SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

x                           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

o                              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                        to                       

Commission File Number 1-6479-1

OVERSEAS SHIPHOLDING GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code: 212-953-4100

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

 

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

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

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

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

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

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

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

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

The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 30, 2005, the last business day of the registrant’s most recently completed second quarter, was $2,077,168,507, based on the closing price of $59.65 per share on the New York Stock Exchange on that date. (For this purpose, all outstanding shares of Common Stock have been considered held by non-affiliates, other than the shares beneficially owned by directors, officers and certain 5% shareholders of the registrant; certain of such persons disclaim that they are affiliates of the registrant.)

As of February 24, 2006, 39,531,417 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed by the registrant in connection with its 2006 Annual Meeting of Shareholders are incorporated by reference in Part III.

TABLE OF CONTENTS

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PART I

ITEM 1.                 BUSINESS

Overview

Overseas Shipholding Group, Inc. (“OSG” or the “Company”) is one of the world’s leading independent bulk shipping companies engaged primarily in the ocean transportation of crude oil and petroleum products. The Company owns or operates a modern fleet of 89 vessels (aggregating 11.4 million deadweight tons) of which 79 vessels operate in the international market and 10 operate in the U.S. Flag market. OSG’s newbuilding program includes four LNG carriers, four International Flag Product Carriers and ten U.S. Flag Product Carriers, bringing the Company’s total operating and newbuild fleet at December 31, 2005 to 107 vessels.

OSG’s vessel operations are organized into strategic business units: crude oil tankers, Product Carriers, U.S. Flag vessels and Liquefied Natural Gas (“LNG”) Carriers. The crude oil tanker unit manages International Flag V-Plus, VLCC, Aframax and Panamax tankers; the Product Carriers unit principally manages Handysize Product Carriers; the U.S. Flag unit manages most U.S. Flag vessels; and the LNG unit is developing its chartering and commercial capabilities in preparation for the delivery of four LNG carriers beginning in late 2007. Each strategic business unit has dedicated chartering and commercial personnel while the Company’s technical ship management operations and corporate departments support all four business units.

The Company charters its vessels either for specific voyages (“Voyage Charter”) at spot rates or for specific periods of time (“Time Charter”) at fixed monthly amounts. Spot market rates are highly volatile, while time charter rates are fixed for a specific period of time, and provide a more predictive stream of Time Charter Equivalent Revenues. For a more detailed discussion on factors influencing spot and time charter markets, see Operations - Charter Types.

A glossary of shipping terms (the “Glossary”) that should be used as a reference when reading this Annual Report on Form 10-K begins on page 27. Capitalized terms that are used in this Annual Report are either defined when they are first used or in the Glossary.

Business Strategy

The Company’s strategy is to be a market leader in each of the segments in which it operates. OSG believes that it differentiates itself from its competitors through the scale and diversity of its fleet, the skills, experience and capabilities of its sea-based crew and shore-based personnel, and its ability to and reputation of providing reliable, safe transportation services while protecting its crews and the environment. To support its goal of market leadership, OSG intends to expand its International and U.S. Flag fleets on an opportunistic basis, strive for operational excellence, and maintain a strong balance sheet to support future growth.

Balanced Growth—The Company believes that by balancing the types of vessels it deploys as well as actively managing the mix of Charters and the ownership profile of its fleet, it can maximize returns on invested capital while making it less dependent on any particular market sector.

Operational Excellence—The Company is committed to technical excellence across its fleet. To support this goal, the Company has a high quality, modern fleet operated by experienced crews. The Company has established operational practices and procedures that are designed to ensure that it complies with all applicable environmental, regulatory and safety standards and has invested in technology and machinery to further such compliance. The Company’s operating policies and procedures are audited by an internal team that reports to the Company’s Head of Shipping Operations. Furthermore, the Company employs an operational compliance officer who reports directly to the Company’s President.

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Financial Flexibility—The Company believes its strong balance sheet, high credit rating and high level of unencumbered assets give it access to both the unsecured bank markets and to the public debt markets, allowing it to borrow primarily on an unsecured basis and to reduce its financing costs and cash flow breakeven levels in each of its vessel classes. This financial flexibility permits the Company to pursue attractive business opportunities.

