health and safety of the people and the environment; it also strives to promote the sustainable development of the local communities. The process of sustainable development requires the integration of quality, health, safety, the environment and socially responsibility for the company business operations. Saipem has undertaken this process through management systems that are in line with the international standards and consistent with clients’ requirements. Saipem felt the need to extend these themes to the whole Saipem’s world and, in 2004, issued the document entitled “Different Light on Saipem’s World” to illustrate Saipem’s approach to business management in accordance with the principles of Quality, Health & Safety, the Environment and Sustainable Development.

Quality: client’s satisfaction and continuous improvement During 2004, activities focused on client satisfaction monitoring for major Clients progressed; information were gathered and evaluated in order to enable the company to best channel internal investments aimed at continuously improving the Group’s management and operational systems. Furthermore, support activities were extended to all Group companies to obtain a certificate of compliance to ISO 9001:2000; main interventions were carried out in 2004 at Saibos s.a.s., Saipem Contracting (Nigeria) Ltd, Saudi Arabian Saipem Ltd, Global PetroProjects Services A.G., Energy Maintenance Services S.p.A., Sonsub S.p.A., Petrex S.A., Petromar Lda and ER SAI Caspian Contractor Llc. This activity will reach completion during 2005. In 2004, the following was achieved: - the functional approach was superseded in favour of a business processes based approach; - the extension of QA training to all levels of activity and improved training aimed at project dedicated personnel. The QHSE centre in Romania was strengthened and overall training hours increased; - the consolidation of instruments and methods to control and measure QA processes, that are able to identify process objectives by means of numerical targets and can therefore be easily measured, so as to build and then analyse reference trends; - the introduction of adequate ‘client satisfaction’ and ‘client complaints’ monitoring systems to enable the company to best channel investments and focus on development programmes; - the first introduction of supplier and subcontractor monitoring systems in order to improve data gathering and thereby the vetting system for supplies and services; - the integration of activities aimed at maintaining and improving QA management systems at all Saipem Group operating companies, through the standardisation of reporting to the parent company and the data consolidation systems; this enabled the publication, in 2004, of the first Saipem Group Quality Assurance Report; 55 SAIPEM FINANCIAL REPORT 2004 QUALITY ASSURANCE, HEALTH & SAFETY AND THE ENVIRONMENT

- the conclusion of pilot projects relating to the QA cost management system; these have enabled the financial evaluation of available data and information and thereby measure the overall performance of the QA management system; - an increase in the local content of QA personnel, in particular in Nigeria, Azerbaijan, Croatia, Indonesia and Peru. This achievement is reflected in local personnel holding higher positions entailing more responsibility for Project Quality management and Quality Control activities. Similar developments are planned for the years 2005 and 2006 in Kazakhstan, Russia and Angola.

Health: internal measures aimed at prevention Beside the medical measures aimed at safeguarding the health of its personnel around the world, Saipem has implemented programmes for the prevention and control of malaria, infectious and sexually transmitted diseases. Information and training for both expatriates and local employees is the key factor in the prevention of these diseases; from the sustainable development standpoint, the increased awareness that these programmes have provided has contributed to promote preventative measures throughout the local communities. In particular, Saipem, at Corporate level, has adopted a policy that is supports initiatives aimed at preventing HIV-AIDS. Furthermore, in 2004, the company has held a Medical Coordinator’s Workshop for the whole Saipem Group in Milan; its objective was to provide training through the comparison and sharing of experience and new approach techniques in remote areas. The final goal of this comparison was the further standardisation of the service, promoting the implementation of the health management process with Quality.

Safety: development in a safe working environment In 2004, a series of particularly significant accidents has caused the company to embark on a serious rethink of its safety measures. Following several particularly serious accidents at the beginning of the year, the trend bucked during the second half of the year and Saipem managed to record an LTI (lost time injury) frequency rate of 1.56, in line with that achieved in 2003. Main initiatives undertaken in 2004 to improve the safety management system include: - holding internal workshops aimed at improving health and safety management on site and onboard offshore vessels; - the review of “Safety cases” relating to a number of offshore drilling vessels; - strengthening the safety reporting system in order to encourage personnel to be proactive; - monitoring of working environments; - the development and implementation of HSE training courses, held by internal trainers as well as at external training centres, aimed at the certification of specific professional roles; - qualification and refresher courses for safety officers operating within the company; - participation to Eni HSE work groups; - implementing safety audit procedures onboard offshore vessels and at operational sites; - maintaining Saipem’s system compliant with the International Safety Management Code; - constant benchmarking of competitors and category associations aimed at continuous improvement and the pursuit of excellence.

56 SAIPEM FINANCIAL REPORT 2004 QUALITY ASSURANCE, HEALTH & SAFETY AND THE ENVIRONMENT

The environment: environmental protection during all types of operations In 2004, Saipem bore out its full commitment to environmental protection, especially on certain projects in frontier areas, for which it carried out specific studies and analysis on the environmental impact of its operations. Particularly noteworthy in terms of environmental protection was the “Prestige” project as it entailed the recovery of crude oil from the wreck of the tanker Prestige, which sank in 2002 off the coast of Galicia, Spain. The project, carried out on behalf of Repsol, saw the complete recovery of the oil contained in the tanker in waters of approximately 4,000 metres. Recovery operations required the implementation of innovative technologies which enabled the extraction of over 12,000 tonnes of crude oil and the preservation of the delicate marine eco-system of the area. This is a great achievement both in technological and environmental terms; it proves once again Saipem’s ability to meet new challenges, integrating its global expertise and vast experience. Furthermore, with reference to specific projects, Saipem showed remarkable commitment towards the environment during its operations on the Sakhalin II projects, and the protected species inhabiting the area. A series of environmental studies and analyses highlighted the need to protect the grey whale species, which is under serious threat of extinction. Measures taken to safeguard these mammals included the presence of observatories onboard vessels to monitor the whales and minimise any cause for disturbance. With regard to the environmental management systems, two main achievements were attained in 2004: compliance to the international standard ISO 14001:1996 for the companies PT Saipem Indonesia and Energy Maintenance Services (EMS). Also in 2004, Saipem played an active part in the Eni oil-spill emergency management system, both in terms of emergency intervention standpoint and inter-company support as well as in terms of information and training, taking part in seminars, conferences, workshops and training courses on this specific subject.

Social responsibility: promoting sustainable development in local communities For a few years now, Saipem has been reviewing its operations and implementing a process aimed at integrating concepts and policies of social responsibility into its daily operational activities. To effectively integrate its business into the local milieu, the company realised that it is necessary to first protect the environment in general and safeguard the working environments; secondly, at a social level, it is paramount to involve local workers, so that they can grow professionally and improve their standard of living. The successful integration also concerns suppliers and local sub-contractors, as they generate growth of ancillary industries and thereby exert a positive impact on the local economy. In 2004, Saipem has strived to promote these goals in particularly critical areas, namely Kazakhstan, Peru, Nigeria and Azerbaijan. The results will be issued in 2005 as local reports; these will represent Saipem’s first attempt to provide direct information on these matters.

57 SAIPEM FINANCIAL REPORT 2004 QUALITY ASSURANCE, HEALTH & SAFETY AND THE ENVIRONMENT

human resources

In 2004, the Human Resources, Organisation and Systems Department focused on harmonising processes and operational practices, in addition to coordinating Corporate policies. 2004 also, saw the conclusion of the programme for the integration with Saipem s.a. which aimed at harmonising and consolidating the Group structure. The international human resources scene, in which Saipem operates, was the focus of HR management and development policies, with emphasis placed strongly on integration and valorisation of local content and international personnel, as they are the main vehicle to gain a competitive advantage in terms of efficiency, flexibility and initiative. Development and remuneration policies implemented in 2004 have targeted firstly the support and promotion of training and career programmes for local personnel, as well as initiatives in low-cost areas. The policy of recruitment, career development and retention for the group’s young talent (both Italian and international) was introduced across the board at most overseas companies and is yielding significant results in terms of motivation and support of local resources, 2004 reinforcing the high level of retention experienced in 2003. The main tool used to achieve this was the Group’s performance appraisal system, which, in 2004, was extended to new areas, namely Nigeria and Croatia. Another tool used is a programme that identifies and measures the potential of resources; this has been applied in Italy and is currently being implemented in Nigeria, France, Croatia and the UK, where it has already improved the identification and evaluation of nonItalian talent. Consistent with Saipem’s Professional Roles System, the Group training and development programmes have been defined for the maritime workforce and the following professional areas: Drilling, QHSE, Asset Management and Maintenance, Procurement and Engineering. For the latter, a specific training programme was devised which obtained international certification. Testimony to the high-level of investment that Saipem has channelled into HR development, training throughout the year has provided managerial and training courses in several languages (English, French, Italian), and in many countries (Nigeria, France, Croatia, the UK) facilitating wider access to Group personnel whilst maintaining consistency of content; particular emphasis was placed on Project Management courses (in Nigeria, UK and France). Saipem’s group-wide international training courses are detailed in a catalogue to be re-issued in 2005. Saipem’s recruitment of graduate resources, carried out in conjunction with Eni Corporate University, saw the more efficient use of internships, even at international level, promoting the exchange and integration of resources belonging to different group companies. The cooperation with Eni Corporate University enabled the forging of stronger links with academic institutions as well as the setting up of master’s degrees for specific professional skills (internal audit, process engineering, and electro-acoustics). In 2004, the first resources who graduated from the aforementioned masters started working for the company: for instance the Medea Master for young international 58 SAIPEM FINANCIAL REPORT 2004 HUMAN RESOURCES

graduates, who were employed at Saipem foreign companies; also, initiatives with international institutes, such as the participation to the IFP (Institut Francais du Pétrole) Forum in Paris. Saipem’s local content initiatives targeted mostly Angola, India and Nigeria: in these countries, the company is defining projects and investments aimed at developing local resources. Furthermore, development is also progressing in Croatia where a motivation analysis has been carried out on resources taken on from 2002 in addition to a professional skill assessment for all local personnel. The project for the review of the mission and activities of Global PetroProjects Services AG was launched; it aims at strengthening the support it provides to other Group companies in terms of strategy, career development and retention programmes for international resources. The annual salary review process, carried out successfully in June and July 2004, was based on a process common to all Group companies, sharing common policies, guidelines and timeframes. The integration process with Saipem s.a. was finalised and, consistent with the policies implemented at Saipem S.p.A., the analysis and evaluation of managerial roles was carried out; culminating in the full completion of the integration process for all management of Saipem s.a. In order to improve the planning processes for all HR management and development activities, Saipem has launched, together with Eni, a performance evaluation system to measure the achievement of strategic objectives and the effectiveness and efficiency of ongoing initiatives. The first report was issued in March 2005. The Saipem Group shows a reduction in number of employees of 1,521 versus 2003; this is due mainly to the release of international personnel following the completion of the Karachaganak project in Kazakhstan. Average Italian personnel increased by 79 resources versus the previous year, following the acquisition of 49 personnel from Stogit, an Eni Group company, into Energy Maintenance Services S.p.A. With regard to the review of the Italian personnel qualitative mix, the following resources were taken on: 44 graduates (9 of which under a vocational contract) and 10 diploma-qualified personnel (1 of which under a vocational contract).

59 SAIPEM FINANCIAL REPORT 2004 HUMAN RESOURCES

Average workforce 2003

Average workforce 2004

Saipem S.p.A. (*)

4,903

3,432

Saipem s.a. (*)

8,101

8,135

Other Group Companies (**)

10,192

10,108

Total

23,196

21,675

Offshore Construction

6,128

6,958

Offshore Drilling

1,081

1,042

43

94

Leased FPSO Onshore Construction

9,680

7,531

Onshore Drilling

2,521

2,165

Liquefied Natural Gas Maintenance Modification and Operation Staff positions

687

697

1,630

1,613

1,426

1,575

23,196

21,675

Italian personnel

2,332

2,443

French personnel

3,862

3,839

Other nationalities

17,002

15,393

Total

23,196

21,675

2,161

2,240

171

203

2,332

2,443

Total

Italian personnel under open-ended contract Italian personnel under fixed-term contract Total

number of engineers

31st December 2003

31st December 2004

3.382

3.508

(*) includes personnel employed at joint venture companies for the proportion of participated quota (**) includes all personnel of consolidated companies; for those companies consolidated using the proportional method, the personnel number included is equal to the proportion of the consolidated quota.

In 2004, sound practices of consolidated industrial relations enabled Saipem to open and successfully complete the following negotiations with national energy, engineering and maritime trade unions: - an agreement was reached to make lay-off pay available for the period NovemberJanuary due to a temporary downturn in the onshore drilling sector; - the management of the two-year agreement with Intermare Sarda for the downsizing programme at the Arbatax yard (Sardinia); measures involved lay-offs with labour mobility, retraining of existing production employees and the definition of the frame agreement for the outsourcing of complementary activities; - implementation of agreements with oil & gas trade unions in Nigeria (Pengassan and Nupeng); - resumption of negotiations within Eni vis-à-vis the frame agreement with the Unions for the 2004-2007 “production bonus” to be allocated based on profitability and productivity indicators for the various business sectors and Group companies; - collective agreement for the integration of personnel employed by Sofresid Nord, Sofresid Aquitaine, Sofresid Ouest and Sofresid Provence into Sofresid Engenierie, providing the same company regulations and harmonising their previous contractual conditions; - collective agreement for the integration of personnel employed by Sofresid s.a. into Saipem s.a., providing the same company regulations and harmonising their previous contractual conditions; - implementation of all procedures required by Italian law for the acquisition by Energy Maintenance Services of the company branch Stogit. Negotiations started with the trade unions to define a frame agreement detailing working hours and business travel allowances. 60 SAIPEM FINANCIAL REPORT 2004 HUMAN RESOURCES

The Executive Committee was reappointed at Saipem s.a. With regard to Eni’s European Companies Committee, the new agreement signed in June provides for the appointment of three members from Saipem s.a. and one from Saipem S.p.A. Activities carried out by the Corporate Organisation department are focused on strengthening the organisational and cultural integration of all Saipem Group companies. The company was committed to consolidating the process of change that started in 2002 with the acquisition of the French company Bouygues Offshore and, particularly, to completing the final phase of the integration programme by setting up the Organisation department at Saipem s.a. The objective was twofold: integrating all operative and legal companies of Saipem s.a. into the Saipem Group and align their respective structures to the corporate organisational model. Furthermore, efforts were made to develop decentralisation of operations at international level, ensuring adequate organisational support to understand and implement the company’s main organisational tools: the document system, the management appraisal system, the standard document system, which identifies the organisational structure, internal authorisation powers and the procedures on which all internal processes are based, and the Professional Role Mapping System. With regard to the latter, a new project was launched to improve and optimise the mapping system of professional roles, in order to bring it up-to-date with the evolution that has characterised the Saipem business and to provide all Group companies with a single tool with which to develop, manage and plan human resources policies. With regard to the Document system, which handles both corporate and group organisational documents, a new IT system has been implemented that is to become the common tool for all main Group companies. The corporate role of the Organisation department was consolidated; it issues standard corporate directives that enable all Group companies to follow and implement procedures in line with Group principles, namely internal/external power allocation, definition of organisational structures and their reporting patterns. In 2004, initiatives for the continuous improvement of the IBIS IT system were launched that culminated in the development and optimisation of several processes and tools. Additionally, permanent monitoring methods were defined which include the periodic review of indicators identified with the relevant organisational referees. The implementation of a group-wide intranet portal progressed in parallel with several communications initiatives, both to support the integration process and at the request of individual company departments, such as the group-wide “Innovation Trophy”. Finally, in conjunction with the “Image” department, the “Saipem World Tour 2004” DVD was produced. It is a portfolio of the main projects successfully executed or currently underway around the world.

61 SAIPEM FINANCIAL REPORT 2004 HUMAN RESOURCES

information technology

In 2004, the roll-out of the SAP system was completed at main group operative companies. The GHRS system was introduced at Saudi Arabian Saipem, the Saipem Sharjah branch and the companies in Nigeria. Saipem s.a. was completed integrated, by rolling out the SAP and GHRS systems at all its main subsidiaries and the CUSTOM (Flexy R4) applications at minor branches and associated companies. IBIS has completed coverage of base areas and is not focusing on the integration of business processes within the global system. The Use of the Material Tracking – MARIAN module for Saipem s.a.’s new projects has been continuously improving; the system has also been introduced at Saipem India Project Services Ltd and Intermare Sarda. The Document Workflow project was launched; this system will standardise all documentation relating to projects and assets. Together with Saipem s.a., an IT support instrument was selected (Documentum) and development activities have already started. With regard to the Data Warehouse project, the Human Resources and Asset Management areas have been completed, while the procurement module was rolledout at group level. Also, the SAP SEM - BCS system was successfully rolled-out, which will carry out the statutory and consolidation operations for the whole Saipem Group With regard to the group infrastructure, activities progressed aimed at rationalising and optimising the whole IT and telecommunications network, new technologies were introduced and integration and synergies implemented both within Saipem and at Eni level. This new infrastructure will be able to support the centralisation of all applications and critical systems in addition to providing new services. The “3I Project – ICT Infrastructure Integration Project” on the Microsoft Windows 2000/XP platform is nearing completion. This has involved the integration of a total of 7000 users and has standardised hardware equipment, software packages, server and email systems for the whole group. The “Saipem Group International Network” project is at an advanced stage of development and should reach completion in the first quarter 2005. Its aim is to create a new integrated network at Group level; that is architecturally compatible, reliable and efficient in terms of services and effective in terms of costs. Particularly worthy of note is the integration of the fleet into the global network, with new services having been introduced on nine further vessels. Also, preparatory activities were launched for the IT consolidation project, at both hardware and logic level, so as to enable the rationalisation and optimisation of service provision. The assessment in terms of data security progressed on main IT services and applications; a study was launched to define proper Disaster Recovery and Business Continuity measures consistent with Saipem’s business requirements.

62 SAIPEM FINANCIAL REPORT 2004 INFORMATION TECHNOLOGY

corporate governance report

Fair Practice Saipem believes that the creation of value for its shareholders, especially in the medium to long term, should be attained through fair practice towards all its stakeholders, comprising, besides the shareholders; employees, suppliers, clients, commercial and financial partners as well as the communities the Group comes into contact with. The Board of Directors deems it important to clearly define the values that Saipem recognises and accepts, to identify the responsibilities the company assumes both internally and externally to ensure that all Group activities are carried out in compliance with the law, in fairness, honesty, integrity, correctness and in good faith, respecting the legitimate interests of shareholders, employees, suppliers, clients, commercial and financial partners as well as the communities of those countries in which Saipem operates. These values are stated in the Code of Practice, which all employees are required to adhere to and whose violations are examined by the Board of Directors, upon notification from the annual Report by the Guarantor of the Code of Practice.

Principles All personnel working for Saipem, without distinction and/or exceptions, are committed to observing and enforcing the following principles, within their own function and responsibilities. The belief of acting in Saipem’s interest cannot in any way justify the adoption of practices contravening these principles. Business ethics Saipem’s activities, anywhere in the world, are carried out in fairness, honesty and in compliance with the law. Stakeholders Saipem is committed to respecting all the stakeholders with whom it interacts in business, as it believes that they are an important asset to the company. Labour protection and equal opportunities Saipem respects the universally recognised core labour standards contained in the

Fundamental Conventions of ILO (International Labour Organisation); it guarantees freedom to form a union and the right of collective bargaining; it repudiates any form of forced or juvenile labour and/or discrimination. In addition, Saipem is an equal opportunity employer and guarantees its employees equal treatment based on merit. Development of professional skills Saipem values and promotes the development of skills and competencies of each employee in addition to team work, so that energy and creativity of the individual can realise its full potential. Diversity Saipem’s business conduct is inspired by the respect it affords to cultures, religions, traditions, ethnic diversity and the communities in which it operates, and strives to preserve their biological, environmental, social, cultural and economic identities.

Human rights Worldwide, Saipem is committed to supporting and respecting the principles contained in the UN Universal Declaration of Human Rights. Cooperation Saipem is committed to promoting the quality of life and the social and economic development of the communities in which the Group operates. Health and Safety Saipem ensures ever-increasing health and safety standards for its employees and the communities in all areas of the world where it operates. Environmental protection Saipem is committed to protecting the environment and ecosystems involved in its business operations and strives to achieve the sustainability goals set by the international conventions Italy endorses.

63 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

Corporate Governance The Board of Directors of Saipem S.p.A., at their meeting of 9th November 2000, resolved to adopt the “Self Regulatory Code of Listed Companies” (hereafter Code) and has updated its Corporate Governance to include the amendments made to the Code in July 2002. In compliance with the guidelines and recent recommendations issued by the Italian Stock Exchange, specifically the “annual Corporate Governance Report Guidelines” of 12th February 2003, information on Saipem’s Corporate Governance system is provided hereafter.

Saipem’s structure Saipem’s structure is based on the traditional model where the Board of Directors is solely responsible for the company’s management, the Board of Statutory Auditors carry out supervisory and control duties and the External Auditors are responsible for auditing the accounts. The Board of Directors has vested the Managing Director and the Chairman with the power to represent the company, pursuant to art. 21 of the company’s articles of association. In compliance with the most widely internationally adopted Governance principles, the Board of Directors has set up internal corporate bodies, with consultative and advisory functions.

The Board of Directors: responsibilities, powers and composition The Board of Directors is the central body within Saipem’s Corporate Governance system. Art. 20 of Articles of Association states that the management of the Company is exclusively the responsibility of the Board of Directors. Art. 2365 of the Italian Civil Code grants the Board the power, normally granted to the Extraordinary Shareholders’ Meeting, to resolve on motions concerning: - merger by incorporation of companies whose shares or stakes are owned entirely by the Company, pursuant to art. 2505 of the Italian Civil Code; - merger by incorporation of companies whose shares or stakes are at least 90% (ninety per cent) owned by the Company, pursuant to art. 2505-bis of the Italian Civil Code; - the proportional de-merger of companies whose shares or stakes are entirely or at least 90% (ninety per cent) owned by the Company, pursuant to art. 2506-ter of the Italian Civil Code; - transfer of the Company’s Headquarters within Italy; - creation, change and closure of secondary offices; - share capital decreases in case of shareholder’s withdrawals; - the issue of corporate bonds and other debentures, barring the issue of bonds convertible into Company’s shares. In addition to the powers granted by art. 2381 of the Italian Civil Code, the Board of Directors is responsible for reviewing and approving the company’s long-term strategic plans; it resolves on the most significant economic and financial company operations, as well as the most relevant Group industrial and financial operations; it defines, based on indications provided by the relevant Committee, guidelines for the internal control system and ascertains the adequacy and management of main business risks; it reviews and approves the guidelines supporting the company and Group structure ensuring they are adequate for the company’s business model; it evaluates the general 64 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

management and performance of the company, paying particular attention to situations of potential conflict of interests; it is promptly informed by the directors with executive powers regarding: activities within their responsibilities carried out during the year; major operations (having previously set down criteria for their identification); atypical and/or unusual operations or operations with related parties. The Board of Directors approves all motions put forward for approval to the Shareholders’ Meetings; vests Board Directors with particular powers; appoints General Managers and grants them powers; approves all operations involving the incorporation of directly owned companies and branches, acquisitions, alienations, winding-up of company holdings, transfer of companies, or branches thereof, the purchase, sale or financial lease of land and buildings in excess of 2,500,000 euros; appoints the members of the Audit Committee and the Compensation Committee; approves Corporate Governance procedures; approves the company’s Stock Grant and Stock Options schemes; approves the remuneration of Directors vested with executive powers; approves the preliminary Financial Statements, the budget, the Quarterly and Six-Monthly Reports, preliminary results; approves and enters into agency agreements; approves all donations. The Board vested the Chairman with all ordinary and extraordinary powers to manage the Company, except for the undelegable powers and those of the Board itself, and granted the Managing Director the powers to manage the company’s commercial and operational activities. The Board of Directors, comprising nine Directors, was appointed by the Shareholders’ Meeting on 15th May 2002 for three years, its mandate expiring at the Shareholders’ Meeting called to approve the Financial Statements at 31st December 2004. The appointment of Directors occurs pursuant to art. 21 of Articles of Association, through voting from a list, so as to allow the appointment of minority interest representatives. Lists are filed at the company’s registered headquarters at least 20 days prior to the Shareholders’ meeting (first summons) and are published in three national newspapers. It is a matter of procedure for the voting lists to enclose a professional résumé for all candidates. Lists can be presented by Shareholders, who, individually or with others, hold voting shares representing at least 2% of the share capital. Directors shall meet the honourability requirements prescribed by regulations, possess the professional expertise and experience to carry out their mandate efficiently and effectively and be able to dedicate sufficient time and resources to their offices. Pursuant to art. 1.3 of the Code, information regarding offices of Directors or Auditors held by members of the Board of listed companies, financial or insurance companies or companies of considerable size is provided below under “Offices held by Board Directors”. The Code recommends that public companies set up a Committee for appointment proposals comprising a majority of non-executive directors, “specifically when the Board of Directors notices that Shareholders are finding it difficult to put forward appointment proposals”. This Committee has not been implemented since, as previously stated, it is customary for lists to enclose a professional résumé for all candidates. The Board comprises the Chairman, Pietro Franco Tali, the Managing Director, Hugh James O’Donnell, and the Directors Franco Bruni, Francesco Gatti, Roberto Jaquinto, Jacques Yves Léost, Marco Mangiagalli, Marco Reboa and Ian Wybrew-Bond. On 14th December 2004, the Board of Directors, pursuant to the provisions of the Code, identified as independent four non-executive Directors (Franco Bruni, Francesco Gatti, Marco Reboa and Ian Wybrew-Bond), based on information provided by the interested parties. They are considered independent as they do not enjoy economic relations with the company, its controlled companies, its parent company Eni or Eni’s controlled companies of relevant proportion to influence their autonomy of judgement, they are not close relatives of executive Directors, nor are they employed by the company, its controlled companies, its parent company Eni or Eni’s controlled companies. Franco Bruni, Francesco Gatti and Marco Reboa feature on the list presented by institutional investors coordinated by ARCA SGR S.p.A. The company’s Articles of Association do not specify how often the Board should meet, although art. 21 states it has to occur at least quarterly as follows: “The Directors inform 65 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

the Board of Directors and the Board of Statutory Auditors promptly or at least every quarter on company activities, major economic and financial transactions involving the Company or its subsidiaries; in particular they report those operations in which they have an interest, on behalf of themselves or third parties, or those operations that are subject to the influence of the controlling party”. In 2004, the Board of Directors met on 8 occasions; three meetings have been scheduled to take place in the first half of 2005. The general public is informed of dates of Board Meetings when periodical statements and reports, required by current legislation, are to be approved. The Board of Directors sets down the formalities pertaining to the calling of Board Meetings; in particular, meetings are convened by the Chairman, who also prepares the agenda for the meeting, through notice sent by mail, fax or e-mail at least five days prior to the date of the meeting; in exceptional circumstances, notice is sent at least 24 hours prior to the time of the meeting. The Articles of Association allow for meetings to be held via video-conference link. Directors and Statutory Auditors are provided in advance with documents pertaining to items to be discussed and/or resolved on at the meeting. In 2004, 85% of Board Directors and 96% of independent Directors on average attended Board Meetings. Director’s remuneration is approved by the Shareholders’ Meeting; the remuneration of the Chairman and the Managing Director is set by the Board of Directors at the proposal of the Compensation Committee, having previously conferred with the Statutory Auditors. Pursuant to Consob regulations, the Directors’ Report in the Financial Statements, i.e. the Notes to the Financial Statements, contain the following: (i) amounts paid to the Directors, Statutory Auditors and General Managers; (ii) number of stock grants and stock options allocated to the Chairman and the Managing Director as well as the General Managers; (iii) number of shares held by the Directors, Statutory Auditors and General Managers of Saipem and its controlled companies. The Shareholders’ Meeting of 15th May 2002 set at 20,000 euros the remuneration for each Director for every year of office. Directors are also entitled to 1,000 euro for attending each meeting of Statutory Boards, in addition to reimbursement of expenses incurred. The Directors do not receive additional compensation for serving on the committees. Based on the powers the Chairman and the Managing Director are vested with, the Board of Directors has set their remuneration, comprising a fixed and a variable component. The variable part of the Chairman’s and the Managing Director’s remuneration, as well as that of the top management, is linked to the achievement of specific economic/operational objectives (profitability, efficiency, strategic projects) and share objectives (share price). The variable part, in addition to a pecuniary incentive, comprises a free Saipem stock grant redeemable after three years from date of allocation.

Offices held by Board Directors Based on the information received, we list hereunder additional directorships or auditor posts held by Saipem’s Board Directors in other listed companies, either in Italy or abroad, in financial companies, banks, insurance companies or companies of relevance (art. 1.3 of the Code). Franco Bruni Board Director of UniCredito Banca Mobiliare S.p.A., Tradinglab Banca S.p.A. and Pioneer Global Asset Management S.p.A. Vice-President of S+R Investimenti e Gestioni (S.G.R.) S. p. A. Roberto Jaquinto Board Director of Syndial S.p.A., Enifin S.p.A., Snam Rete Gas S.p.A., Snamprogetti S.p.A. and Sofid S.p.A. 66 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

Marco Mangiagalli Chairman of the Board of Directors of Enifin S.p.A. and Eni Coordination Center s.a. Board Director or Snamprogetti S.p.A., Oil Investment Corp. Ltd, Energy Asset Management Ltd, Eni International Bank Ltd, Eni International Holding BV, Sofid S.p.A., Albacom S.p.A., Snam Rete Gas S.p.A. and Polimeri Europa S.p.A. Marco Reboa Board Director of Seat Pagine Gialle S.p.A., Interpump Group S.p.A., IMMSI S.p.A., Schema 28 S.p.A., Intesa Lease Sec S.r.l., Intesa 2 Sec- S.r.l. and Nextra Investment Management SGR. Statutory Auditor of Autogrill S.p.A. and Galbani S.p.A.

Board Committees In order to carry out its responsibilities more efficiently, the Board has set up two committees: the Audit Committee, comprised exclusively of non-executive independent Board members, and the Compensation Committee. The former comprises Franco Bruni, Francesco Gatti and Marco Reboa; the latter Roberto Jaquinto, Marco Mangiagalli and Marco Reboa.

Audit Committee The Audit Committee, in compliance with the Board resolution of 9th November 2000, fulfils a preparatory, consultative and propositive role regarding the general management of the company. In compliance with the amendments made to the Code in July 2002, the Committee approved the “Audit Committee Regulations” on 25th February 2003. In accordance with the Regulations, the Chairman of the Board of Auditors, or an Auditor appointed by the Chairman takes part in the Committee’s activities; meetings can be attended by Saipem’s Chairman. The Internal Audit Manager (being the person in charge of the Internal Control System, as per art. 9.4 of the Code, appointed at the aforementioned Board meeting) assists the Audit Committee and carries out duties assigned as part of his/her role. The Internal Audit department, reporting to the Chairman, is responsible for the following: (i) assessing the conformity of accounting and non-accounting criteria and principles, the efficiency of administrative procedures and control systems; (ii) ensuring the implementation and updating of the risk assessment, mapping and classification systems for auditing purposes. The Audit Committee’s responsibilities are: (i) assisting the Board of Directors in the following areas: (a) setting guidelines for the internal control system; (b) periodically checking that it is adequate and operates effectively; (c) ensuring that major risks facing the company are suitably identified and properly managed; (ii) evaluates together with the Administrative Director and the external Auditors, the adequacy of accounting principles adopted and their consistency throughout the Financial Statements; (iii) assesses together with the external Auditors: (a) accounting principles considered ‘critical’ for the correct financial and economic representation of Saipem’s position; (b) alternative accounting standards provided for by the accounting principles and reviewed with the management, the consequences of the application of said alternative standards and related information in addition to the methods considered preferential by the external auditors; (c) contents of every relevant written exchange between the external auditors and the company’s management; (d) issues relating to statutory and consolidated financial statements of major Group Companies; (iv) evaluates the work programme prepared by the Internal Audit Manager and receives from the latter reports, al least quarterly, on opinions issued by the auditors; (v) evaluates issues raised through Internal Audit reports, communications from the Board of Auditors or individual Auditors, reports and the 67 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

management letter issued by the external Auditors, the annual report issued by the Guarantor of the Internal Code of Practice and inquiries by third parties; (vi) assesses offers received from external auditing firms for the award of the auditing contract, the work programmes put forward and works carried out by the said auditing firms, also in terms of their independence; (vii) verifies independence of the external Auditors; (viii) evaluates requests advanced by departmental managers to utilise the auditing firm appointed to audit the financial statements for non-audit service and presents proposals to the Board of Directors. The Audit Committee convened six times during 2004 and examined the reports issued by the Internal Auditors; met with the Director of the company Administrative Department, the Chairman of the Board of Statutory Auditors, the partners of the External Auditing firm to examine the main issues pertaining to the 2003 and 2004 Financial Statements; it monitored the development of the operating model of the Internal Auditing Department; acknowledged company activities relating to Law Decree 231/01 particularly initial and compliance activities; monitored company activities related to the implementation of accounting processes necessary to implement the new International Financial Reporting Standards (IFRS) and reviewed the effects of these adjustments on the Saipem’s Consolidated Financial Statements at 31st December 2003.

Compensation Committee The Compensation Committee is responsible for proposing to the Board of Directors incentive schemes for the company’s top management, the annual remuneration of the Chairman and the Managing Director and reviewing the remuneration policy of the Group top management. In 2004, the Compensation Committee convened on four occasions and carried out the following: it reviewed the 2004 Group performance and incentive schemes as well as results of the 2003 schemes, in view of the stock grant allocation to Group senior managers; it proposed the remuneration of the Chairman and the Managing Director; it proposed the 2004 stock grant and stock option allocations to managers holding positions directly responsible for Group results or of strategic interest to the Group, who have achieved their pre-set targets.

The Board of Statutory Auditors The Board of Statutory Auditors, pursuant to art. 149 of Law Decree 58/1998, monitors: compliance to the Law and the Articles of Association; that management principles are correctly adhered to; the adequacy of the company organisational structure, the internal control system and the administrative/accounting system, and the reliability of the latter to clearly reflect the company position. The Board comprises three Statutory Auditors and two alternate Auditors, appointed by the Shareholders on 15th May 2002. The term of office for Statutory Auditors is three years and will expire at the Shareholders’ Meeting called to approve the Financial Statements at 31st December 2004. The appointment of Statutory Auditors occurs pursuant to art. 27 of Articles of Association, through voting from a list, so as to allow the appointment of minority interest representatives. The Auditors operate autonomously and independently from the shareholders who appointed them (art. 14.1 of the Code). It is a procedure for the voting lists to enclose a professional résumé for all candidates. Lists are filed at the company’s registered headquarters at least 20 days prior to the Shareholders’ meeting (first summons) and are published in three national newspapers The Board of Auditors comprises the Chairman Gaetano Troina, the Statutory Auditors Paolo Andrea Colombo and Fabio Venegoni and the alternate auditors Bruno Maier and Lorenzo Caprio Art. 27 of Articles of Association states that statutory auditors be in possession of the 68 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

requisites as stated by the current legislation, in particular Decree 162/2000; in compliance with the Decree, the Articles of Association provide that the following fields are pertinent to the company ’s activities: commercial law, business administration and management, the engineering and geology sectors. All Saipem’s Statutory Auditors are members of the Register of Certified Auditors. Statutory Auditors are provided in advance with documents pertaining to items to be discussed and/or resolved on at Board meetings. Meetings of the Board of Statutory Auditors may be convened via video-conference link. The Shareholders’ Meeting of 15 th May 2002 set at 30,000 euros the annual remuneration of the Chairman of Statutory Auditors and at 20,000 euros that of the Auditors. They are also entitled to 1,000 euros for attending each meeting of Statutory bodies, in addition to reimbursement of expenses incurred. In compliance with the law, Audit of accounts is entrusted to an external auditing company registered in the Roll of Auditors, appointed by the Shareholders’ meeting. The current auditing company is PricewaterhouseCoopers S.p.A., appointed by the Shareholders’ meeting of 29th April 2004, whose mandate expires with the approval of the 2006 Financial Statements. Pursuant to art. 27 of Articles of Association, candidates already holding the office of statutory auditors at five listed companies may not be appointed as auditors.

Saipem’s Shareholders At 31st December 2004, the share capital of Saipem S.p.A. amounted to 441,177,500 euros; it is fully paid up and comprises no. 440,987,734 ordinary shares of the nominal value of 1 euro each and no. 189,766 savings shares of the nominal value of 1 euro each. Shares cannot be divided and each share carries the entitlement to one vote. Saipem’s shareholders enjoy, and are limited by, all relevant rights afforded by law. Savings shares are convertible at par with ordinary shares; they enjoy a higher dividend than ordinary shares equal to 3% of the share nominal value. The Savings Shareholders’ meeting appointed Mr Gianluca Officio as their collective representative. Based on information available and received and pursuant to Consob resolution 11971/99, at 31st December 2004 the Shareholders owning a Saipem S.p.A. holding in excess of 2% are: Shareholders

Eni S.p.A. Artisan Partners Ltd.

Number of shares

% of capital

189.423.307

42,93

9.436.025

2,13

69 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

Based on information received from the banks responsible for dividend payments in 2003, the Shareholders’ breakdown by geographical area and size of holding is as follows: Shareholders breakdown by geographical area based on 2003 dividend payments Shareholders

No. of Shareholders

No. of shares

% of capital

17,103

* 270,272,540

61.26

Italy Other EU countries

414

79,469,689

18.01

Americas

282

41,798,067

9.48

UK & Ireland

146

43,031,494

9.75

64

2,849,099

0.65

Other European countries Rest of the world

56

3,756,611

0.85

18,065

441,177,500

100.00

No. of Shareholders

No. of shares

% of capital

> 10%

1

189,423,307

42.93

> 2%

1

9,436,025

2.13

1% – 2%

4

30,751,556

6.97

0.5% – 1%

17

54,267,797

12.30

0.3% – 0.5%

20

33,835,571

7.67

0.1% – 0.3%

47

32,615,950

7.4

≤0.1%

17,975

90,847,294

20.6

Total

18,065

441,177,500

100.00

Total * Includes treasury shares with no dividend entitlement

Shareholders breakdown by size of holding Shareholders

Shareholders’ meetings The Shareholders’ meeting represents the institutional meeting point of the company’s management and its shareholders. At the meetings, Shareholders may ask questions on items on the agenda or on the company’s management at large. The information provided shall comply with the provisions applicable to price sensitive data. Ordinary Shareholders’ meetings are regulated by art. 2364 of the Italian Civil Code, extraordinary Shareholders’ meetings by art. 2365. Notices of Shareholders’ meeting are published in various national Italian newspapers, in order to promote Shareholders attendance. The Shareholders’ meeting of 30th January 2001 approved the Shareholders’ meetings regulations (available on Saipem’s website) to ensure smooth and effective meetings proceedings and, specifically, to safeguard every shareholders’ right to intervene on items under discussion.

Operations with Related Parties Saipem, with regard to Art. 11 of the Self-Regulatory Code, drafted a procedure named “Code of Practice Regulating Operations with Related Parties”, which was approved by the Board of Directors on 7th July 2003. This procedure identifies the related parties and details all operations carried out amongst them; it lists criteria of application, 70 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

operations that require prior consent by the Board of Directors and those that are to be notified to the Board of Statutory Auditors as well as the Board of Directors.