Summary of 2005 Acquisitions and Transactions

During 2005, the Company pursued several initiatives to expand the number of vessels in its fleet and to reduce the average age of its vessels. Among these initiatives were the following transactions:

International Crude Oil Tankers

·       On October 13, 2005, OSG sold seven tankers (three VLCCs and four Aframaxes) to Double Hull Tankers, Inc. (“DHT”), in connection with DHT’s initial public offering. The total purchase price paid for the vessels, after giving effect to the exercise of the over-allotment option granted by OSG to the underwriters of the DHT offering, was $419.9 million in cash and 13.4 million shares in DHT, constituting a 44.5% interest in DHT. OSG time chartered the vessels back from DHT for initial periods of five to six and one-half years with various renewal options up to an additional five to eight years, depending on the vessel. Under related agreements, a subsidiary of the Company provides Technical Management services for these vessels for DHT for amounts that have been fixed (except for vessel insurance premiums) over the term of the agreements. Such management agreements are cancelable by DHT upon 90 days notice.

·       On June 1, 2005, a subsidiary of OSG acquired its partner’s 50.1% interest in a joint venture that owned four double hull V-Plus tankers for $69.0 million. Subsequently, OSG sold two of the four V-Pluses to the former joint venture partner in a cash transaction valued at $168.5 million (net of repayment of subordinated partner loans) and retained ownership of the remaining two V-Plus tankers. Each V-Plus is capable of carrying up to 3.2 million barrels of crude oil, nearly 50% greater than a VLCC, thus providing customers a lower delivered cost per barrel than other vessel types. These modern, double hull tankers have design features that extend their trading lives to 40 years and enhance their safety and efficiency on long haul routes.

·       During 2005, the Company sold its single hull Suezmax, its 50% interest in a 13 year old double sided Aframax, an 11 year old Aframax, two approximately 18 year old double sided Panamaxes, two 12 year old Panamaxes (which the Company bareboat chartered back for 50 months) and its 30% interest in a single hull VLCC.

International Product Carriers

·       On October 7, 2005, OSG signed an agreement to time charter-in four newbuild Product Carriers for a period of ten years each. The vessels are scheduled for delivery to OSG between September 2006 and June 2007 and will be able to transport petroleum products, vegetable oils and IMO III chemicals.

·       On January 20, 2005, OSG acquired Stelmar Shipping Ltd. (“Stelmar”), a leading international provider of petroleum product and crude oil transportation services. Stelmar’s modern fleet consisted of 40 vessels, aggregating 2.3 million dwt. The acquisition resulted in numerous financial and operational benefits, including the addition of 24 Product Carriers, which primarily operate on time charters providing revenue stability that balances OSG’s spot market exposure in the crude oil segment. The purchase also included sixteen additional Panamax and Aframax vessels, which enhanced the Company’s crude oil fleet and its presence in the Pacific trades between South America and Central America and the U.S.

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·       During 2005, the Company sold four double sided Handysize Product Carriers with an average age of approximately 16 years. Simultaneously with these sales, the Company bareboat chartered back such vessels for terms of three and one-half years to four years. With these sales, the Company’s entire fleet of owned International Flag Product Carriers are double hull.

U.S. Flag Fleet

·       In June 2005, OSG signed agreements to bareboat charter-in ten Jones Act Product Carriers to be constructed by Aker Philadelphia Shipyard, Inc. (“APSI”). Following construction, APSI will sell the vessels to subsidiaries of American Shipping Corporation (“ASC”), an affiliate of APSI, which will bareboat charter the vessels to subsidiaries of OSG for initial terms of five and seven years, with OSG having extension options for the life of the vessels. The bareboat charterers of the vessels will, in turn, time charter the vessels to an entity owned jointly by a subsidiary of OSG and an affiliate of ASC. The vessels are scheduled to be delivered beginning in late 2006 through 2010. Each bareboat charter will commence upon delivery of the respective vessel. OSG has entered into long-term time charters with two major oil companies for the first four vessels to be delivered.

·       In February 2005, the Company signed agreements with the Maritime Administrator of the U.S. Department of Transportation pursuant to which it entered into the U.S. Maritime Security Program three U.S. Flag Product Carriers and one U.S. Flag Pure Car Carrier for ten-year terms (see “U.S. Flag Fleet Operations” on page 11). The program affords OSG the opportunity to bid on contracts to transport cargoes of select government programs as well as receive an annual subsidy in exchange for the assurance that the vessels will be made available if called upon by the U.S. government.