Investor relations and data protection Saipem has adopted a policy of information supporting a constant dialogue with the institutional investors, the shareholders and the market in order to guarantee the timely disclosure of comprehensive information on company activities, and is limited only by the confidentiality requirements afforded to certain information. Information to investors, the market and the press takes place through press releases, periodical meetings with institutional investors, the financial community and the press, in addition to the comprehensive information made available and constantly updated on the company website. Relations with investors and financial analysts are held by the Head of the Investor Relations Department. Information of interest to them is made available on Saipem’s website or can be requested via email at: [email protected] Relations with Shareholders are held by the Head of the Secretary ’s Office. Information of interest to Shareholders is made available on Saipem’s website or can be requested via email at: [email protected] Information pertaining to the periodical financial reports, relevant operations and newly-issued corporate governance procedures, are communicated immediately to the public also via publication on the website, where all press releases and shareholders’ notices are also available. Saipem’s commitment to provide investors and markets with financial information that is true, comprehensive, transparent, timely and non-selective is stated in the Code of Practice, which identifies the values it applies in its business operations and the relations with third parties: namely, disclosure of complete and clear information, the formal and essential legitimacy of practices by its employees at all levels, clarity and veridicity of its accounting practices in compliance with current legislation and internal procedures. On 12th December 2002, the Board of Directors approved the “Procedure regulating Market notification of documents and information pertaining to activities of the company and its controlled companies”. This procedure implements guidelines contained in the “Guide on Information to the Market” issued by “Forum ref ” in June 2002, and defines the requirements to be applied to the disclosure of price-sensitive information (materiality, clarity, homogeneity, symmetry, consistency and timeliness) and regulates the flow of information from Group Companies necessary to provide the market and the Board with timely price-sensitive information. The Code of Practice also defines the duty of confidentiality that employees are required to adhere to.

Law Decree 231/2001 On 22nd March 2004, the Board of Directors approved the Organisational, managerial and control model, pursuant to Law 231/2001 and established a Compliance Committee. The Model comprises a comprehensive set of procedures and control processes aimed at preventing the offences detailed in the aforementioned Law Decree, as well as Law Decrees 61/2002 and 7/2003. The Chairman is responsible for devising and implementing initial activities, updating and upgrading the Model. A plan was defined detailing initial activities aimed at improving the control system based on the results of the gap analysis and mapping all organisational requirements necessary to implement the Model. The introduction of this plan entails the following: (i) update/upgrade of company regulations; (ii) definition of organizational actions consistent with the findings of the gap analysis; (iii) alignment 71 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

of power allocation in compliance with the model; (iv) planning training of personnel and promoting the knowledge of the model; (v) alignment of the company ’s IT systems to guarantee flow of information towards the Public Administration. In 2004 the Compliance Committee convened on four occasions and has: approved a set of internal regulations which came into force on 15th October 2004; monitored the diffusion of the document “Principles of the Model” to all Saipem S.p.A. employees; it promoted training activities of personnel aimed at ensuring the adequate knowledge of the Model; it identified the Compliance Programme for the year and ensured that it was implemented alongside the scheduled and ad-hoc control activities; set up communication channels to and from the Compliance Committee.

Internal dealing The Internal Dealing Code, approved by the Board of Directors on 12th December 2002 and effective from 1st January 2003, pursuant to the current regulations of Borsa Italiana S.p.A., contains the mandatory notifications of the company and restrictions concerning operations involving financial instruments issued by the company carried out, on their own behalf, by relevant persons. Relevant persons are Board Directors and Statutory Auditors of Saipem S.p.A. and Directors of Saipem s.a.; persons reporting directly to the Chairman and the Managing Director of Saipem S.p.A. and Saipem s.a.; managers reporting directly to those persons. The Internal Dealing Code sets at 35,000 euros the value of operations carried out in any three month period, which if exceeded, must be notified to the market by relevant persons (Stock Exchange Regulations set the threshold at 50,000 euros) and at 175,000 euros the value of operations carried out in any three month period, which if exceeded, must be immediately notified. (Stock Exchange Regulations set the threshold at 250,000 euros). The Internal Dealing Code considers amongst operations to ascertain the threshold value, the exercise of stock options or the sale/transfer of shares allocated as part of stock option or stock grant schemes. The Internal Dealing Code prevents relevant persons from carrying out any operation involving financial instruments issued by the company 15 working days prior to Saipem S.p.A.’s Board of Directors meetings during which Statutory Financial Statements or provisional statements are due to be examined; and also, if not notified at a Board of Directors’ meeting, 15 days prior to the date on which the dividend proposal is put to the Shareholders’ meeting. The trading ban is not applicable to the exercise of stock options or stock grants allocated as part of stock option and/or stock grant schemes, although the sale of shares in the periods indicated is prohibited.

72 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

37

11

X

50

X

100

9

X

100

X

100

Attendance %

100

member

X

No. of other offices

5

independent

Attendance %

Compensation Committee

member

Audit Committee Attendance %

Board of Directors non executive

executive

Members

The following tables are taken from the document “Guidelines for the compilation of the Corporate Governance Report” issued by Assonime and Emittenti Titoli S.p.A. in March 2004.

4

X

85

X

100

Chairman Tali Pietro Franco

X

100

X

75

Managing Director Hugh James O’Donnell Directors Bruni Franco (*)

X

X

Gatti Francesco (*)

X

X

Jaquinto Roberto

X

75

Leost Jacques

X

87

Mangiagalli Marco

X

Reboa Marco (*)

X

Wybrew–Bond Ian

X

No. of meetings held in 2004

8

100 87

X

100

6

4

(*) Appointed from the list of minority shareholders.

Board of Statutory Auditors Members

Attendance %

No. of other offices

77



Chairman Troina Gaetano Statutory Auditors Colombo Paolo Andrea

30

3

100



Caprio Lorenzo (*)





Maier Bruno





13



Venegoni Fabio (*) Alternate Auditors

No. of meetings held in 2004 (*) Appointed from the list of minority shareholders.

The requirement to put forward voting lists is to hold voting shares representing at least 2% of the share capital at the Ordinary Shareholders’ Meeting.

73 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

Other provisions of the Self-Regulatory Code Yes

No

Powers and operations with related parties The BoD has allocated the following powers: a) Thresholds

X

b) Exercise of powers

X

c) Disclosure of information

X

Has the BoD the power to review and approve the most significant economic and financial operations (including operations with related parties)?

X

Has the BoD defined guidelines and criteria that identify operations as “significant”?

X

Have the aforementioned guidelines and criteria been detailed in the report?

X

Has the BoD set appropriate procedures for the review and approval of operations with related parties?

X

Have the aforementioned procedures for the approval of operations with related parties been detailed in the report?

X

Procedures pertaining to the most recent appointment of Directors and Statutory Auditors Have candidacies to the offices of Directors been filed at least ten days prior to their appointment?

X

Did the candidacies to the offices of Directors contain sufficient information?

X

Did the candidacies to the offices of Directors enclose a statement indicating the requirement of independence?

X

Have candidacies to the offices of Statutory Auditors been filed at least ten days prior to their appointment?

X

Did the candidacies to the offices of Statutory Auditors contain sufficient information?

X

Shareholders’ Meetings Has the company approved Shareholders’ Meeting’s Regulations?

X

Are these Regulations enclosed in the Report (or information as to where they can be obtained/downloaded)?

X

Internal Audit Has the company appointed internal auditors? Do these internal auditors not report to managers of operational areas? Internal Audit Department (pursuant to art. 9.3 of the Code)

X X Internal Audit

Investor relations Has the company appointed an investor relations manager? Investor Relations Department: contact details (address/fax/email) of the Manager

X Investor Relations (*)

(*) Saipem S.p.A. – Via Martiri di Cefalonia, 67 - San Donato Milanese (Milan) 20097 Italy - Tel. +39 02 520 34653 - Fax +39 02 520 54295

74 SAIPEM FINANCIAL REPORT 2004 CORPORATE GOVERNANCE REPORT

additional information

Buy-back of treasury shares The Shareholders’ Meeting of 29th April 2004 authorised the Board of Directors to buy back up to 2,460,000 treasury shares on the market, for a total amount not exceeding 21,000,000 euros, to be allocated as follows: - 1,600,000 to the 2004 stock-option schemes; - 860,000 to the 2003 stock grant scheme. From 1st January to 31st December 2004, the number of treasury shares purchased amounted to 1,395,000. On 29th January, 29th July and 2nd November 2004, no. 20,000 treasury shares were transferred to assignees of the 2003 and 2004 stock grant scheme. On 3rd November 2004, 79,500 stock-options were allocated as part of the stock-option scheme approved in 2002, 2003 and 2004. As of 24th March 2005, the company holds no. 3,644,257 treasury shares.

Incentive schemes Stock grants On 13th July 2004, the Board of Directors of Saipem S.p.A. approved the allocation of a maximum of 633,800 shares to the 2003 stock grant scheme. Said stock, to be bought back on the market as per Ordinary Shareholders’ Meeting resolution of 29th April 2004, shall be granted free of charge to executive managers who, in 2003, achieved the objectives set by the company, within 45 days after three years from the date of allocation. Stock-options In order to implement the 2004 stock-option scheme, on 28th July 2004, the Board of Directors of Saipem S.p.A. approved the allocation of no. 1,166,000 stock-options at the price of 7.594 euro per share (i.e. the shares official price average recorded by the Telematic Stock Market over the month preceding allocation). Stock will be allocated to Saipem Group Executive Managers directly responsible for Group results or holding strategic positions. Options can be exercised after three years from the date of allocation and no later than 28th July 2012 for assignees resident in Italy; assignees resident in France, in compliance with local regulations, will be able to exercise the stock after four years from date of allocation and no later than 28th July 2011. Shares for allocation to the stock-option and stock grant schemes will be bought back on the open market, as per Ordinary Shareholders’ Meeting resolution of 29th April 2004.

75 SAIPEM FINANCIAL REPORT 2004 ADDITIONAL INFORMATION

Significant events subsequent to year end New orders In the first two months of 2005, additional orders were awarded to the Saipem Group amounting to approximately 550 million euros, of which the majority is in the Offshore Construction sector (444 million euros). The most important contracts awarded to the Saipem Group are:

Offshore Construction - on behalf of BP Berau Ltd, two contracts comprising engineering, procurement, construction and installation of two platforms and two subsea pipelines as part of the “Tangguh LNG Project” in the Berau Bay region of Indonesia; - on behalf of Talisman Energy UK, the Tweedsmuir project in the British sector of the North Sea, comprising the laying of a pipeline and a pipe-in-pipe flowline for a piggy-backed gas pipeline. The pipelines, which will link existing platforms, will be provided by the client; - on behalf of Offshore Oil Engineering Co., the Dong Fang and Lu Feng projects in China, comprising the installation of two jackets and associated piles, two decks and a pipeline; - on behalf of Raffineria di Gela S.p.A., a contract in Sicily, comprising the design, procurement and installation for the replacement of a pipeline.

Onshore Construction - on behalf of Sonatrach/Sonelgaz, the EPC-type project Berrouaghia in Algeria, for the construction of a gas power station. The contract was awarded to the joint venture with Siemens (leader).

Onshore Drilling - on behalf of KPO, the one-year lease of two rigs in Kazakhstan; - on behalf of Burren Petroleum, the one-year lease of a rig in Turkmenistan; - on behalf of Ninotsminda Oil Company Georgia, the four-month lease, plus the option of a further two months, of a rig in Georgia; - on behalf of Sonatrach, the five-month lease of a rig in Algeria; - on behalf of PDVSA, the six-month lease of a rig in Venezuela.

Operations with related parties Main operations involving related parties are detailed hereafter, pursuant to the National Commission of Italian Companies and the Stock Exchange (“Commissione Nazionale per le Società e la Borsa”) communications no. 97001574 of 20/02/1997 and 98015375 of 27/02/ 1998. Saipem S.p.A. is a subsidiary of Eni S.p.A. Operations with related parties entertained by Saipem S.p.A. and/or companies within the consolidation area involve essentially the supply of services, trading of goods, obtainment and use of financial instruments with other Eni S.p.A. subsidiaries or associated companies. These operations are an integral part of the ordinary day-to-day business and are carried out at market conditions, i.e. at prices which would be applied between independent parties. All transactions have been carried out for the mutual benefit of the companies involved. The table below shows the value of the transactions of a commercial, financial or 76 SAIPEM FINANCIAL REPORT 2004 ADDITIONAL INFORMATION

other nature entertained with related parties. The analysis by company is based on the principle of relevance in relation to the amount of individual transactions. Operations not itemised because deemed immaterial are to be found under the following headings Eni subsidiary companies; Eni associated companies; other related parties. (million €)

Eni Congo SA

Services

Services

Other

1

-

2

190



2







6

– –

Year 2004 Revenues

Goods 43

Year 2004 Costs

31st December 2004 Payables

Eni Divisione Exploration & Production

31st December 2004 Receivables

Company name

Commercial and other transactions

Eni Petroleum Co Inc.









1

Snamprogetti S.p.A.

1

2



3





Snamprogetti Saudi Arabia Ltd.

7







5



Serfactoring



20









Eni Divisione Refining & Marketing

3

2

11



1



Eni International BV



13









Eni Pakistan Ltd









1



Eni Corporate S.p.A.



5



6

1



Eni Corporate University S.p.A.



1



2





Agip Fuel SpA



1

5







11







49



1







2

Agip Energy & Natural Res. (Nigeria)

20







42



GreenStream BV

37







78



Ieoc Production BV

12







15



1











Eni Iran BV Agip Karachaganak BV

Syndial S.p.A. Eni Dacion Bv

2







13



Stoccaggi Gas Italia S.p.A.

2

1



1

6



Eni Divisione Gas & Power

6







18



Sieco



8



11





Servizi Aerei







1





Serleasing



1



1





Tecnomare S.p.A.







2





N.A.E. Ltd.

4







12



Naoc – Nigerian Agip Oil Co. Ltd.

43

14





88



Padana Assicurazioni S.p.A.

17

18



54













46



212

87

16

83

574



Eni associated companies Total

Saipem S.p.A. and the other companies included in the consolidation area provide services to Eni Group companies mainly in the Offshore and Onshore Construction sectors, in the Offshore and Onshore Drilling sectors both in Italy and abroad and in the M.M.O. sector in Italy. In 2004, operating revenues from Eni associated companies amounted to 46 million euros as follows: Blue Stream Pipeline Company B.V. for the Blue Stream project (5 million euros), Karachaganak Petroleum Operating B.V. (34 million euros) and Inagip Doo (7 million euros).

77 SAIPEM FINANCIAL REPORT 2004 ADDITIONAL INFORMATION

(million €)

Receivables

Year 2004

Company name

31st December 2004

Financial operations

Charges

Income

Enifin S.p.A.



Payables Commitments 480

1,860

27

17

Eni International Bank Ltd.



57

101

2



Sofid S.p.A.











Serleasing S.p.A.



28



1



Eni Coordination Center



445



8

4

Total



1,010

1,961

38

21

Enifin S.p.A., a wholly owned subsidiary of Eni S.p.A., provides financial services to Eni Group companies. A specific agreement between Saipem and Enifin provides that the latter supplies financial services to the Italian companies of the Saipem Group, consisting of loans, deposits and financial instruments for the hedging of foreign exchange and interest rate risks.

78 SAIPEM FINANCIAL REPORT 2004 ADDITIONAL INFORMATION

Management expectations for 2005 (pre IFRS impact) The oil industry is faced with continually increasing demand and the increasingly demanding challenge of replacing oil reserves. This has led many oil companies to increase the level of spending in recent years. This trend, favoured by high oil and gas prices, is expected to continue throughout 2005. The positive overall trend of the market and Saipem’s credibility and competitiveness, especially on complex projects in frontier areas, underpin expectations for 2005 to achieve further revenue growth, improving on the 2004 record, as well as the award of new contracts so as to maintain the high level of backlog. The phenomenon that will continue to adversely affect Saipem’s profit levels is the appreciation of the euro against the US dollar. This is because approximately 70% of Saipem’s revenues are denominated in the American currency, whilst costs of the Milan and Paris operating centres as well as almost all depreciation - a total of approximately 560 million per annum - are denominated in euros. The impact of the euro appreciation is felt approximately one year after contract award, i.e. the average time lag between contract acquisition (and hedging), and execution. In 2004 therefore, Saipem’s average invoice exchange rate was 1.15 (while the average euro/US dollar ratio in the same period was 1.24). In 2005, the combination of contracts already in the backlog at end 2004 and to be executed during the current year, along with contracts to be acquired in 2005, are expected to lead to an approximate average invoice exchange rate of 1.23. Euro appreciation from 1.15 to 1.23 is expected to have a two-fold impact. Firstly it will cause a reduction in the euro-equivalent contribution from USD-denominated contracts (translation effect), estimated at approximately 13 million euros. Secondly, the effect of the company’s euro-denominated structural costs will determine a further reduction in operating income estimated at approximately 22 million euros. Conversely: - volumes are expected to grow thanks to the substantial order backlog at the end of 2004 and the positive overall market trend; - in those business sectors and those areas where US competition is weakest, it is possible to gradually transfer to prices the effects of the euro’s appreciation. At present it is expected that, in 2005, the Group can repeat the record 2004 results, with possible room for further improvement. Capital expenditure for 2005 is estimated at approximately 260 million euros and will include: maintenance and upgrades of vessels and equipment (160 million euros); the expansion of bases/yards in Kazakhstan and West Africa (30 million euros); the construction of new vessels and specific equipment required for contracts already in the backlog (70 million euros). Depreciation and amortisation for 2005 is expected to total around 215 million euros.

Forward-looking statements are based on a number of assumptions and expectations that could ultimately prove inaccurate, as they are subject to risks and variables outside the company’s control. These include: currency fluctuations, interest rate fluctuations, the level of capital expenditure in the oil and gas industry, as well as other industries, political instability in the Persian Gulf and/or other regions, and actions by the competition. Moreover, contract execution is also subject to variables outwith the company’s control, such as weather conditions. Actual results could therefore differ materially from the forward-looking statements.

79 SAIPEM FINANCIAL REPORT 2004 ADDITIONAL INFORMATION

introduction of the international financial reporting standards

Following the introduction of European Regulation No. 1606/2002 by the European Parliament and European Council of 19 th July 2002 (“Regulation”), from 2005 companies listed on Member States Stock Markets are required to prepare their consolidated financial statements in accordance with international financial reporting standards (“IFRS”). Taking into account the significance of the innovations arising from the adoption of the new regulations, the Company has begun a structural analysis in 2003 of the current IFRSs, including in this analysis the numerous opinions issued by International Accounting Standards Board (IASB) between December 2003 and March 2004. In 2004, Saipem notified Group companies of the forms required for collecting information needed to calculate the effect of the new accounting standards on opening balances as of 1st January 2004 for assets and liabilities at the transition date. According to IFRS 1, First Adoption of International Financial Reporting Standards, companies have to prepare accounts that: (i) recognize only all the assets and liabilities defined as such by the new accounting standards; (ii) classify and evaluate assets and liabilities with the values that would have been determined if the new accounting standards had been applied from the initial recognition (retrospective application); (iii) reclassify items in accordance with IFRS. IFRS that have the greatest impact on the Saipem Group are: I) the provision according to which goodwill cannot be amortized and its recoverability is ascertained at least annually; II) periodic maintenance costs are to be amortized over the asset’s useful life rather than accrued to a provision; III) the use of actuarial techniques for the evaluation of employee termination indemnities. With regard to IAS 39 (relating to the recognition and measurement of financial instruments, namely hedging contracts), it is Saipem policy to hedge long-term contracts against exchange rate fluctuations. These hedging contracts, in part (the extent of which is still to be defined), would not be classified as specific hedging contracts as defined in IAS 39. Hence, for non-specific hedging contracts, revenues and costs are to be accounted for utilising spot exchange rates, and hedges are to be accounted at their fair value. The application of this principle, while not having any appreciable effect in the longterm, can lead to pronounced short-term volatility in the company’s results. Saipem will continue to utilise hedging contracts, but will strive, insofar as the nature of its business allows, to satisfy the effectiveness criteria required by IAS 39. In any case, the periodic financial updates will highlight the effects that the new reporting standards have on hedging operations, so as to enable quarterly and yearly comparisons of data, net of these effects. PricewaterhouseCoopers is preparing an audit of initial accounts at 1st January 2004. 80 SAIPEM FINANCIAL REPORT 2004 INTRODUCTION OF THE INTERNATIONAL FINANCIAL REPORTING STANDARDS

Considering the difficulties in applying the new standards, in particular the retrospective method, a precise quantification will be made only after the results of the audit procedure. At present and with the exclusion of the effects of IAS 39, Saipem expects an immaterial increase in net equity and net capital employed at 1st January 2004, due in particular to the reassessment of effects associated to the capitalisation of periodic maintenance costs. The main effect on consolidated net income should be an increase of approximately 45 million per annum, mainly due to the discontinuance of the goodwill amortisation.

81 SAIPEM BILANCIO CONSOLIDATO INTRODUCTION OF THE INTERNATIONAL FINANCIAL REPORTING STANDARDS

reclassified consolidated balance sheet and income statement

(million €)

Reclassified balance sheet 31-12-2003

Net tangible fixed assets Net intangible fixed assets

1,688

851

805

Tangible and intangible assets, net - Offshore Costruction - Offshore Drilling - Leased FPSO - Onshore Costruction - Onshore Drilling

2,545 1,115

656

661

89

74

244

233 87

193

181

- MMO

85

78

- Other

56

Financial investments Non-current assets (a) Inventories Other current assets Current liabilities Provisions for contingencies and other charges

2,510 388

1,529

1,583 (1,966)

(117)

(118) (196)

(113)

(31)

(34)

Capital employed (d=a+b+c)

2,344

2,363

Group shareholders’ equity (e)

1,368

1,488

23

9

Minority interest in net equity (f) Net financial debt – medium and long term

578

Net financial debt – short term

375

Net debt (g) Cover (h = e+f+g)

SHEET AND INCOME STATEMENT

17

2,571

(1,915)

Employees’ termination benefits (c)

RECLASSIFIED CONSOLIDATED BALANCE

64 26

307

Net current assets (b)

82

2,493

1,127

95

- LNG

SAIPEM FINANCIAL REPORT 2004

31-12-2004

1,694

470 396 953

866

2,344

2,363

(million €)

Reclassified income statement (by nature of costs)

Operating revenues Other income and revenues Purchases, services and other costs

2003

2004

4,231

4,306

11

10

(2,977)

(3,046)

Payroll and related costs

(704)

(740)

Gross operating income

561

530

Amortisation, depreciation and write-downs

(258)

(240)

Operating income

303

290

Financial expenses, net

(53)

(42)

16

19

266

267

Income from investments, net Income before extraordinary items and taxes Extraordinary expenses

(3)



Income before income taxes

263

267

Income taxes

(67)

(67)

Income before minority interest

196

200

Minority interest Group net income

– 196

(3) 197

(million €)

Reclassified income statement (by destination of costs) 2003

2004

4,231

4,306

(3,658)

(3,747)

Idle costs

(78)

(78)

Cost of sales

(66)

(66)

Research and development expenses

(9)

(9)

Other operating income (expenses), net

(2)



Operating revenues Production costs

Contribution from operations

418

406

(115)

(116)

Operating income

303

290

Financial expenses, net

(53)

(42)

General and administrative expenses

Income from investments, net Income before extraordinary items and taxes Extraordinary expenses, net Income before income taxes

16

19

266

267

(3) 263

– 267

Income taxes

(67)

(67)

Income before minority interest

196

200

Minority interest Group net income

– 196

(3) 197

83 SAIPEM FINANCIAL REPORT 2004 RECLASSIFIED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT

84 SAIPEM FINANCIAL REPORT 2004

Consolidated Financial Statements at 31st december 2004

85 SAIPEM FINANCIAL REPORT 2004 CONSOLIDATED FINANCIAL STATEMENTS

balance sheet

(million €)

31.12.2003

31.12.2004

ASSETS Share capital to be received:





6

7

12

9

Non-current assets: - Intangible assets: Research & development costs Industrial patents and similar rights Goodwill

36

28

792

759

Assets under development and payments on account

4

2

Other

1



851

805

Differences on consolidation

Total - Tangible assets: Land and buildings

63

74

1,534

1,490

Industrial and commercial equipment

40

34

Other assets

27

24

Assets under construction and payments on account

30

66

1,694

1,688

Plant and machinery

Total - Financial fixed assets: Investments in: Subsidiary companies

2

3

Associated companies

22

19

Other companies

2

Total Total non-current assets

86 SAIPEM FINANCIAL REPORT 2004 BALANCE SHEET

– 26

22

2,571

2,515

(million €)

31.12.2003

31.12.2004

Current assets: - Inventories: Raw materials and consumables

133

Contract work in progress

174

243

307

388

Total

145

- Accounts receivables: Trade receivables: - due within one year - due after one year

1,020 997 23

Subsidiary companies: - due within one year

3

3 3

7 7

Parent companies: - due within one year

20 3

Associated companies: - due within one year

1,031 1,011

6 6

45 45

52 52

Tax credits due within one year

43

Pre-paid tax due within one year

21

14

236

240

Others: - due within one year - due after one year

222

220

14

Total

102

20 1,375

1,448

- Marketable securities Treasury shares Total

13

22

13

22

546

590

- Cash: Cash deposits with banks, postal and Eni Group finance companies Cash in hand and cash equivalents Total Total current assets Prepayments and accrued income TOTAL ASSETS

3

5

549

595

2,244

2,065

150

118

4,965

5,086

87 SAIPEM FINANCIAL REPORT 2004 BALANCE SHEET

(million €)

31.12.2003

31.12.2004

LIABILITIES Shareholders’ equity: - Share capital - Share premium reserve - Revaluation reserve pursuant to Law no. 413 of 30.12.1991

441

441

62

62

2

2

- Legal reserve

52

55

- Riserve for treasury shares held

13

22

- Riserve for buy-back of treasury shares

22

21

- Reserve for exchange rate differences

(5)

(17)

- Retained earnings

585

- Net income Total Group Shareholders’ equity Minority interest in net equity Total

705

196

197

1,368

1,488

23

9

1,391

1,497

Provisions for contingencies: Severance pay and similar provisions

32

39

Income taxes, deferred

25

28

Other

60

56

117

123

31

34

411

383

Total Employee termination benefits Accounts payables: Due to banks: - due within one year

109

- due after one year

302

Due to other financial institutions:

101 282 1,100

- due within one year

824

- due after one year

276

1,083 878 205

Advances

138

255

Due to suppliers:

877

1,039

- due within one year

874

- due after one year

1,037

3

Due to associated companies:

2 1

- due within one year

1

Due to parent companies:

1 1

4

- due within one year

4

Due to tax authority:

8 8

43

- due within one year - due after one year

92

43

90



2

Social security charges:

29

- due within one year

29

Other payables:

37 37

160

- due within one year

160

Total

2,763

Accrued expenses and deferred income TOTAL LIABILITIES

88 SAIPEM FINANCIAL REPORT 2004 BALANCE SHEET

127 127 3,025

663

407

4,965

5,086

(million €)

31.12.2003

31.12.2004

GUARANTEES AND OTHER MEMORANDUM AND CONTINGENCY ACCOUNTS Guarantees given on behalf of :

977

1,305

- subsidiary companies

962

1,225

- associated companies

9

73

- others

6

Guarantees given by third parties on behalf of parent company

7 570

542

1



- Hedging contracts against foreign currency risks

1,994

1,988

Total

3,542

3,835

Collateral given on behalf of: - subsidiary companies Other memorandum and contingency accounts:

89 SAIPEM FINANCIAL REPORT 2004 BALANCE SHEET

income statement

(million €)

2003

2004

Revenues: Turnover Variations to contract work in progress Increase in internal work capitalised under fixed assets Other revenues and income: - Other

4,105

4,240

126

66

8

13

19

47

19

Total

47 4,258

4,366

Operating costs: Raw materials, consumables and supplies

759

858

1,949

1,974

Use of third party assets

208

213

Payroll and related costs

706

Services

745

Wages and salaries

553

582

Social security contributions

120

107

Employee termination benefits

6

7

Pensions and similar costs

9

13

Other costs

18

Amortisation, depreciation and write-downs: Amortisation of intangible assets

36 267

246

70

69

188

170

Other depreciation of tangible assets

-

1

Write-downs of receivables included in current assets

9

6

Depreciation of tangible assets

Variations in raw materials, supplies and consumables

(12)

Provision for contingencies

(12)

3

2

Other provisions

34

22

Other operating costs

41

28

3,955

4,076

303

290

2

1

Total Difference between revenues and operating costs Financial income and expenses: Income from investments: - others

2

1

Other financial income: Other income:

42

- associated companies

42

42 42

- others Interest and other financial expenses: - others

95 95

Total

(51)

Gains and (losses) on exchange



Total financial income and expenses

90 SAIPEM FINANCIAL REPORT 2004 INCOME STATEMENT

84 84

(51)

(41) – (41)

(million €)

2003

2004

Adjustments to financial income and expenses: Revaluation of investments: - valued with the equity method - other investments

15

18

14

18

1

Write-down of investments: Total adjustments

– 1



14

18

Extraordinary income and expenses Income: - other income

2

Expenses: - other expenses Total extraordinary income and expenses Income before income taxes



2

– 5



5

– (3)



263

267

Income taxes

67

67

Net income

196

200

Minority interest Group net income



(3)

196

197

91 SAIPEM FINANCIAL REPORT 2004 INCOME STATEMENT

92 SAIPEM FINANCIAL REPORT 2004

Notes to the Consolidated Financial Statements

93 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

cash flow statement (million €)

31.12.2003

Group net income Minority interests Depreciation and amortisation Write-downs (appreciations) Net change in provisions for contingencies Net change in employee severance pay Losses from elimination and write-offs Losses (gains) on accounts receivable in relation to disposables (Dividends) (Interest earned) Interests paid Unrealised (gains) losses on foreing currency exchange Extraordinary (income) expenditure Income taxes Operating income before changes to working capital Changes: Inventories Commercial and other receivables Accrued and deferred income Commercial and other payables Accrued and deferred expenses Cash flow from operations Dividends received Interests received Interests paid Extraordinary income (expenditure) received (paid) Income taxes paid Net cash flow from operations Investments: Intangible fixed assets Tangible fixed assets Acquisition of consolidated company holdings Company holdings Changes to accounts payables and receivables relating to investments Short term financing loans Outflows from investments Disposals: Tangible fixed assets Company holdings Collection and transfer of short term loans Inflows from disposals Net cash flow from investments Short term financial loans Long term financial loans Repayment of short term financial loans Repayment of long term financial loans Increase (decrease) in short term current account debts Third party capital injection Repayment of capital to third parties Dividends paid Partial purchase of consolidated holdings Net cash flow from financing Buy-back of treasury shares Effect of changes to the consolidation area Effect of changes to the consolidation area – cash Effect of changes to the consolidation area, net Effect of exchange rate fluctuations Other changes Net cash flow Cash available at the beginning of the year Cash available at the end of the year

94 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31.12.2004

196 – 258 (9) (7) 3 – (6) – (16) 40 (7) 3 67

197 3 240 (17) 2 3 – (3) – (8) 24 10 – 67 522

(140) (107) (47) 476 (19)

518 (78) (95) 31 6 –

685 10 35 (39) (3) (84)

382 21 8 (20) – (31)

604 (15) (247) (8) – (2) (6)

360 (11) (176) (12) – – (1)

(278) 12 5 9

(200) 7 4 5

26 (252) 40 220 (191) (26) 9 1 – (63) –

16 (184) 81 2 (109) (6) (1) 16 (14) (65) (25)

(10) (13) (4) – (4) (26) – 299 250 549

(121) (10) – – – (3) 4 46 549 595

Preparation criteria The Consolidated Financial Statements at 31st December 2004 were prepared in accordance with the criteria established in paragraph 3 of Law Decree 127 of 9/4/1991 (hereinafter referred to as “Decree”), and comply with the accounting principles set by the “Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri” (Italian Council of Public Accountants), the “Organismo Italiano di Contabilità” (Italian Accounting Body) and, where silent, those set by the International Accouting Standards Board (I.A.S.B.). The true and correct presentation of the Consolidated Balance Sheet and Income Statement has not deviated from paragraph 4 of Decree art.29. The Consolidated Financial Statements comprise the Financial Statements of Saipem S.p.A. and all Italian and foreign subsidiaries over which Saipem S.p.A. exerts direct or indirect control by way of majority holdings of voting rights sufficiently large to exert a dominant influence at a general shareholders meeting or on the basis of agreements with other stockholders. The consolidated financial statements also include, on a line-by-line proportional basis, the financial statements of companies owned and jointly managed with other partners. Companies held exclusively for subsequent sale, those in liquidation and/or minor companies considered immaterial were excluded from the consolidation area. The criteria adopted to establish the consolidation area are consistent with those of the previous financial year. The quantification of contract work in progress includes extra revenues from additional works following modifications to the original contracts when they can be reasonably undertaken. Owing to the ever-increasing volumes generated by EPIC (Engineering, Procurement, Installation and Construction) type projects, which are intrinsically highly complex, large-scale, long-term and involve a high level of unpredictability, the financial statements shall include expected additional revenues even before a formal agreement with the counterpart is reached. The following tables list subsidiary and associated companies of Saipem S.p.A., pursuant to art. 2359 of the Italian Civil Code, by location (Italy and abroad). They detail consolidation methods and evaluation criteria used, together with information of changes affecting the consolidation area during the year. The list was drawn up taking into account the last comma of art. 39 of the Decree. The Financial Statements of consolidated subsidiaries with the exception of few smaller companies are fully audited by Independent Auditors, who also review the information required for inclusion in the Consolidated Financial Statements. Significant events occurred subsequent to year-end are detailed in the Directors’ Report. Modifications to the accounts principles Modifications were made to the consolidated income statement to reflect the provisions of Law 6 – Vietti act - of 17th January 2003. A new caption has been added to the Consolidated Income Statement: “Gains/(losses) on exchange” pursuant to art. 2425, paragraph 17-bis of the Italian Civil Code. Exchange rate gains and losses included under the captions “Other financial income” and “Interest and other financial expenses” in the 2003 Financial Statements, were reclassified and listed under the caption “Gains and losses on exchange”. Moreover, caption 22 of art. 2425 of the Italian Civil Code was renamed “Current, deferred, pre-paid income taxes”. In compliance with art. 2424 of the Italian Civil Code, the caption “tax credits” was introduced in the Balance Sheet; the data pertaining to the year 2003 was duly reclassified to read 43 million euros, previously included under the caption “Accounts receivables – others”. Furthermore, the caption “Provision for contingencies – Income Taxes” under “Balance Sheet - Liabilities” changed to “Provision for contingencies – Income Taxes, deferred”.

95 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Share capital

EUR

441,177,500

Eni S.p.A. Saipem S.p.A. Third parties

42.94 0.77 56.29

CONTROLLED COMPANIES Italy Bos Italia S.r.l. Consorzio SaiTre (**)

Milan S. Donato Mil.se (MI)

EUR EUR

10,000 51,646

Consorzio Sapro

San Giovanni Teatino (CH) EUR

10,329

Energy Maintenance Services S.p.A.

S. Donato Mil.se (MI)

EUR

9,020,216

Intermare Sarda S.p.A. Saipem Energy International S.p.A . Sonsub S.p.A. Abroad Boscongo s.a.

Tortolì (NU) S. Donato Mil.se (MI) Venice

EUR EUR EUR

6,708,000 2,550,000 884,000

Saipem s.a. Saipem S.p.A. Third parties Saipem S.p.A. Third parties Saipem S.p.A. Eni S.p.A. Saipem S.p.A. Saipem S.p.A. Saipem S.p.A.

100.00 51.00 49.00 51.00 49.00 50.00 50.00 100.00 100.00 100.00

Pointe Noire (Congo)

XAF

200,000,000

Bos Investment Limited Bos-Uie Limited Camom Gesellschaft fur Instandhaltung und Montagen Gmbh

London (UK) London (UK) Frankfurt (Germania)

GBP GBP EUR

5,000,000 3,300,000 25,565

99.98 0.02 100.00 100.00 95.00 5.00

Camom Industrie Instandhaltung GmbH e Co.Kg.

Spergau (Germany)

EUR

25,565

Camom Industrie Instandhaltung Verwaltungs GmbH

Spergau (Germany)

EUR

25,565

Camom s.a. Canalisations, Tuyauteries Soudées s.a.

Montigny le Bretonneux (France) EUR Nangis (France) EUR

2,897,500 915,000

Conception Maintenance Petrochimique de l’Ouest (***)

S. Vigor d’ Ymonville (France) EUR

305,000

Csmi S.n.c. (***)

Montigny le Bretonneux (France) EUR

1,525

Delong Corporation Delong Hersent - Estudos, Construções Maritimas e Participações, Unipessoal Lda Entreprise Nouvelle Marcellin s.a. ER SAI Caspian Contractor Llc

Houston (USA) Funchal (Portugal) Marseille (France) Almaty (Kazakhstan)

USD EUR EUR KZT

21,489 5,000 1,018,700 1,105,930,000

ERS Equipment Rental & Services B.V. European Marine Contractors Ltd

Amsterdam (Netherlands) EUR London (UK) GBP

90,760 14,000,000

European Marine Investments Limited European Maritime Commerce B.V. Global PetroProjects Services AG Guangdong Contractor S.n.c.

London (UK) Amsterdam (Netherlands) Zurich (Switzerland) Montigny le Bretonneux (France) Mumbai (India)

USD EUR CHF EUR

20,000,000 18,000 5,000,000 1,000

INR

100,000

Saipem s.a. Third parties Saipem s.a. Bos Investment Limited Saipem s.a. Camom s.a. Camom Gesellschaft fur Instandhaltung und Montagen Gmbh Camom Gesellschaft fur Instandhaltung und Montagen Gmbh Saipem s.a. Camom s.a. Third parties Camom s.a. Third parties Camom s.a. Entreprise Nouvelle Marcellin s.a. Saipem inc. Saipem s.a. Saipem s.a. Saipem International B.V. Third parties Saipem International B.V. European Marine Investments Limited Saipem UK Ltd Saipem International B.V. ERS Equipment Rental & Services B.V. Saipem International B.V. Entreprise Nouvelle Marcellin s.a. Third parties Services et Equipements Gaziers et Petroliers s.a. Third parties

Hazira Cryogenic Engineering & Construction Management Pvt Ltd

96 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(*) Metod of consolidation or evaluation criteria

Currency

S. Donato Mil.se (MI)

Saipems’ consolidation (%)

Registered office

CONSOLIDATING COMPANY Saipem S.p.A.

% held

Company

Shareholders

Consolidation area

100.00

F.C. Co.

50.00

Co. F.C.

100.00 100.00 100.00

F.C. F.C. F.C.

100.00

F.C.

100.00 100.00 100.00

F.C. F.C. F.C.

100.00 100.00 100.00 99.98 0.02 99.97 0.03 99.00 1.00 100.00 100.00 100.00 50.00 50.00 100.00 50.00 50.00 100.00 100.00 100.00 60.00 40.00 55.00 45.00

Co.

100.00 100.00

Co. F.C. F.C. N.E. N.E.

100.00 100.00 50.00

Co. F.C. F.C. F.C.

100.00 100.00

F.C. F.C.

100.00 100.00 100.00 60.00

F.C. F.C. F.C. P.C.

55.00

F.C

1,603,800 110,000,000 145,000 20,000,000 100,000 40,000,000 19,412,815 357,143

PT Bos Indonesia

Jakarta (Indonesia)

IDR 2,176,000,000

PT Saipem Indonesia

Jakarta (Indonesia)

USD

PT Sofresid Indonesia Ll.

Jakarta (Indonesia)

IDR 3,016,000,000

Saibos Akogep S.n.c.

29,000,000

EUR

39,000

Saibos Construções Maritimas Lda Saibos FZE Saibos s.a.s. Saimexicana SA de Cv Saipem (Malaysia) Sdn Bhd

Montigny le Bretonneux (France) Funchal (Portugal) Dubai (United Arab Emirates) Montigny le Bretonneux (France) Mexico City (Mexico) Kuala Lumpur (Malaysia)

EUR AED EUR MXN MYR

55,102,104 1,000,000 38,125 50,000 1,033,500

Saipem (Nigeria) Ltd

Lagos (Nigeria)

NGN

259,200,000

Saipem (Portugal) Comércio Marítimo Lda

Funchal (Portugal)

EUR

299,278,738

Saipem (Portugal) Gestão de Participações SGPS S.A. Saipem Argentina S.a.m.i.c.y F. (***)

Funchal (Portugal) Buenos Aires (Argentina)

EUR ARS

49,900,000 150,000

Saipem Asia Sdn Bhd Saipem Australia Pty Ltd (***) Saipem Contracting (Nigeria) Ltd

Kuala Lumpur (Malaysia) Sydney (Australia) Lagos (Nigeria)

MYR AUD NGN

8,116,500 10,661,000 567,000,000

Saipem Contracting Algerie S.p.A.