·       During 2005, the Company sold its three 28 year old single hull U.S. Flag Crude Tankers, upon the expiration of their respective bareboat charters, which coincided with the dates that applicable laws preclude such vessels from calling on U.S. ports.

LNG

In November 2004, the Company and Qatar Gas Transport Company Limited (Nakilat) formed a joint venture that ordered four 216,000 cbm LNG Carriers for an aggregate purchase price of $908 million. The LNG Carriers will, upon delivery in 2007 and 2008, commence 25-year time charters (with options to extend) to Qatar Liquefied Gas Company Limited (II). The vessels are intended for use on a new project to transport liquefied natural gas from Qatar to the United Kingdom. These state-of-the-art vessels will have twin slow-speed diesel engines and on-board reliquefaction capability to handle cargo boil-off.

Tax Changes Benefiting OSG’s International Shipping Operations

In October 2004, Congress passed the American Jobs Creation Act of 2004 which, for taxable years beginning in 2005, reinstates the indefinite deferral of United States taxation on international shipping income until such income is repatriated to the United States as dividends. From 1987 through 2004, the Company’s international shipping income was subject to current taxation. The new tax law effectively restores the pre-1976 tax treatment of international shipping income beginning in 2005 and places the Company’s international fleet on a level playing field with its offshore competitors for the first time since 1986 (see “Taxation of the Company” on page 20).

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Fleet Highlights

As of December 31, 2005, OSG owned or operated (including newbuilds ordered) an aggregate of 107 vessels. Of this total, 87 vessels are International Flag and 20 vessels are U.S. Flag. The Marshall Islands is the principal flag of registry of the Company’s International Flag vessels. Additional information about the Company’s fleet, including its ownership profile, is set forth below under Operations—Fleet Summary, as well as on the Company’s website, www.osg.comwww.osg.com. The Company’s fleet includes:

·       Forty-eight International Flag tankers engaged in the transportation of crude oil worldwide;

·       Twenty-nine International Flag Product Carriers (including two Aframaxes and two Panamaxes that are currently reflected in the International Flag Crude Tankers reportable segment) engaged in the transportation of refined petroleum products;

·       Two International Flag Dry Bulk Carriers that transport primarily coal and iron ore;

·       Ten U.S. Flag vessels, seven of which are Product Carriers (including three that trade primarily in the international market and are therefore reflected in the International Flag Product Carriers reportable segment) that transport refined and unrefined petroleum products, two of which are Dry Bulk Carriers and one of which is a car carrier; and

·       Four International Flag newbuild Product Carriers (scheduled for delivery in 2006 and 2007), ten newbuild U.S. Flag Jones Act Product Carriers (scheduled for delivery between 2006 and 2010) and four newbuild LNG carriers (scheduled for delivery in 2007 and 2008).

In the international market, the Company has one of the industry’s most modern and efficient fleets. At a time when customers are demonstrating an increasingly clear preference for modern tonnage based on concerns about the environmental risks associated with older vessels, 100% of OSG’s owned International Flag fleet is double hull. The young age of the Company’s International Flag fleet and the Company’s Technical Management expertise has resulted in minimal service disruptions for these vessels.

Commercial Pools

To increase vessel utilization and thereby revenues, the Company participates in Commercial Pools with other owners of modern crude oil tankers. By operating a large number of vessels as an integrated transportation system, Commercial Pools offer customers greater flexibility and a higher level of service while achieving improved scheduling efficiencies. All of the Company’s V-Plus and VLCC vessels are managed in the Tankers International pool which, as of December 31, 2005, operated an aggregate of 47 VLCC and V-Plus tankers that trade on long haul routes throughout the world. All but one of OSG’s Aframax tankers are in the Aframax International pool, which at year end 2005 consisted of 36 Aframaxes that generally trade in the Atlantic Basin, North Sea and the Mediterranean on short and medium haul routes. The remaining Aframax is expected to join Aframax International in March 2006, upon completion of its current time charter. Nine of the Company’s 13 Panamax tankers participate in Panamax International, which operated a total of 13 Panamaxes as of December 31, 2005 on short and medium haul routes between South and Central America, the U.S. and Caribbean. These commercial ventures negotiate charters with customers primarily in the spot market. The size and scope of these pools enable them to enhance utilization rates for pool vessels by securing backhaul voyages and Contracts of Affreightment (“COAs”), thus generating higher effective TCE revenues than otherwise might be obtainable in the spot market. For detailed information on the pools, See Operations—International Fleet Operations.