Hassi Messaoud (Algeria)

DZD

10,000,000

Sofresid Engineering Saibos s.a.s. Third parties Saipem s.a. Saibos Construções Maritimas Lda Saipem s.a. Saipem s.a. Saipem International B.V. Third parties Saipem International B.V. Third parties Saipem (Portugal) Gestão de Participações SGPS S.A. Saipem International B.V. Saipem International B.V.

0.10 70.00 30.00 100.00 100.00 100.00 100.00 41.94 58.06 89.41 10.59

Third parties Saipem International B.V. Saipem International B.V. Saipem International B.V. Third parties

1.23 100.00 100.00 97.00 3.00

100.00 100.00 98.77

Sofresid s.a.

99.94

Saipem s.a.

0.01

Third parties

(*) Metod of consolidation or evaluation criteria

RUB NOK USD NOK NOK NGN PEN USD

Saipem s.a. 99.99 Sofresid s.a. 0.01 Saipem International B.V. 100.00 Saipem International B.V. 100.00 Moss Maritime A/S 100.00 Moss Maritime A/S 100.00 Moss Maritime A/S 100.00 Saipem s.a. 100.00 Saipem International B.V. 100.00 Delong Hersent - Estudos, Construcoes Maritimas e Partecipacoes, Unipessoal Lda 70.00 Third parties 30.00 Saipem s.a. 99.90 Enterprise Nouvelle Marcellin s.a. 0.10 Saipem International B.V. 99.99 Saipem (Asia) Sdn Bhd 0.01 Sofresid s.a. 99.90

Saipems’ consolidation (%)

100,000

% held

Krasnodar (Russian Federation) Lysaker (Norway) Houston (USA) Lysaker (Norway) Lysaker (Norway) Lagos (Nigeria) Iquitos (Peru) Luanda (Angola)

INR

Shareholders

Katran-k Limited Liability Company Moss Maritime A/S Moss Maritime Inc. Moss Offshore A/S Moss Arctic Offshore A/S Nigerian Services & Supply Company Limited Petrex S.A. Petromar Lda

Share capital

Registered office

Mumbai (India)

Currency

Company

Hazira Marine Engineering & Construction Management Pvt Ltd

100.00

F.C.

100.00 100.00 100.00 100.00 100.00 100.00 100.00

F.C. F.C. F.C. F.C. F.C. F.C. F.C.

70.00

F.C. N.E.

100.00

F.C.

100.00

F.C.

70.00

P.C.

100.00 100.00 100.00 100.00

F.C. F.C. F.C. Co. F.C.

89.41

F.C.

100.00 100.00

F.C. F.C. N.E.

100.00 97.00

F.C. N.E. F.C.

100.00

F.C.

0.05

Saipem do Brasil Serviços de Petroleo Ltda

Rio de Janeiro (Brazil)

BRL

5,814,327

Saipem International B.V.

100.00

Saipem Energy International Ltd (**)

New Malden (UK)

GBP

6,000,000

Saipem UK Ltd

100.00

100.00

F.C.

Saipem Holding France s.a.s.

Montigny le Bretonneux (France) EUR

40,000

Saipem International B.V.

100.00

Saipem Inc.

Houston (USA)

USD

1,101,000

Sonsub Inc.

100.00

100.00

F.C.

Saipem India Project Services Limited

Chennai(India)

INR

2,000,000

Saipem s.a.

100.00

100.00

F.C.

Saipem International B.V.

Amsterdam (Netherlands)

EUR

172,444,000

Saipem S.p.A.

100.00

100.00

Saipem Logistics Services Limited (***)

Lagos (Nigeria)

NGN

55,000,000

Saipem International B.V.

100.00

Saipem Luxembourg S.A.

Luxembourg (Luxembourg)

EUR

31,002

N.E. 100.00

F.C.

F.C. N.E.

Saipem (Portugal) Gestão de Participações SGPS S.A.

100.00

100.00

97 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F.C.

Saipem s.a. Saipem Services s.a.

Montigny le Bretonneux (France) EUR Bruxelles (Belgium) EUR

26,207,647 61,500

Saipem Singapore Pte Ltd Saipem UK Ltd

Singapore (Singapore) New Malden (UK)

SGD GBP

25,000 6,470,000

Saipem Venezuela s.a.

Caracas (Venezuela)

VEB

20,000,000

SAIR Construções Mecanicas de Estruturas Maritimas Lda

Funchal (Portugal)

EUR

5,000

SAS Port de Tanger Société par Actions Simplifiée Unipersonelle SASP Offshore Engineering UK Ltd (**) Saudi Arabian Saipem Ltd

Montigny le Bretonneux (France) EUR New Malden (UK) GBP Al-Khobar (Saudi Arabia) SAR

37,000 500,000 5,000,000

SB Construction and Maritime Services B.V.

Amsterdam (Netherlands) EUR

18,152

Services et Equipements Gaziers et Petroliers s.a.

Donges (France)

EUR

38,125

Société de Construction d’ Oleoducs S.n.c.

Donges (France)

EUR

39,000

Société d’Etudes d’Oleoducs S.n.c. (***) Société de Pose de Pipelines S.n.c. (**)

Montigny le Bretonneux (France) EUR Nangis (France) EUR

39,000 40,000

Société Nouvelle Technigaz s.a.

Montigny le Bretonneux (France) EUR

228,750

Sofresid Engineering

Montigny le Bretonneux (France) EUR

1,267,142

Sofresid s.a. Sonsub A/S Sonsub Asia Sdn Bhd (**) Sonsub Inc. Sonsub Ltd Sonsub International Pty Ltd Star Gulf Free Zone Company

Montigny le Bretonneux (France) EUR Randaberg (Norway) NOK Kuala Lumpur (Malaysia) MYR Wilmington (USA) USD Aberdeen (UK) GBP Sydney (Australia) AUD Dubai (United Arab Emirates) AED

8,253,840 1,882,000 100,000 43,333,335 5,901,028 13,157,570 500,000

STTS S.n.c.

Montigny le Bretonneux (France) EUR

1,000

Sud Est Cie

Aix en Provence (France)

EUR

152,704

TBE Ltd

Damietta (Egypt)

EGP

50,000

98 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Saipem International B.V. 100.00 Saipem (Portugal) Gestão de Participações SGPS S.A. 100.00 Saipem S.p.A. 100.00 Saipem International B.V. 99.98 ERS Equipment Rental & Services B.V. 0.02 Saipem s.a. 100.00 Saipem International B.V. 75.00 European Marine Investments Limited 25.00 Saipem s.a. 99.95 Third parties 0.05 Saipem (Portugal) Gestão de Participações SGPS S.A. 86.00 Third parties 14.00 Saipem s.a. 100.00 Saipem Energy International Ltd 100.00 Saipem International B.V. 60.00 Third parties 40.00 ERS Equipment Rental & Services B.V. 50.00 Entreprise Nouvelle Marcellin s.a. 50.00 Saipem s.a. 99.76 Third parties 0.24 Services et Equipements Gaziers et Petroliers s.a. 99.90 Camom s.a. 0.10 Sofresid s.a. 100.00 Services et Equipements Gaziers et Petroliers s.a. 50.75 Third parties 49.25 Saipem s.a. 99.96 Third parties 0.04 Sofresid s.a. 99.99 Third parties 0.01 Saipem s.a. 100.00 Saipem International B.V. 100.00 Saipem International B.V. 100.00 Saipem International B.V. 100.00 Saipem International B.V. 100.00 Saipem International B.V. 100.00 Saipem s.a. 60.00 Sofresid s.a. 40.00 Saipem s.a. 57.00 Société Nouvelle Technigaz s.a. 3.00 Third parties 40.00 Sofresid s.a. 99.62 Third parties 0.38 Société Nouvelle Technigaz s.a. 70.00 Third parties 30.00

(*) Metod of consolidation or evaluation criteria

Share capital

1,500,000 224,459

Saipems’ consolidation (%)

Currency

HRK EUR

% held

Registered office

Rijeka (Croatia) Funchal(Portugal)

Shareholders

Company

Saipem Mediterranean Services Llc Saipem Perfurações e Construções Petrolíferas América do Sul Lda

100.00

F.C.

100.00 100.00 100.00

F.C. F.C. F.C.

100.00

N.E. F.C. Co.

86.00

F.C.

100.00 100.00

F.C. N.E. F.C.

100.00

F.C.

100.00

F.C.

100.00

F.C. N.E. Co.

100.00

F.C.

100.00

F.C.

100.00 100.00 100.00 100.00 100.00 100.00

F.C. F.C. N.E. F.C. F.C. F.C. F.C.

60.00

P.C.

Co. 70.00

F.C.

Consorzio U.S.G. (**)

Parma

EUR

25,823

Rosbos S.c.r.l. (**)

Ravenna

EUR

10,400

Rosfin S.r.l.

Ravenna

EUR

9,649,200

Abroad Africa Oil Services s.a.

Guyancourt (France)

EUR

37,500

Ateliers Ferroviaires D’artix s.a.

Artix (France)

EUR

80,000

Barber Moss Ship Management A/S

Lysaker (Norway)

NOK

1,000,000

Bos Shelf Limited Society

Baku City (Azerbaijan)

AZM

10,000,000

Dalia Floater Angola S.n.c.

Coubervoie (France)

EUR

0,1

Doris Development Canada Ltd Doris Engineering s.a.

St. John’s (Canada) Paris (France)

CAD EUR

10,000 3,571,440

Doris Usa Inc. Eurig GmbH (***)

Houston (USA) Koln (Germany)

USD EUR

1,500,000 25,000

Eurig GmbH & Co.Kg. (***)

FPSO Firenze Produção de Petroleo, Lda

FPSO Mystras (Nigeria) Ltd FPSO Mystras Produção de Petroleo, Lda

Koln (Germany)

Funchal (Portugal)

Lagos (Nigeria) Funchal (Portugal)

EUR

EUR

NGN EUR

250,000

50,000

15,000,000 50,000

Gaztransport Et Technigaz s.a.s.

Saint Remy Les Chevreuse(France) EUR

Kazakhoil Bouygues Offshore S.a.r.l.

Almaty (Kazakhstan)

KZT

1,000,000

Kwanda Suporto Logistico Lda.

Luanda (Angola)

AOR

25,510,204

Lipardiz – Construção de Estruturas Maritimas, Unipessoal Lda

Moss Krylov Maritime

Funchal (Portugal)

EUR

St.Petersburg (Russian Federation) RUB

370,288

5,000

98,000

Saipem Energy International S.p.A. Tecnomare Saipem S.p.A. Third parties Saipem s.a. Third parties Saipem s.a. Third parties

50.00 50.00 40.00 60.00 50.00 50.00 33.33 66.67

Services et Equipements Gaziers et Petroliers s.a. Third parties Camon s.a. Third parties Moss Maritime A/S Third parties Star Gulf Free Zone Company

44.88 55.12 49.48 50.52 50.00 50.00 50.00

Third parties 50.00 Entreprise Nouvelle Marcellin s.a. 27.50 Third parties 72.50 Doris Engineering s.a. 100.00 Sofresid s.a. 40.00 Third parties 60.00 Doris Engineering s.a 100.00 Camom Gesellschaft fur Instandhaltung und Montagen Gmbh 50.00 Third parties 50.00 Camom Gesellschaft fur Instandhaltung und Montagen Gmbh 50.00 Third parties 50.00 Saipem (Portugal) Gestão de Participações SGPS S.A. 50.00 Third parties 50.00 FPSO Mystras Produção de Petroleo Lda 100.00 Saipem (Portugal) Gestão de Participações SGPS S.A. 50.00 Third parties 50.00 Société Nouvelle Technigaz s.a. 22.22 Saipem s.a. 7.78 Third parties Saipem s.a. Third parties Delong Hersent - Estudos, Construções Maritimas e Participações, Unipessoal Lda

(*) Metod of consolidation or evaluation criteria

Share capital

10,000

Saipems’ consolidation (%)

Currency

EUR

% held

Registered office

S. Giuliano Mil.se (MI)

Shareholders

Company

ASSOCIATED COMPANIES Italy Consorzio Saipem Energy International – Tecnomare S.p.A.

50.00

P.C. Co. N.E. N.E.

N.E. Co. N.E. 50.00

P.C.

27.50

P.C. Co. N.E. N.E. Co.

N.E.

50.00

P.C.

50.00

P.C.

50.00

P.C. N.E.

70.00 50.00 50.00

Co.

40.00

N.E.

Third parties Saipem (Portugal) Gestão de Participações SGPS S.A. Third parties Moss Maritime A/S

60.00 50.00 50.00 50.00

Third parties

50.00

50.00

99 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

P.C. N.E.

Petrosupport s.a.s. (**)

Rueil Malmaison (France)

EUR

38,120

PMS - Petrochemicals Maintenance Services Gmbh

Leuna (Germany)

EUR

200,000

Saipar Drilling Company B.V.

Amsterdam (Netherlands) EUR

20,000

Saipem Aban Drilling Co. Pvt Ltd

Chennai (India)

INR

50,000,000

SEA Tank Co. s.a.

Paris (France)

EUR

46,800

Servicios de Construçiones Caucedo s.a.

Dominican Republic

DOP

100,000

Société pour la Realisation du Port de Tanger Mediterranée

Anjra (Morocco)

EUR

33,000

Starstroi Limited Liability Company

Krasnodar (Russian Federation) RUB

7,699,490

Starstroi – Security sarl Starstroi – Sakhalin – Bezopasnost sarl Tchad Cameroon Maintenance B.V.

Krasnodar(Russian Federation) RUB Yuzhno (Russian Federation) RUB Schiedam (Netherlands) EUR

300,000 300,000 18,000

Tecnoprojecto Internacional Projectos e Realizações Industriais s.a.

Linda a Velha Oeiras (Portugal) EUR

700,000

Tss Dalia S.n.c.

Courbervoie (France)

EUR

0,1

Upstream Constructors International FZCO

Jebel Ali (United Arab Emirates) AED

600,000

Saipem s.a. 50.00 Doris Engineering 50.00 Saipem s.a. 50.00 Third parties 50.00 Camom Gesellschaft fur Instandhaltung und Montagen Gmbh 25.00 Third parties 75.00 Saipem International B.V. 50.00 Third parties 50.00 Saipem International B.V. 50.00 Third parties 50.00 Doris Engineering s.a. 99.62 Third parties 0.38 Saipem s.a. 49.70 Third parties 50.30 SAS Port de Tanger Société par Actions Simplifiée Unipersonelle 33.33 Third parties 66.67 Saipem s.a. 50.00 Third parties 50.00 Starstroi Limited Liability Company 100.00 Starstroi – Security sarl 100.00 Saipem s.a. 40.00 Third parties 60.00 Saipem s.a. 42.50 Third parties 57.50 Saipem s.a. 27.50 Third parties 72.50 Saibos Construções Maritimas Lda 50.00 Third parties 50.00

(*) Metod of consolidation or evaluation criteria

Share capital

100,000

Saipems’ consolidation (%)

Currency

GBP

% held

Registered office

London (UK)

Shareholders

Company

Offshore Design Engineering Ltd

50.00

P.C. Co.

N.E. 50.00

P.C.

50.00

P.C. Co.

49.70

P.C.

33.33

P.C.

50.00

P.C. N.E. N.E. N.E. N.E.

27.50

P.C.

50.00

P.C.

(*) F.C. = full consolidation, P.C. = proportional consolidation; N.E. consolidation using net equity method; Co. = consolidation using the cost method (**) in liquidation (***) inactive throughout the year

The Saipem Group comprises 127 companies: 67 are consolidated using the full consolidation method, 18 the proportional method; 26 the net equity method and 16 the cost method.

100 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Variations to the consolidation area Variations to the consolidation area, with respect to the consolidated financial statements at 31st December 2003, are detailed hereunder in date order: Newly incorporated companies: - on 21st April 2004, the Russian company Starstroi – Security sarl was incorporated and is consolidated using the net equity method (the company is 100% owned by Starstroi Limited Liability Company); - on 21 st April 2004, the Russian company Starstroi – Sakhalin – Bezopasnost sarl was incorporated and is consolidated using the net equity method (the company is 100% owned by Starstroi – Security sarl); - on 22nd April 2004, the German company PMS – Petrochemicals Maintenance Services GmbH was incorporated; it is held by Camom Gesellschaft fur Instandhaltung und Montagen GmbH (25%) and third parties (75%), and it has been consolidated using the net equity. Acquisition of company holdings: - on 28th April 2004, 51% of the share capital of the company Camom Industrie Instandhaltung GmbH e Co.Kg. was acquired from third parties so as to achieve 100% ownership; the company is consolidated using the cost method; - on 8th December 2004, 50% of the share capital of the company Katran-k Limited Liability Company was acquired from third parties so as to achieve 100% ownership; the company is consolidated using the full consolidation method; - on 22nd December 2004, Saipem International B.V. increased the share capital of European Marine Investments Limited and on 23rd December 2004 it reduced its share capital by cancelling the quota held by Eni International B.V.; at 31st December 2004, the company was 100% owned by Saipem International B.V., and is therefore consolidated using the full consolidation method. Disposals, liquidations and changes to the consolidation method: - the company Conception Maintenance Petrochimique de L’Ouest s.a., previously consolidated using the full consolidation method, is consolidated using the net equity method following the cessation of company activities; - the company Csmi S.n.c., previously consolidated using the full consolidation method, is consolidated using the net equity method following the cessation of company activities; - the company Eurig GmbH & Co Kg, previously consolidated using the proportional consolidation method, is consolidated using the net equity method following the cessation of company activities; - the company Société d’Etudes d’Oleoducs S.n.c., previously consolidated using the full consolidation method, is consolidated using the net equity method following the cessation of company activities; - the company Moss Arctic Offshore A/S, previously consolidated using the proportional consolidation method, is consolidated using the full consolidation method following the acquisition of the remaining 50% from third parties; - PT Bos Offshore Indonesia Ll. changed its name to PT Bos Indonesia; the company, previously consolidated using the full consolidation method, is consolidated using the net equity method following the cessation of company activities; - the company Saipem Energy International Ltd., previously consolidated using the full consolidation method, is consolidated using the net equity method following the company’s voluntary wind-up; - the company Saipem Singapore Pte. Ltd., previously consolidated using the full consolidation method, is consolidated using the net equity method; - the company Doris Development Canada Ltd., previously consolidated using the net equity method, is consolidated using the cost method; - the company SEA Tank Co. s.a., previously consolidated using the net equity method, is consolidated using the cost method; - on 19th April 2004, the company Principia Recherche Developpement s.a. was sold to third parties; - on 24th August 2004, the company Studeurop s.a., consolidated using the net equity method, was delisted from the Register of Companies; - as of 30 th September 2004, the companies European Maritime Commerce B.V. and Saipem Services s.a. are consolidated in 2004 using the full consolidation method because they have reached relevant size; in 2003 they had been consolidated using the net equity method; - on 26th October 2004, the company Saifor S.p.A., consolidated using the net equity method, was delisted from the Register of Companies; - on 28th October 2004, Saipem s.a. sold 42.5% of its stake in Tecnoprojecto Internacional Projectos e Realizações Industriais s.a. to third parties. The company continues to be consolidated using the net equity method; - on 29th October 2004, the company Petrosupport s.a.s., consolidated using the cost method, has been put into liquidation; 101 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

- Rosbos S.c.r.l., previously consolidated using the proportional consolidation method, has been consolidated using the net equity method following cessation of company operations. The company has been put into liquidation on 29th October 2004; - on 23rd November 2004, the company Offshore Services (Thailand) Limited, consolidated using the cost method, was delisted from the Register of Companies; - on 2nd December 2004, the company Société de Pose de Pipelines S.n.c., consolidated using the cost method, has been put into liquidation; - on 21st April 2004, the Russian company Starstroi – Vostok - Bezopasnost sarl entered the consolidation area; the company was 100% owned by Starstroi – Security sarl and was consolidated using the cost method. On 9th December 2004, the company was put into liquidation and on 31st December it was delisted from the Register of Companies; - on 21st December 2004, the company Société Civile Immobiliere Le Moulin de Saint Antoine, consolidated using the cost method, was delisted from the Register of Companies; - on 23rd December 2004, the company Société Robilliart s.a. was sold to third parties; - on 31st December 2004 the company European Marine Contractors Llc, consolidated using the full consolidation method, was delisted from the Register of Companies. Change of company names or transfer of holdings between group companies, not affecting the consolidation area: - on 7th January 2004, the company International Development Process and Engineering Limited changed its name to Saipem India Project Services Limited; - on 31st March 2004, the company Sofresid Group s.a. was merged into the company Sofresid s.a.; - on 5th July 2004, the company Saipem Algerie S.p.A. changed its name to Saipem Contracting Algerie S.p.A.; - on 2nd September 2004, the company European Marine Contractors Netherlands B.V. was merged into the company Ers B.V.; - on 3rd September 2004, the company Bos Corp Inc. sold 50% of its stake in Doris Usa Inc. to Doris Engineering s.a.. The company is therefore now 100% owned by Doris Engineering s.a. and is consolidated using the net equity method; - on 1st November 2004, Petro-Marine BCI Engineering Inc. was merged into the company Saipem Inc.; - on 30th November 2004, the company Bos Limited changed its name to Bos Investment Limited.; - on 1st December 2004, Saipem s.a. sold the company Bos Corp. Inc. to Saipem Inc., which was then merged into the latter; - on 1st December 2004, Saipem s.a. sold the company Delong Corporation to Saipem Inc.

Variations that occurred subsequent to 31st December 2004 - on 25th January 2005, the company Sonsub Asia Sdn Bhd, consolidated using the net equity method, was delisted from the Register of Companies; - on 3rd February 2005, the company Société de Pose de Pipelines S.n.c., consolidated using the cost method, was delisted from the Register of Companies; - on 4th February 2005, the company Sonsub S.p.A. changed its name to Saipem FPSO S.p.A. and was consolidated at 31st December 2004 using the full consolidation method; - on 7th March 2005, the company Delong Corporation was merged into Saipem Inc.; - on 11th March 2005, the company Saipem Inc. was merged into Sonsub Inc. and the latter, on the same date, changed its name to Saipem America Inc.; - on 15th March 2005, the company Petrosupport s.a.s., consolidated using the cost method, was delisted from the Register of Companies.

Consolidation period The consolidation period ends on the same date as the accounting period for the Financial Statements of Saipem S.p.A. and the majority of companies within the consolidation area, as per the Financial Statements reviewed by Board Directors for Shareholders’ approval. For the following companies: Saipem Aban Drilling Co. Pvt Ltd, whose fiscal year closes on 31st March; Saipem Luxembourg S.A., whose fiscal year ends on 31st July, consolidation was carried out based on the relative accounting position for the period 1st January – 31st December 2004, duly prepared by the relevant Board Directors for inclusion in the Group consolidated Financial Statements and subject to audit. The Financial Statements of consolidated companies were adjusted, where necessary, to harmonise with Saipem S.p.A. accounting principles. Amounts are in million euros. Items of less than one million euros have been omitted.

102 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Principles of consolidation Investments in companies included in the consolidation area Assets, liabilities, expenditure and income of companies consolidated using the full consolidation method have been stated in full in the financial statements. The book value of investments has been eliminated against the shareholders equity of the relevant subsidiaries. The quotas of shareholders equity and income/(loss) attributable to minority interest have been stated in the relevant captions. The book value of investments in companies consolidated using the proportional method has been eliminated against the related quota of shareholders equity of the subsidiaries. Under this method, assets, liabilities, expenditure and income of consolidated companies have been stated in the consolidated financial statements proportionally to the percentage held by the parent company. The difference between the purchase price of investments and the corresponding share of the equity has been allocated to specific asset and liability captions on the basis of their valuation at the date of purchase. Any residual positive difference is recorded, where possible, under the asset caption “Differences on consolidation” and systematically depreciated on the basis of its future residual value. Dividends, revaluations, write-downs and losses from investments in consolidated companies, together with gains and losses realised on inter-company disposals of investments in consolidated companies, have been eliminated.

Inter-company transactions and balances Profits and losses deriving from transactions between consolidated companies and not yet realised with third parties have been eliminated. Inter-company receivables and payables, expenditure and income, together with guarantees, commitments and contingencies have also been eliminated.

103 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Translation of financial statements in foreing currency

1.13

1.26

1.24

Pound Sterling

0.69

0.70

0.68

0.70

Algerian Dinar

85.48

84.92

87.92

97.57

Angolan Kwanza

Currency

2003

Year-end rate

Average rate

US Dollar

Average rate

Year-end rate

The financial statements of foreign companies, independent from the parent company, have been translated into million euros as follows: the exchange rate prevailing at year-end has been used for balance sheet captions, whereas the average annual exchange rate has been used for income statement captions. Exchange rates used are detailed hereafter:

2004

1.36

83.52

99.22

103.61

116.56

Saudi Arabian Riyal

4.24

4.73

4.66

5.10

Australian Dollar

1.74

1.68

1.69

1.75

5,557.65

6,212.69

6,129.99

6,689.27

Azerbaijani Manat Brazilian Real Congo Franc cfa Croatian Kuna

3.47

3.66

3.63

3.61

655.96

655.96

655.96

655.96

7.56

7.65

7.49

7.65

53.05

57.58

56.34

59.34

9,769.26

10,621.80

11,117.80

12,626.60

168.89

180.80

168.93

177.01

4.30

4.79

4.73

5.18

148.40

174.29

165.34

177.75

Norwegian Kroner

8.00

8.41

8.37

8.24

Peruvian New Sol

3.93

4.38

4.24

4.47

34.66

36.93

35.81

37.84

Singaporian Dollar

1.97

2.14

2.10

2.23

Swiss Franc

1.52

1.56

1.54

1.54

UAE Dirham

4.15

4.64

4.57

5.00

Indian Rupia Indonesian Rupia Kazakhstani Tengè Malaysian Ringgit Nigerian Naira

Russian Ruble

The financial statements that have been translated are those compiled in the local currency or in the functional currency, i.e. the currency in which most of the financial transactions as well as assets and liabilities are denominated. Exchange rate differences arising from the translation into euros of financial statements of foreign companies are booked under the shareholders equity caption “Reserve for exchange rate differences”.

Continuity of application in consolidation principles There have been no changes in the consolidation principles used to prepare the consolidated financial statements in respect of the previous year.

Valuation criteria The valuation critieria used to compile the consolidated financial statements comply with the provisions of the Italian Civil Code, the accounting principles promulgated by the “Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri”, and, where silent, those of the International Accounting Standards Board (I.A.S.B.), which are included in current Italian general standards.

Continuity of application in valuation criteria There have been no changes in the valuation criteria used to prepare the consolidated financial statements at 31st December 2003. The main valuation critieria used in the compilation of the consolidated financial statements are: 104 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Intangible assets Intangible assets are stated at purchase or production cost, inclusive of directly related charges and are amortised over the period deemed of future asset use. Purchased goodwill is capitalised in the balance sheet and is amortised on a straight-line basis over the period deemed of future asset use; the same criteria also applies to the differences on consolidation. Costs incurred for share capital increases are amortised on a straight-line basis over five years, from the year in which they were incurred. Industrial patents and similar rights are amortised over three years. Intangible assets are written-down when their book value is lower than their residual utilisation value. If the reasons for such write-downs are no longer deemed appropriate during the year, the intangible assets, with the exception of startup costs and goodwill, are revalued up to their full original value.

Costs for scientifical and technological research Capital expended for the acquisition of new know-how or discoveries, the development of alternative products or processes, new techniques or modes, the design and realisation of prototypes or all other scientific and technological research and development activities are generally considered to be current costs and are expended to the year in which they are incurred. Research and development costs featured in the balance sheet assets pertain to expenditure spanning over several years; these are expended applying the same criteria used for intangible assets.

Tangible assets Tangible assets are stated at purchase or production cost, inclusive of directly related charges and financial expenses incurred during construction of the asset, net of government grants. In order to quantify financial expenses to be attributed to cost, it is assumed that investments not financed through specific loans are financed by own capital generated during the year. Assets acquired under capital leases are stated at the lower value between market value and discounted lease installments and surrender price. Tangible assets, including those under finance leases, are depreciated on a straight-line basis over their useful economic lives. Rates applied are as follows: Buildings Plant, machinery, equipment and vehicles Industrial and commercial equipment Other assets

2.5% - 12.5% 7.0% - 25.0% 3.75% - 67.0% 12.0% - 20.0%

Tangible assets destined for specific operating projects, for which no further future use is envisaged due to the peculiarities of the asset itself or the high usage sustained during the execution of the project, are amortised over the duration of the project. Costs relating to improvements, upgrades and conversions, which increase the value of the assets, have been capitalised and are amortised on a straight-line basis over the period deemed of future residual utilisation of the asset. Ordinary maintenance and repair costs are expended to the year in which they are incurred. Write-downs and revaluations are carried out applying the same criteria used for intangible assets.

Financial assets - shareholdings Investments in subsidiary companies not included in the consolidation area as well as investments in associated companies have been stated using the net equity method. Other investments have been stated at cost and duly adjusted for permanent impairment of value, where needed. Cost is ascertained based on the criteria used for intangible assets. Risks arising from potential losses exceeding shareholders’ equity are stated in the liabilities account “provisions for contingencies – other”. 105 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

If the reasons for such write-downs are no longer applicable, due to an increase in shareholders’ equity or prospects of future earnings by the company in which the stake is held, the value of the investment is reviewed and the adjustment is charged to the income statement as revaluation, up to the full value of the write-down.

Inventories Inventories, with the exception of contract work-in-progress, have been stated at the lower price between the price calculated according to the criteria for intangible assets and the market value. Purchase price is calculated using the weighted average cost method. As inventories mostly consist of spare parts, the market value thereof is represented by their replacement cost or by their net realisable value, if lower. Contract work-in-progress relating to long-term contracts is stated on the basis of accrued contractual revenues, agreed with the customers using the percentage of completion method and complying with the principle of prudence. Given the nature of the contracts and the type of work, the percentage of completion is calculated on the basis of the work performed, being the percentage of costs incurred with respect to the total estimated costs. Adjustments made for the economic effects of using this method with respect to the revenues invoiced are included under “work-in-progress” if positive or under deferred income if negative. The agreed revenues, where expressed in a foreign currency, are calculated by taking into account the exchange rate fixed by the designated hedge; the same method is used for any costs in a foreign currency. The valuation of work-in-progress considers all directly related costs, contractual risks and contractual price revisions, where they can be objectively determined. Modifications to original contracts, for additional works, are acknowledged when they can reasonably be undertaken. Contract losses are allocated in full to the year in which they become known. Bidding costs are expended in the year in which they are incurred.

Accounts receivables and payables Receivables have been stated at their estimated realisable value and payables at their nominal value. Receivables and payables in foreign currency, originally stated using the exchange rate prevailing on the date of transaction, have been adjusted to the exchange rate prevailing at year-end. Where hedges have been put in place, exchange rate differences are stated under the caption pre-payments and accruals.

Marketable securities These have been stated at the lower value between acquisition cost and market value.

Pre-payments and accruals Pre-payments and accruals are recorded on an accrual basis in order to spread costs/charges and revenues/income over the relevant period if they pertain to two ore more years.

Provisions for contingencies Provisions for contingencies comprise allocations made to certain or probable costs and expenses, which at year end, were un-quantified or uncertain as to when they would become payable. Costs relating to periodic maintenance, not constituting improvements, modernisation or upgrades which can be capitalised, are stated in the “provisions for contingencies – other”. The cost is amortised over the relevant cycle. The provision is reviewed each year in order to provide for any modifications to the timing or estimated costs.

106 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Restructuring costs In the year in which negative market conditions cause redundancies in the company’s organisational structure and entail the reduction of personnel at the companies experiencing difficulties, specific accruals are made to the “provisions for contingencies – other”. The amounts provided for are calculated on the estimated charges to be incurred for the above-mentioned purpose. Costs deriving from resignations and early retirement incentives are expensed in the year in which the restructuring programme is formalised and related decrees issued or contractual terms agreed upon.

Employee termination benefits Employee termination benefits are allocated throughout the employment period of all employees in compliance with current legislation and national labour contracts, net of applicable advances. The amount stated in the financial statements reflects the full amount matured for employees, net of advances made to them. Saipem also makes contributions on behalf of employees to various organisations, which are not controlled by Saipem, providing medical cover and other benefits. Contributions made are based on the contractual conditions negotiated with the workers’ organisations and charged to the income statement when paid. Obligations arising from pension funds are immaterial.

Guarantees and other memorandum and contingency accounts Guarantees are stated at the foot of the balance sheet for the nominal amount of the guarantee given, which does not significantly differ from their actual value. Collateral given against payables or commitments is shown in the balance sheet caption, which indicates the assets given as guarantee. Commitments for derivative contracts (forward purchases of foreign currencies and swaps), which involve future swaps of capital, other assets or the difference between two currencies, are stated at the contract regulation price. The other commitments are stated at the foot of the balance sheet for the actual commitment of the company at year-end. Guarantees and other memorandum and contingency accounts in foreign currency are calculated using the exchange rates prevailing at year-end. Commitments for derivatives are stated at the contract forward regulation price.

Revenues and costs Revenues from the sale of goods and services are recognised upon the transfer of title or upon delivery of the service.

Income taxes Current income taxes are calculated on the basis of the estimated taxable income. The current estimated tax liability has been included under “Amounts payable to taxation authorities”. Deferred taxation is calculated on all temporary differences between the carrying value of an asset or liability in the balance sheet and its value recognised for tax purposes. Deferred tax liabilities are calculated regardless of the actual or future tax losses of the company. Deferred tax assets are recognised only to the extent that they can reasonably be expected to be recovered. Taxation of the shareholders’ equity reserves of consolidated companies, or companies valued using the equity method, is recognised when it is expected that such reserves will be distributed or utilised and such distribution or utilisation will give rise to tax charges. Tax benefits relating to losses carried forward are recognised when they can reasonably be expected to be realised, even if these losses were incurred in previous years, otherwise the benefits are recognised when incurred. Deferred tax assets and liabilities are netted on an individual company basis. The net balance is recorded in the “Pre-paid tax” account, in the case of deferred tax assets and in the “Income taxes, deferred”, in the case of deferred tax liabilities.

Derivatives Saipem mainly uses domestic currency swap contracts and forward contracts to hedge foreign currency risks. Hedges are considered specific when they relate to a specific economic transaction. Income and expenses, for which specific hedges have been put in place, are stated using the hedging exchange rate. Premia and discounts are expensed to the income statement on an accruals basis over the duration of the related contract. Saipem uses interest rate swap contracts to hedge interest rate risks. Interest rate gains or losses are expensed to the income statement on an accruals basis over the duration of the related contract. General hedges, if any, which do not allow the economic transaction to be matched with the hedge are valued using the exchange rate prevailing at year-end and the related income and expenses are charged to the income statement as exchange rate differences.

107 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Incentive Schemes Stock grants and stock-options assigned to employees are recognised by each company, where personnel are working, as labour costs, as these represent part of the employee remuneration. The cost of stock-based compensation is measured by their fair value plus the relevant social security contributions and termination benefits to be borne by the employer based on the shares nominal value; the cost recognised in the income statement is determined pro rata temporis over the vesting period. The fair value of stock grants corresponds to the market value of the shares on the date the commitment is undertaken, minus the present value of dividend forecasts over the vesting period. The fair value of stock-options corresponds to the value of the option determined by applying the Black-Scholes model, which takes into account the conditions for the exercise of the options, the current value of shares and the projected volatility and the risk-free interest. Costs pertaining to stock grants allocated to Saipem S.p.A.’s employees are stated under the caption “payroll and related costs – other costs” and as a contra entry under the caption “provision for contingencies – other contingencies”. The fair value of stock grants allocated to employees of controlled companies determined at the grant date is stated under the caption “financial expenses – other expenses” and as a contra entry under the aforementioned provisions; in the same fiscal year, the corresponding amount is charged to the relevant companies as a contra entry under the caption “financial income – other income”. With regard to stock allocated to personnel on loan to other companies, the relevant costs are charged pro rata temporis to the companies where they are working. With regard to stock-options, the fair value is stated under the caption “payroll and related costs – other costs” and as a contra entry under the caption “retained earnings”.

108 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Financial statements captions balance sheet - assets Non-current assets Intangible assets

3





- transfers





Balance at 31.12.2004

1

9

872

2



12

(6)

2

1

7





81

57

885

Total



- exchange differences and other changes

55

Others

- acquisitions

78

Assets under developmenr and payments on accoun

6

Difference on consolidation

1

Goodwill

Researc h & Development costs

Balance at 31.12.2003

(million €)

Industrial patents and similar rights

Start-up and capital costs

Intangible assets amounted to 805 million euros at 31st December 2004, showing a decrease of 46 million euros versus the previous year. Operations for the year are set out below:

4

21

1,037

5



22



(2)

(5)

(7)





19

1,054

Historical cost

2

Accumulated amortisation Balance at 31.12.2003

1



66

19

80

20

186

- amortisation



2

12

9

46





69

- exchange differences and other changes





(6)

1





(1)

(6)

Balance at 31.12.2004

1

2

72

29

126



19

249

Net book value



7

9

28

759

2



805

The most important captions under intangible assets include: - the caption “Industrial patents and similar rights” mainly comprises costs incurred in the roll-out of SAP modules to subsidiary companies; - the caption “Goodwill” refers to the increased value attributed as a result of the reorganisation of the Moss Maritime Group; - the caption “Differences on consolidation“ comprises the difference between the purchase price, inclusive of related charges, and the net equity value of Saipem s.a. (736 million euros), Sofresid s.a. (19 million euros), Sonsub Inc. (3 million euros) and Saipem Energy International S.p.A. (1 million euros).

109 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Tangible assets Assets under construction and payments on account

Total

3,431

8

54

177

1

(16)

Industrial and commercial equipent

30

Plant and machinery

80

Land and buildings

Other assets

Tangible assets amounted to 1,688 million euros, a decrease of 6 million euros versus 31st December 2003. Operations for the year are set out below:

132

2,898

291

- acquisitions

17

85

13

- transfers

10

5



- disposals

(6)

(6)

(8)

(3)

- eliminations

(2)

(13)

(2)

- exchange differences and other changes

(5)

(9)

(4)

(million €)

Historical cost Balance at 31.12.2003 Movements:

Balance at 31.12.2004





(23)

(3)



(20)

(2)

(2)

(22)

146

2,960

290

81

66

3,543

69

1,364

251

53



1,737

- depreciation

13

133

13

11



170

- write-downs



1







1

Accumulated depreciation Balance at 31.12.2003 Movements

- disposals

(6)

(3)

(6)

(2)



(17)

- eliminations

(2)

(13)

(2)

(3)



(20)

- exchange differences and other changes

(2)

(2)



Balance at 31.12.2004

72

1,470

(12)

256



57



1,855

(16)

Net book value

74

1,490

34

24

66

1,688

Vessels operating in the Offshore Construction and Offshore Drilling sectors are included under the caption “Plant and machinery”. Acquisitions for the year amounted to 177 million euros and relate mainly to investments on maintenance and upgrading of vessels. In particular, the most important investmens for the year were: - upgrades to the semi-submersible platforms Scarabeo 3, Scarabeo 4 and the jack-up Perro Negro 3 and Perro Negro 5 (40 million euros); - work carried out on the semi-submersible platforms Scarabeo 6 and 7 (5 million euros); - the purchase of plant and equipment required for the execution of the Kashagan project in Kazakh waters (14 million euros); - the ongoing maintenance programme for Offshore Construction assets (5 million euros); - the purchase of plant and equipment required for the execution of the Sakhalin project in Russia (14 million euros); - the purchase of plant and equipment required for the execution of the Port de Tanger project (5 milioni euro); - works aimed at the realisation of the fabrication yard in Kazakhstan (15 million euros) and the expansion of those in Angola and Nigeria (8 million euros). Tangible assets include freely transferable assets of 3 million euros and leased assets of 41 million euros. Leased assets relate to a finance lease contract for the use of a drilling rig in deep waters (Scarabeo 5). Financial expenses for the year and those relating to previous years capitalised on the value of tangible assets are considered immaterial.