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Technical Operations

OSG believes that its commercial success depends in part on the Company’s compliance with quality, safety and environmental standards mandated by worldwide regulators and customers. Technical operations for the Company’s crude oil tankers, Product Carriers and U.S. Flag fleet is managed from Newcastle, United Kingdom, Athens, Greece and New York, New York, respectively, by an integrated team of shore side and sea-based personnel. The Company has established operational practices and procedures that are designed to ensure that all applicable quality, safety and environmental standards are satisfied and has provided all of its operational personnel with appropriate training and machinery to fully implement these practices and procedures. In 2005, OSG established an operational integrity group, responsible for auditing compliance with vessel operating procedures, vessel compliance with environmental regulatory requirements, vessel safety and maintenance standards and responding to the Company’s open, self reporting system of possible violations of Company policies and procedures. The Company has also hired an independent compliance officer of its practices, procedures and training programs.

Commercial Operations

OSG’s commercial operations teams based in its offices in London, New York and Singapore permit customers to have access at all times to information about their cargo’s position and status. The Company believes that the scale of its fleet, its commercial management skills and extensive market knowledge allow it to achieve better rates than smaller, independent shipowners. OSG’s reputation in the marketplace is a result of longstanding relationships with its customers and business partners. Investments in technology, including database and software tools, have enabled OSG to improve the speed, quality and information it provides to its customers.

Customers

OSG’s customers include major independent and state-owned oil companies, oil traders, and U.S. and international government entities. The Company believes that it distinguishes itself in the shipping market through an emphasis on service, safety, reliability and its ability to maintain and grow long-term customer relationships.

Liquidity

The Company believes that the strength of its balance sheet, and the financial flexibility that it affords, distinguishes it from many of its competitors. At December 31, 2005, shareholders’ equity increased by $450 million to $1.88 billion and liquidity, including undrawn bank facilities, increased to more than $1.42 billion. On February 9, 2006, OSG entered into a new $1.5 billion unsecured credit facility which replaced bank facilities that provided up to $1.33 billion of unsecured financing.

Liquidity adjusted debt to capital was 24.5% at December 31, 2005, a reduction of close to 26 percentage points from a pro forma 50.3% as of December 31, 2004, adjusted to reflect the Stelmar acquisition and the sales of Product Carriers in January 2005. For this purpose, liquidity adjusted debt is defined as long-term debt reduced by cash and the tax adjusted balance in the Capital Construction Fund. Notably in 2005, the Company used the proceeds of the DHT transaction to pay down debt, while simultaneously expanding its fleet by chartering-in tonnage, which requires no capital commitment.

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Employees

As of December 31, 2005, the Company had 3,337 employees: 3,187 seagoing personnel and 250 shore side staff. The Company has collective bargaining agreements with two different maritime unions covering 204 seagoing personnel employed on the Company’s U.S. Flag vessels. These agreements are in effect through June 15, 2006 with one of the unions and June 15, 2015 with the other union. Under the collective bargaining agreements, the Company is obligated to make contributions to pension and other welfare programs. OSG believes that it has a satisfactory relationship with its employees.

Forward-Looking Statements

This Form 10-K contains forward-looking statements regarding the outlook for tanker markets, and the Company’s prospects, including prospects for certain strategic alliances and investments. There are a number of factors, risks and uncertainties that could cause actual results to differ from the expectations reflected in these forward-looking statements, including changes in production of or demand for oil and petroleum products, either globally or in particular regions; greater than anticipated levels of newbuilding orders or less than anticipated rates of scrapping of older vessels; changes in trading patterns for particular commodities significantly impacting overall tonnage requirements; changes in the rates of growth of the world and various regional economies; risks incident to vessel operation, including discharge of pollutants; unanticipated changes in laws and regulations; increases in costs of operation; drydocking schedules differing from those previously anticipated; the availability to the Company of suitable vessels for acquisition or chartering-in on terms it deems favorable; changes in the pooling arrangements in which the Company participates, including withdrawal of participants or termination of such arrangements; the ability to attract and retain customers; the ability to restore refining capacity and crude oil production damaged by hurricanes in the Gulf of Mexico; the impact on the Company’s financial statements of the sale of seven vessels to Double Hull Tankers, Inc. and the charter back of such vessels; estimates of future costs and other liabilities for certain environmental matters and investigations; and projections of the costs needed to develop and implement the Company’s strategy of being a market leader in the segments in which the Company competes. The Company assumes no obligation to update or revise any forward-looking statements. Forward-looking statements in this Form 10-K and written and oral forward-looking statements attributable to the Company or its representatives after the date of this Form 10-K are qualified in their entirety by the cautionary statement contained in this paragraph and in other reports hereafter filed by the Company with the Securities and Exchange Commission.