110 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Financial assets Financial assets show a balance of 22 million euros, a decrease of 4 million euros over the previous year:

Total

Adjustments

Costs

Financial assets

(million €)

Opening balance : - subsidiaries - associated companies - other companies

6

(4)

2

24

(2)

22

2



2

32

(6)

26

- subsidiaries

1



1

- associated companies

1



1

18



18

(21)



(21)

- subsidiaries

(2)

2



- associated companies

(2)

1

(1)

- other companies

(2)



(2)

Total Movements: Variations to the consolidation area

Re-valuations - associated companies Write-downs - associated companies Disposals

Closing balance - subsidiaries - associated companies - other companies Total

5

(2)

3

20

(1)

19

– 25

– (3)

111 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

– 22

Subsidiary companies

31st December 2003

31st December 2004

Group holding %

The balance at 31st December 2004 amounted to 3 million euros, an increase of 1 million euros versus 2003, due mainly to the reallocation amongst associated companies of the companies Saipem Singapore Pte and Conception Maintenance Petrochimique de l’Ouest, which were not operative during the year. Valued using the equity method:

Saipem Singapore Pte Ltd

100.00



1

Saipem Logistics Services Ltd.

100.00

1

1

99.97



1

(million €)

Conception Maintenance Petrochimique de l’Ouest SASP Offshore Engineering UK Ltd.

100.00

Total

1



2

3

Associated companies

31st December 2003

31st December 2004

Group holding %

The balance at 31st December 2004 amounted to 19 million euros, a decrease of 3 million euros versus 2003. Valued using the equity method:

Doris Engineering s.a.

40.00

6

6

Gaztransport et Technigaz Sas

30.00

10

3

Rosfin S.r.l.

33.30

3

3

Kwanda Suporto Logistico Lda.

40.00

2

2

Tchad Cameroon Maintenance B.V.

40.00



2

1

3

22

19

(million €)

Other minor holdings Total

During the year the management of group holdings resulted in net income of 18 million euros. This is due to income, accounted for proportionally to the quota held, generated during the year and depreciation amounting to 21 million euros, due to the realignment of the value of the holdings with the underlying net equity following the distribution of dividends.

Other companies This caption at 31st December 2004 amounted to zero, following the sale of the holding in Sieco S.p.A. to the parent company Eni Corporate S.p.A..

Sieco S.p.A.

16.0

Total

112 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31st December 2004

(million €)

31st December 2003

Group holding %

Investments in Eni Group companies valued using the cost method:

2



2



Current assets Inventories

Raw materials and consumables

Contract work in progress

Total

Inventories amounted to 388 million euros at 31st December 2004, an increase of 81 million euros versus the previous year. Movements for the year are set out below:

- original value (a)

143

174

317

- provision for write-downs (b)

(10)

- net carrying value

133

174

307

12

66

78 1

(million €)

Opening balance: –

(10)

Movements for the year Original value: - operating variations - acquisition of company branch

1



- exchange variations, differences and other

(1)

3

2

Total (c)

12

69

81

- (allocations)/utilisation







- exchange variations, differences and other







Total (d)







- original value (e=a+c)

155

243

398

- provision for write-downs (f=b+d)

(10)

- net carrying value (g=e+f)

145

Provision for write-downs:

Closing balance: – 243

(10) 388

Raw materials and consumables, mainly comprising the replacement of assets and equipment, were written-down in previous years to account for the reduced use of certain materials and the obsolescence of certain specific items. Work in progress for Eni Group companies amounted to 73 million euros. The valuation of work in progress includes requests for payments not yet formally accepted by clients.

113 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Accounts receivables Accounts receivable amounted to 1,448 million euros, an increase of 73 million euros versus the previous year. Changes for the year have been set out in the following table:

Receivables from subsidiary companies

Receivables from associated companies

Receivables from parent companies

Tax receivables

Pre-paid tax

Receivables from others

Total

1,069

3

7

45

43

21

254

1,442











1,020

3

7

45

43

21

11



(1)

7

59

(7)

- exchange differences

(1)









Total (c)

10



(1)

7

59

(1)







- exchange differences

2





Total (d)

1





1,079

3

6

Variations in receivables components of curent assets

Trade receivables

(million €)

Opening balance - original value (a) - provision for write-downs (b)

(49)

- net value

(18) 236

(67) 1,375

Variation for the year Original value: - operating variations

(5)

64



3

2

(7)

(2)

66





2

1







4

6







6

7

52

102

14

252

1,508

Provision for write-downs: - (allocations)/utilisation

Closing balance - original value (e=a+c) - provision for write-downs (f=b+d) - net value (g=e+f)

(48) 1,031

There are no receivables due after 5 years.

114 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS











3

6

52

102

14

(12) 240

(60) 1,448

Trade receivables Trade receivables amounted to 1,031 million euros at the 31st December 2004, an increase of 11 million euros versus 31st December 2003, and comprise receivables of a trading nature only. Trade receivables due after one year amounted to 20 million euros, (23 million euros at 31st December 2003) and mainly relate to receivables given as collateral against the execution of long-term contracts. They also include trade receivables due from Eni Group companies of 143 million euros.

Receivables from subsidiary companies These amounted to 3 million euros at 31st December 2004, unchanged versus 31st December 2003; and relate exclusively to trading transactions of the parent company with the SaiTre Consortium, carried out on an arms length basis.

Receivables from associated companies These amounted to 6 million euros at 31st December 2004 and relate to trading activities carried out on an arms length basis with jointly controlled companies for the non-consolidated portion. They were as follows: (million €)

31.12.2003

31.12.2004

- due within one year: Lipardiz – Construção de Estruturas Maritimas, Unipessoal Lda



4

FPSO Mystras Produção de Petróleo Lda

2

1

Saipar Drilling Co. BV

3

1

Saipem Aban Drilling Company Pvt. Ltd.

1



ER SAI Caspian Contractor Llc

1



Total

7

6

Receivables from parent companies These amounted to 52 million euros at 31st December 2004, an increase of 7 million euros versus 31st December 2003 and comprise receivables of a trading nature due from Eni Exploration & Production.

Tax receivables These amounted to 102 million euros at 31st December 2004, an increase of 59 million euros versus 31st December 2003 and comprise mainly of receivables from the Italian and overseas VAT authorities (33 million euros from Italian VAT authorities and 41 million from abroad) and receivables on income tax from the Italian and overseas fiscal authorities of 27 million euros.

Pre-paid tax These amounted to 14 million euros at 31st December 2004, a decrease of 7 million euros versus 31st December 2003 and relate mainly to tax paid in advance by Saipem S.p.A. and Saipem s.a.

115 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Pre-paid and deferred tax are as follows: (million €)

31.12.2004

Deferred income tax: - accumulated depreciation of intangible and tangible assets in excess

(5)

- provision for losses and risks on credits in excess



- provision for risks and charges in excess



- gains subject to deferred taxation



- equity subject to taxation of which distribution is foreseen



- other



Total deferred income tax

(5)

Pre-paid income tax: - provision for non-deductible losses on receivables

8

- fiscal losses carried forward

64

- provision for non-deductible losses on intagible and tangible assets and inventories

2

- other

18

Less: - devaluation on pre-paid income tax

(78)

Total pre-paid income tax

14

Total pre-paid tax, net

9

Devaluation on pre-paid income tax amounting to 78 million euros relates to tax losses the company deems not likely to recoup against future income.

Fiscal losses carried forward Current Italian law provides that losses can be carried forward for five years, except for losses incurred in the company’s first three years of its life, which can be carried forward for an unlimited period of time. Fiscal losses incurred by foreign companies can generally be carried forward for an unlimited period of time. Fiscal recoupment rates amount to 33% for Italian companies and an average rate of 29% for foreign companies. Fiscal losses carried forward amount to 221 million euros and can be detailed as follows: (million €)

Italian Companies

Foreign Companies

2005

8



2006





2007



3

2008



26

2009





beyond 2009





Unlimited period of time



184

Total

8

213

Receivables from others Amounted to 240 million euros at 31st December 2004, an increase of 4 million euros versus 31st December 2003. Receivables from others due within one year amounted to 220 million euros (222 million at 31st December 2003). These comprise: payments on account to suppliers of 85 million euros (73 million euros at 31st December 2003); trade receivables and amounts receivables from joint ventures of 32 million euros; amounts receivable from insurance companies for reimbursement of costs and damages of 19 million euros (40 million euros at 31st December 2003); amounts receivable from tax authorities of 13 million euros; receivables from employees of 12 million euros (11 million euros at 31st December 2003); guarantee deposits of 4 million euros (4 million euros at 31st December 2003); amounts receivables from consultants and/or professionals (5 million euros) and advances on national insurance/social security contributions (4 million euros). This caption also includes short-term financial receivables of 5 million euros (9 million at 31st December 2003). 116 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Receivables from others of 20 million euros, due after one year (14 million euros at 31st December 2003) relate to advances paid to associated companies to cover current investments (9 million euros), advances paid to the financial administration (8 million euros) and contributions to Government Bodies (3 million euros) pursuant to local legislation due to be reimbursed to the paying company after a set period of time (twenty years). Receivables from others include 17 million euros due from other Eni Group companies.

Markeatable securities This caption amouted to 22 million euros, an increase of 9 million euros versus the previous year. It comprises treasury shared bought back by Saipem S.p.A. on the open market for allocation to the stock grant and stock-option schemes aimed at executive managers of Saipem S.p.A., its subsidiaries, its parent company and subsidiaries of the parent company, working within the Saipem Group who have achieved their pre-set targets.

Cash and equivalents Cash amounted to 595 million euros at 31st December 2004, an increase of 46 million euros versus the previous year following amounts received towards the end of the year, which were impossible to utilise in repayment of related debts, and amounts received related to companies jointly owned and/or managed. Cash and equivalents at year-end, 61% of which are denominated in euros, 30% in US dollars and 9% in other currencies, received an average interest rate of 1.72%. 325 million euros thereof are on deposit at Eni Group financial companies. The breakdown of cash and equivalents at 31st December 2004 by geographical area (based on the country of domicile of the relevant company) is as follows: (million €)

France

342

Italy

45

Rest of Europe

173

Asia/Pacific

27

South America

1

North America

4

Africa

3

Total

595

Prepayments and accrued income These amounted to 118 million euros at 31st December 2004, a decrease of 32 million euros versus the previous year, and comprise the following: - Accrued income amounted to 7 million euros at 31st December 2004, a decrease of 12 million euros versus the previous year and related to the positive balance on hedging operations (17 million euros at 31st December 2003). - Prepayments amounted to 111 million euros at 31st December 2004, a decrease of 20 million euros versus the previous year and mainly comprised: costs to be incurred in future periods of 71 million euros (106 million euros at 31st December 2003); insurance premia of 16 million euros (8 million euros at 31st December 2003), costs of office leases of 3 million euros and other prepayments of 21 million euros. Prepayments relating to Eni Group companies amounted to 15 million euros.

117 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

balance sheet - liabilities and shareholders’ equity Shareholders’ equity (million €)

31.12.2003

Share capital

31.12.2004

441

441

62

62

2

2

Legal reserve

52

55

Reserve for treasury shares held

13

22

Reserve for buy-back of treasury shares

22

21

Reserve for exchange rate differences

(5)

(17)

Share premium reserve Re-valuation reserve

Retained earnings

585

Net income for the year

196

197

1,368

1,488

Total

705

Share capital The share capital of Saipem S.p.A. amounted to 441 million euros, corresponding to 441,177,500 shares with a nominal value of 1 euro each, of which 440,987,734 are ordinary shares and 189,766 are savings shares.

Share premium reserve This amounted to 62 million euros at 31st December 2004, unchanged versus the previous year.

Re-valuation reserve This reserve was set up by the Saipem S.p.A. pursuant to Law no. 413/91.

Legal reserve The legal reserve of Saipem S.p.A. represents the portion of profits accrued as per art. 2430 of the Italian Civil Code. The legal reserve increased by 3 million euros versus 31st December 2003, following the allocation to this reserve of 5% of the 2003 net income.

Reserve for treasury shares held This reserve is due to the buy-back of no. 3,394,257 treasury shares at 31st December 2004, stated under the relevant asset caption. With regard to no. 99,500 treasury shares sold following the exercise of allocated stock-options and stock grants, the average purchase cost, equal to 1 million euros, was reclassified under the caption “Retained earnings”.

Riserve for buy-back of treasury shares This riserve amounted to 21 million euros and was created by drawing from the “retained earnings” riserve. On 29th April 2004, the Shareholders’ meeting granted the Board of Directors the power, pursuant to art. 2357, comma 2, of the Italian Civil Code to buy back, over a period of 18 months from date of Shareholders’ approval, up to no. 2,460,000 treasury shares of the nominal value of 1 euro each at a price not lower than their nominal value but not higher than 5% of the reference price on the day preceding each purchase, which shall take place on the Telematic Share Market of the Italian Stock Exchange, for an overall amount not exceeding 21 million euros Following the expiry of the power granted by the Shareholders’ Meeting on 2nd May 2004 to the Board of Directors to buy back, over a period of 18 months from date of Shareholders’ approval, up to no. 4,100,000 treasury shares for an overall amount not exceeding 35 million euros, the unutilised residual amount, equal to 12 million euros, was reclassified under the caption “Retained earnings”. With regard to no. 1,395,000 treasury shares bought during 2004, the amount expended (10 million euros) was posted to the “reserve for treasury shares held”. 118 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Reserve for exchange rate differences The reserve for exchange rate differences arises from the translation into euros of those financial statements expressed in foreign currency.

Share capital

Share premium reserve

Revaluation reserve

Legal reserve

Reserve for treasury shared held

Reserve for buy-back of treasury shared

Reserve for exchange rate differences

Retained eamings

Group net income for the year

Total

Movements in consolidated shareholders’ equity for the years ended 31st December 2002, 2003 and 2004

440

60

2

46





54

386

168

1,156

















(56)







2







110

(112)

options exercise

1

2









Exchange differences













(million €)

Balance at 31.12.2001 Distributed dividends

(56)

Retained earnings 2001 and attribution to legal reserve



Share capital increase following stock – (19)





3





(19)

Net income for the year

















191

191

Balance at 31.12.2002

441

62

2

48





35

496

191

1,275

















(63) (128)

Distributed dividends

(63)

Retained earnings 2002 and attribution to legal reserve







4







124

Buy-back of treasury shares









13

22



(35)

Exchange differences













Net income for the year













Balance at 31.12.2003

441

62

2

52

13

22













Distributed dividends

(40) – (5)



– –







196

196

585

196

1,368





(65)

128

(131)

(40)

(65)

Retained earnings 2003 and attribution to legal reserve







3







Buy-back of treasury shares









9

(1)



Exchange differences













Net income for the year













Balance at 31.12.2004

441

62

2

55

22

21

(12) – (17)

(8)







– – (12)



197

197

705

197

1,488

119 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Shareholders’ equity

Net income

Shareholders’ equity

684

70

689

68

686

61

884

259

902

59

1,097

225

(300)

(193)

(271)

32

(406)

24

15

37

16

34

(1)

7

43

34

21

86

65

1,299

194

1,391

196

1,497

200

(million €)

31.12.2002

As reported in statutory financial statements

31.12.2003

Net income

Net income

Shareholders’ equity

Reconciliation of Saipem S.p.A. shareholders’ equity and net income to consolidated shareholders’ equity and net income

31.12.2004

- difference between book value and shareholders’ equity, including result for the year, of consolidated subsidiaries - consolidation adjustments for: . un-realised inter-company result elimination . elimination of tax effects by nature . other adjustments Total shareholders’ equity Minority interests in capital and reserves Group Shareholders’ equity

(24) 1,275

(3) 191

(23) 1,368

– 196

(9) 1,488

(150)

(3) 197

Minority interests in net equity Minority interests amounted to 9 million euros at 31st December 2004, a decrease of 14 million euros versus 31st December 2003, mainly related to the variation occurred to the shareholding in European Marine Investments Limited.

120 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Provisions for contingencies Provisions for contingencies amounted to 123 million euros, an increase of 6 million euros versus the previous year. The composition of the caption and movements are set out below:

Total

17

Other provisions



Redundancy incentives

Periodic maintenance

33

Provisions for losses in associated and other companies

Stock Grants

Balance at 31.12.2002

Provisions for other risks and charges

Income taxes, even if deferred

31

(million €)

Losses on long term contracts

Severance pay and similar provisions

Movements in provisions for contingencies

1



1

132

Other provisions for contingencies

16

33

Movements: Allocation

9

1

2

12

21

4



1



50

Utilisation

(7)

(1)



(11)

(16)

(20)





(1)

(56)

Exchange rate differences

(3)





(1)

(5)







(9)

Other variations



2

(8)





3

3









32

25

2

17

20

19

1

1



117

Allocation

14

6

4

2

20

2







48

Utilisation

(7)

(6)



(17)

(5)

(11)







(46)



3





(12)

9

4





4

39

28

6

2

23

19

5

1



123

Balance at 31.12.2003 Movements:

Other variations Balance at 31.12.2004

Severance pay and similar provisions This amounted to 39 million euros, an increase of 7 million euros versus the previous year; this captions includes amounts due upon retirement to personnel employed in countries other than Italy to whom local legislation applies.

Income taxes, even if deferred These amounted to 28 million euros and include provisions for deferred income tax (5 million euros) and provisions for existing disputes with tax authorities in countries other than Italy, which, based on recent assessments, are still pending (23 million euros).

Other provisions for contingencies These amounted to 56 million euros, a decrease of 4 million euros versus the previous year and mainly relates to the following:

Provisions for stock grant schemes These amount to 6 million euros, an increase of 4 million versus the previous year and include the cost of the scheme, i.e. the fair value of stock plus social contribution and severance pay provisions, which will be due upon the transfer of the stock to company employees. These provisions also include the overall fair value of stock allocated to employees of subsidiary companies, whose costs have been subsequently re-charged.

Periodic maintenance These provisions amounted to 2 million euros, a decrease of 15 million euros versus the previous year, and are allocated to interventions of periodic maintenance on vessels.

Losses on long-term contracts Provisions amounted to 23 million euros, an increase of 3 million euros versus the previous year. At year-end, these 121 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

represented the best estimate of expected losses on long term contracts in the Offshore and Onshore Construction sectors.

Provisions for other risks and charges These amounted to 19 million euros, unchanged versus the previous year, and relate mainly to estimated costs of legal proceedings and the settlement of commercial transactions, for which indemnification by the counterpart is envisaged.

Provisions for losses incurred by associated companies and other holdings These amounted to 5 million euros and represent provisions made for companies and holdings of Saipem s.a.

Provisions for redundancy incentives to surplus personnel These amounted to 1 million euros and relate to an Italian subsidiary.

Employee termination benefits These amounted to 34 million euros, a net increase of 3 million euros versus the previous year. Variations have been set out below: (million €)

Opening balance

31

Variations: - allocations

7

- utilisation

(4)

Closing balance

34

122 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Payables

(million €)

Payables to other financial institutions Accounts payable to suppliers

Closing balance

Other variations

Exchange rate differen.

Increases/ (repayments)

Opening balance

Payables amounted to 3,025 million euros, an increase of 262 million euros versus the previous year. Variations have been set out in the following table:

Movements in the year

1,100 877

(9)

(6)

(2)

1,083

129

15

18

1,039

Paybles to banks

411

(24)

(3)

(1)

383

Advances

138

109



8

255

43

39

(1)

11

92

1





1

Amounts payable to tax authorities Amounts payable to associated companies Amounts payable to parent companies Social security charges Other payables Total



4

4





8

29

8





37

(17)

(2)

(14)

239

3

20

160 2,763

127 3,025

There are no payables due after five years.

Payables to other financial institutions These amounted to 1,083 million euros at 31st December 2004, a decrease of 17 million euros versus the previous year. It comprises loans granted to the parent company and subsidiaries by Eni Group finance companies (982 million euros), and payables due to leasing companies for capital leases (31 million euros). Payables due to Eni Group companies amounted to 1,010 million euros. Payables due after one year totalled 205 million euros (276 million euros at 31st December 2003). The overall debt of 1,466 million euros, consisting of the amount due to banks and other financial institutions, comprises short term debts of 979 million euros (933 million euros at 31st December 2003), granted at an average interest rate of 3.49% (2.74% in 2003) and amounts due after one year of 470 million euros (578 million euros at 31st December 2003) granted at an average interest rate of 2.96% (3.79% in 2003).

Accounts payable to suppliers Amounted to 1,039 million euros at 31st December 2004, an increase of 162 million euros versus the previous year, due to the increase in volumes for the whole Group. Payables due to Eni Group companies amounted to 66 million euros.

Payables to banks Payables to banks amounted to 383 million euros at 31st December 2004, a decrease of 28 million euros versus the previous year. Amounts payable to banks due after one year totalled 282 million euros (302 million euros at 31st December 2003). Saipem has in place financing facilities with Banks amounting to 300 million euros, which require that the company respect certain covenants based on the Saipem Group Consolidated Financial Statements. These conditions were met in full both at 31st December 2003 and 2004.

Advances These amounted to 255 million euros at 31st December 2004, an increase of 117 million euros versus the previous year. This caption comprises advances made by clients to the parent company and to a foreign subsidiary for ongoing works.

123 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts payable to tax authorities These amounted to 92 million euros at 31st December 2004, an increase of 49 million euros versus the previous year. They mainly consist of amounts payable to local taxation authorities for income taxes (35 million euros), VAT (43 million euros), withholding taxes (4 million euros) and other payables (10 million euros).

Amounts payable to associated companies Payables to associated companies amounted to 1 million euros at 31st December 2004, unchanged from the previous year and relate to transactions of a trading and financial nature, summarised as follows: (million €)

31.12.2003

31.12.2004

Saipem Aban Drilling Company Pvt. Ltd. (non-consolidated portion)

1

1

Total

1

1

Amounts payable to parent companies Payables to parent companies amounted to 8 million euros at 31st December 2004 and relate to transactions of a trading nature with Eni Corporate S.p.A. and Eni S.p.A. Divisions.

Social security charges These amounted to 37 million euros at 31st December 2004, an increase of 8 million euros versus the previous year; and comprise social security contributions payable mainly by Saipem S.p.A. and Italian Group companies.

Other payables Other payables amounted to 127 million euros at 31st December 2004, a decrease of 33 million euros versus the previous year. They mainly include amounts payable to joint-ventures of 22 million euros (51 million euros at 31st December 2003); amounts payable to personnel of 60 million euros (50 million euros at 31st December 2003); payables to consultants and professionals amounting to 3 million euros; and amounts payable to insurance companies of 3 million euros (1 million euros at 31st December 2003). Other amounts payable to Eni Group companies amounted to 13 million euros.

Accrued expenses and deferred income These amounted to 407 million euros at 31st December 2004, a decrease of 256 million euros versus the previous year, and are as follows.

Accrued expenses Amounted to 8 million euros at 31st December 2004, a decrease of 4 million euros versus the previous year and are made up as follows: (million €)

Interest expenses on financing

31.12.2003

31.12.2004

2

2

Expenses on hedging transactions

10

6

Total

12

8

124 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Deferred income Amounted to 399 million euros at 31st December 2004, a decrease of 252 million euros versus 31st December 2003 and are made up as follows: (million €)

31.12.2003

31.12.2004

632

371

16

20

Adjustments to revenues from long-term contracts in accordance with the accruals concept, made on the basis of the amounts contractually matured Exchange rate hedging transactions Other Total

3

8

651

399

The decrease of 261 million euros for the caption “Adjustments to revenues from long-term contracts in accordance with the accruals concept, made on the basis of the amounts contractually matured” is due mainly to contracts being in their execution phase in the Offshore and Onshore Construction sectors. Deferred income from Eni Group companies amounted to 3 million euros.

Guarantees and other memorandum and contingency accounts This caption amounted to 3,835 million euros at 31st December 2004 (3,542 million euros at 31st December 2003).

Guarantees Guarantees amounted to 1,847 million euros, and are summarised as follows: (million €)

31.12.2003

31.12.2004

- subsidiary companies

962

1,225

- associated companies

9

73

- others

6

7

Sub-total

977

1,305

Guarantees provided to third parties on behalf of:

- Guarantees by third parties in favour of Saipem S.p.A. Total

570

542

1,547

1,847

They comprise mainly guarantees issued by banks by order and on behalf of Saipem S.p.A., for obligations arising from the participation in contract tenders, for the proper execution of work, for liens and credit facilities.

Collateral Collateral, which at 31st December 2003 amounted to 1 million euros and related to special liens on tangible assets granted by an Italian subsidiary to a bank to guarantee financing received, was reduced to the extent that at 31st December 2004 it was immaterial.

125 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Other memorandum and contingency accounts These amounted to 1,988 million euros and refer to commitments on hedging contracts as follows:

(million €)

Value at 31.12.2003

Value at 31.12.2004

. purchase of foreign currency

386

558

. sale of foreign currency

745

982

1,131

1,540

Hedging contracts – fixed exchange rate:

Sub-total Interest rate swaps (I.R.S.): . purchase

17



. sale

400

400

Sub-total

417

400

Commodities : . purchase of goods



2

Sub-total



2

59

35

. sale of foreign currency

387

11

Sub-total

446

46

1,994

1,988

Options: . purchase of foreign currency

Total

These derivative contracts were entered into in order to reduce the market risk exposure arising from exchange rate fluctuations of those currencies in which trading transactions are carried out. Thus, derivative contracts for dealing purposes are not held.

(million €)

Nominal value at 31.12.2003 Purchase

Sale

Purchase

Amounts by currency are as follows:

US Dollar

245

1,050

289

923

3

425

98

449

125

27

139

15

86

26

62

4

3

4

7

2

462

1,532

595

1,393

Euro Pound Sterling Norwegian Kroner Other Total

Sale

Nominal value at 31.12.2004

The market value of the above contracts reflects the amounts estimated as payable or receivable if the contracts were to be settled at year-end including, therefore the unrealised income or losses on open contracts. In order to estimate the market value of the contracts, the stock market prices and appropriate pricing models have been used. The total theoretical net gains / (losses) arising are as follows: (million €)

31.12.2003

31.12.2004

Derivative contracts on currencies: - gains - losses Total

77

71

(18)

(15)

59

56

Commitments relating to hedging contracts with Eni Group companies amount to 1,961 million euros (1,677 million euros at 31.12.2003).

126 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Interest rate swaps (I.R.S.) were entered into in order to reduce the risk exposure arising from interest rate fluctuations. It was agreed for the parties to swap, at set due dates, the difference between fixed and variable rate, calculated on a nominal reference value. Details on interest rate swaps at year-end are as follows: 31.12.2003

31.12.2004

Nominal value (million €)

400

400

Average interest rate – sale

3.78

3.78

Average interest rate– purchase

2.19

2.20

4

3

Expiry (years)

Average variable rates are based on interest rates at year-end and can vary, thereby significantly affecting future flows. Comparison between sale and purchase swaps does not provide an indication on existing derivative contracts; this result depends on the underlying transaction. The market value for these type of contracts shows theoretical losses amounting to 12 million euros.

Off-balance sheet commitments and contingencies Saipem S.p.A., for the benefit of its customers, is committed to fulfilling the contractual obligations entered into by subsidiary or associated companies where they fail to fulfill the contractual obligations themselves, as well as to pay for any damages incurred as a result of any failure to meet those obligations. These commitments guarantee the cover for contracts whose overall value amounts to 5,004 million euros (3,959 million euros at 31 st December 2003), inclusive of the backlog quota at 31 st December 2004 relating to Group companies.

Commitments to purchase new shares issued by Saipem s.a. Following commitments undertaken during the acquisition of Bouygues Offshore (now Saipem s.a.), Saipem S.p.A. is under obligation to purchase 187,400 shares to be issued by Saipem s.a. should stock-option assignees (of preacquisition stock-option schemes) wish to exercise their right to subscribe the shares on the date and at the price set by the stock-option plan. Since the shares of the French subsidiary have been delisted upon conclusion of the acquisition process, Saipem S.p.A. shall purchase the stock at the price and conditions agreed with stock-option assignees (employed by the French company).

127 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

income statement Revenues Turnover Turnover amounted to 4,240 million euros, an increase of 135 million euros versus the previous year. A breakdown of the Group turnover by business sector is set out below: (million €)

Offshore Construction Leased FPSO

2003

2004

2,435

2,688

39

47

Offshore Drilling

298

289

Onshore Drilling

192

163

Onshore Construction

728

560

Liquefied Natural Gas (L.N.G)

205

205

Maintenance, Modification and Operation (M.M.O)

208

288

4,105

4,240

Total

1.9

140

2003

%

80

million euros

million euros

Italy

%

Geographical area (*)

Turnover by geographical are is as follows:

2004

3.3

North Sea

269

6.6

197

4.7

Rest of Europe

469

11.4

905

21.3

Africa

2,203

53.6

2,240

52.8

Middle East

183

4.5

206

4.9

Far East

184

4.5

213

5.0

Rest of Asia

392

9.5

48

1.1

Americas

204

5.0

148

3.5

Australia

121

3.0

143

3.4

4,105

100

4,240

100

Total (*) Based on the final destination of services

Revenues from Eni Group companies amounted to 528 million euros (667 million euros in 2003), of which 190 million euros from the parent company Eni S.p.A. (Eni Exploration & Production) (120 million euros in 2003).

Variations in contract work in progress The positive variation of 66 million euros relates to contracts in the Onshore and Offshore Construction sectors.

Increase in internal work capitalised under fixed assets This caption relates to the capitalisation of costs for internal work incurred during the year, amounting to 13 million euros, mainly due to interventions carried out by internal resources (labour and materials) on the readying of vessels and equipment for new projects in new geographical areas.

128 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Other revenues and income These amounted to 47 million euros (19 million euros in 2003); and have been analysed as follows: (million €)

2003

2004

- release of provisions for contingencies

1

10

- income on charge-out of personnel costs

6

9

- release of provisions for doubtful debts

6

6

- gains on sale of tangible fixed assets

6

4

- compensation for damages



2

- income relating to trading transactions



1

- grants



1

- other operating revenues



14

19

47

- Others:

Total

The release of provisions for contingencies arises from the fact that the risks provided for in previous years did not occur.

Operating expenses Raw materials, consumables and supplies These expenses amounted to 858 million euros, an increase of 99 million euros versus the previous year. They include costs for the purchase of raw and other materials used in operations as well as consumables and supplies. Costs for raw materials, consumables and supplies purchased from Eni Group companies amounted to 16 million euros.

Services These amounted to 1,974 million euros, an increase of 25 million euros versus the previous year as a direct result of the rise in operating volumes. Such costs relate to sub-contracting, design and project management activities, insurance transport, consultancy and technical services, maintenance, postal and telegraphic services, personnel and other general services. They include approximately 18 million euros (11 million euros in 2003) for commercial brokerage fees. Costs for services provided by Eni Group companies amounted to 80 million euros and refer to insurance premia relating to assets involved in operating activities and personnel insurance of (54 million euros), general services such as management, maintenance and office security services, telecommunications, aircraft services and IT costs (11 million euros), engineering and design costs (4 million euros), services for professional and technical training (2 million euros) and other services (9 million euros).

129 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Use of third party assets These costs amounted to 213 million euros, an increase of 5 million euros versus the previous year. They include instalments for the lease and rental of vessels, motor vehicles, land and buildings and aircraft as well as costs for licences and industrial patents. Costs for the use of third party assets due to Eni Group companies amounted to 3 million euros.

Payroll and related costs Payroll and related costs amounted to 745 million euros, and includes wages and salaries, employee termination benefits, holidays accrued but not yet taken and social security contributions in accordance with current national labour contracts and legislation. The allocation made to employee termination benefits includes re-valuation of the provision at 31st December 2004 and has been calculated on the basis of the Cost of Living index (ISTAT) and the amounts maturing to the benefit of the employee during the year.

- Executive managers - Managers - White collar - Blue collar - Seamen Total

Average workforce (*)

Personnel at 31.12.2004

Personnel at 31.12.2003

Other personnel costs amounted to 36 million euros (18 million euros in 2003) and relate to canteen services, construction yard logistic services, transport and other social costs. The average workforce, by category, for all the consolidated companies is as follows:

290

310

300

1,501

1,828

1,702

7,809

8,494

8,152

11,456

10,744

11,266

258

249

255

21,314

21,625

21,675

(*) flat monthly average; does not take into account the time of company consolidation.

- Executive managers - Managers - White collar - Blue collar - Seamen Total

Average workforce (*)

Personnel at 31.12.2004

Personnel at 31.12.2003

Data shown below relates to employees of companies consolidated using the proportional method, in accordance with art. 37 of Legislative Decree 127 of 9th April 1991. These have been included in the above table at 50%. (Data shown at 100%)







15

9

17

120

132

121

89

105

97

2

2

2

226

248

237

(*) flat monthly average; does not take into account the time of company consolidation.

Amortisation, depreciation and write-downs These amounted to 246 million euros, a decrease of 21 million euros versus the previous year, and include charges for 2004 related to the year of amortisation of intangible and tangible assets for 239 million euros and and the depreciation of tangible assets for 1 million euros. The decrease in this caption is due to the completion of important projects for which specific investments had been made. This caption also includes the write-downs of receivables included under current assets of 6 million euros. An analysis of amortisation, depreciation and write-downs is provided under the captions for intangible and tangible assets. 130 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Variations in raw materials, supplies and consumables This caption mainly comprises the change in spare parts and consumables for internal use rather than for resale and showed a balance of 12 million euros at 31st December 2004. Further information is given under the caption “inventories”.

Provisions for contingencies Provisions for contingencies amounted to 2 million euros (3 million euros in 2003) and relate exclusively to provisions made by a foreign subsidiary.

Other provisions These amounted to 22 million euros (34 million euros in 2003) and are analysed in detail under the caption “Provisions for Contingencies-other”. They include the allocation for the periodic maintenance of vessels of 2 million euros and the allocation made in relation to estimated losses on contracts in the Offshore and Onshore Construction sectors at yearend of 20 million euros.

Other operating costs These costs amounted to 28 million euros, a decrease of 13 million euros versus the previous year and relate to: (million €)

2003

2004

23

19

Losses on disposal of tangible assets

1

1

Losses on receivables and others

2



Charges on trading transactions

1



Other operating costs

14

8

Total

41

28

Taxation and customs duties

131 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Financial income and expenses Income from investments Income from investments amounted to 1 million euros and relate mainly to the sale of company holdings to third parties.

Other financial income This amounted to 42 million euros, unchanged versus the previous year and comprises: (million €)

2003

2004

- interest income from Eni Group financing companies

7

21

- premia on hedging contracts for foreign currency risks

18

13

- interest income on bank deposits and current accounts

15

6

- interest income on tax credits

1



- other financial income

1

2

42

42

Total

The above amounts include income of 21 million euros from Eni Group companies.

Interest and other financial expenses These expenses amounted to 84 million euros, a decrease of 11 million euros versus the previous year and refer to: (million €)

2003

2004

- interest due to Eni Group finance companies

35

39

- interest payable to banks

17

19

- expenses on hedging contracts

29

17

- interest expenses on payables to others

2

1

- other financial expenses

12

8

Total

95

84

2003

2004

The above figures include charges of 39 million euros to Eni Group companies.

Exchange rate gains and losses This caption comprises the following: (million €)

- exchange rate gains

85

165

- exchange rate losses

(85)

(165)

Total





Revaluation of financial activities This caption amounted to 18 million euros and pertains to the economic results achieved by companies consolidated using the net equity method; these are all held directly or indirectly by Saipem s.a.

132 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Current, deferred, pre-paid income taxes 2003

2004

- Italian companies

17

18

- Foreign companies

42

40

- Italian companies



(7)

- Foreign companies

8

16

67

67

(million e)

Current taxes:

Net pre-paid and deferred taxes:

Total

These amounted to 67 million euros, unchanged versus the previous year and refer mainly to taxes paid abroad. (%)

2003

2004

Theoretical tax rate

49.3

49.4

Positive (negative) variation to the theoretical tax rate: - tax on foreign business (Regional Business Tax, IRAP)

(14.1)

(14.8)

- minor taxation on foreign companies

(13.3)

(12.6)

- other reasons

3.6

Total Actual tax rate

3.0

(23.8)

(24.4)

25.5

25.0

133 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Information by business sector

Offshore Construction

Leased FPSO

Offshore Drilling

Onshore Drilling

Onshore Construction

L.N.G.

M.M.O.

Head Office

Total

Operating revenues, contribution from operations, tangible and intangible assets, capital expenditure and depreciation and amortisation by business sector.

2,547

39

298

192

742

205

208



4,231

Contribution from operations

226

9

57

23

70

24

9



418

Tangible and intangible assets

1,127

89

656

95

244

193

85

56

2,545

87

55

73

6

29

5

4

13

272

Depreciation, amortisation and write-downs 115

12

37

20

45

18

7

4

258 4,306

(million €)

2003 Operating revenues

Capital expenditure 2004 Operating revenues

2,700

47

289

158

609

215

288



Contribution from operations

226

11

66

20

49

19

15



406

Tangible and intangible assets

1,115

74

661

87

233

181

78

64

2,493

98



48

11

22

6

2

12

199

Depreciation, amortisation and write-downs 107

10

42

18

31

18

9

5

240

Capital expenditure

Detailed information relating to the above has been disclosed in the relevant business section of the Directors’ report.

Operations with related parties Operations with related parties are detailed in the Directors’ Report.

Saipem S.p.A. Directors’, Statutory Auditors’ and General Managers’ remuneration Emoluments paid to the Saipem S.p.A. Board of Directors for 2004 amounted to 2,276 thousand euros. Emoluments paid to the Saipem S.p.A. Board of Statutory Auditors amounted to 134 thousand euros. Emoluments paid to General Managers amounted to 778 thousand euros. The above compensation represents costs borne by Saipem S.p.A. and its subsidiaries and comprise ordinary emoluments, non-monetary fringe benefits, bonuses and other incentives, attendance fees, out-of-pocket expenses reimbursed as a lump sum and emoluments recognised for similar duties in other consolidated companies. For those directors entrusted with executive powers and who are employees of the company or another Eni Group company, the emoluments also comprise a salary. Moreover, in the case of termination of employment, the emoluments may comprise additional amounts in excess of the termination indemnity. The above remuneration refers to those emoluments, which are subject to taxation in accordance with personal tax regulations.

134 SAIPEM FINANCIAL REPORT 2004 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

independent auditor’s report on the consolidated financial statements

135 SAIPEM FINANCIAL REPORT 2004 INDEPENDENT AUDITORS’ REPORT

A Joint Stock Company with Registered Office in San Donato Milanese (MI), Italy Fully paid-up Share Capital Euro 441,177,500 Fiscal Code and Milan Companies’ Register No. 00825790157 Other offices: Cortemaggiore (PC) - Via Enrico Mattei, 20 Website: www.saipem.eni.it Operator: +39-025201 Information for Shareholders Saipem S.p.A., Via Martiri di Cefalonia, 67 - 20097 San Donato Milanese (MI) Relations with istitutional investors and financial analysts: Fax: +39-0252054295 E-mail: [email protected] Publications Financial Report at 31st of December 2004 (in English) Bilancio al 31 dicembre 2004 (in Italian) Third quarter report at 30th September 2004 (in English) Relazione trimestrale al 30 settembre 2004 (in Italian) Six-monthly Report at 30th June 2004 (in English) Relazione semestrale al 30 giugno 2004 (in Italian) Second quarter report at 30th June 2004 (in English) Relazione trimestrale al 30 giugno 2004 (in Italian) First quarter report at 31st March 2004 (in English) Relazione trimestrale al 31 marzo 2004 (in Italian) Health, Safety Environment 2004 (in Italian and English)

Also available on Saipem’s website: www.saipem.eni.it Design: Fausta Orecchio/Orecchio acerbo Cover: Lorenzo Mattotti Printed by: Impronta Grafica - Cantù

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