Operations

The bulk shipping of crude oil, refined and unrefined petroleum products has many distinct market segments based, in large part, on the size and design configuration of vessels required and, in some cases, on the flag of registry. Freight rates in each market segment are determined by a variety of factors affecting the supply and demand for suitable vessels. Tankers and Product Carriers are not bound to specific ports or schedules and therefore can respond to market opportunities by moving between trades and geographical areas. The Company has established three reportable business segments:  International Flag Crude Tankers and International Handysize Product Carriers, and U.S. Flag Vessels.

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The following chart reflects the percentage of TCE revenues generated by the Company’s three reportable segments for each year in the three-year period ended December 31, 2005 and excludes the Company’s proportionate share of TCE revenues of joint ventures. Segment information for 2004 and 2003 has been reclassified to conform to the 2005 presentation.

 

The following chart reflects the percentage of income from vessel operations accounted for by each reportable segment. Income from vessel operations is before general and administrative expenses and the Company’s share of income from joint ventures:

 

For additional information regarding the Company’s three reportable segments for the three years ended December 31, 2005, see Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7, and Note D to the Company’s consolidated financial statements set forth in Item 8.

The increase in the relative contribution of International Flag Product Carriers to TCE revenues and income from vessel operations in 2005 compared with both 2004 and 2003 reflects the addition of 24 Handysize Product Carriers as a result of the Stelmar acquisition in 2005. Revenues from International Flag Crude Tankers are derived principally from voyage charters and are, therefore, significantly affected by prevailing spot rates. During 2003, spot rates, particularly for VLCCs and Aframaxes, were significantly lower than their levels for 2005 and 2004.

In contrast to the International Flag Crude Tankers, revenues from International Flag Product Carriers and the vessels included in the U.S. Flag reportable segment are derived principally from time charters generating a more predictable level of TCE earnings. Accordingly, the relative contributions of the Handysize Product Carriers and the U.S. Flag segment’s vessels to consolidated TCE revenues and to consolidated income from vessel operations are influenced by the level of freight rates then existing in the international market for crude oil tankers, increasing when such rates decrease and decreasing when such rates increase. The reduction in the relative contribution of the vessels of the U.S. Flag segment also reflects the sale of all four U.S. Flag Crude Tankers between February 2004 and year end 2005.

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Charter Types

The Company believes that by balancing the mix of TCE revenues generated by voyage charters and time charters, the Company is able to maximize its financial performance throughout shipping cycles.

Spot Market

Voyage charters, including vessels operating in Commercial Pools that predominantly operate in the spot market, constituted 69% of the Company’s TCE revenues in 2005, 85% in 2004 and 79% in 2003. Accordingly, the Company’s shipping revenues are significantly affected by prevailing spot rates for voyage charters in the markets in which the Company’s vessels operate. Spot market rates are highly volatile. Rates are determined by market forces such as local and worldwide demand for the commodities carried (such as crude oil or petroleum products), volumes of trade, distances that the commodities must be transported, and the amount of available tonnage both at the time such tonnage is required and over the period of projected use. Seasonal trends greatly affect world oil consumption and consequently tanker demand. While trends in consumption vary with season, peaks in tanker demand quite often precede seasonal consumption peaks as refiners and suppliers try to anticipate consumer demand. Seasonal peaks in oil demand are principally driven by increased demand prior to Northern Hemisphere winters, as heating oil consumption increases, and increased demand for gasoline prior to the summer driving season in the U.S. Available tonnage is affected over time, by the volume of newbuilding deliveries, the removal (principally through scrapping) of existing vessels from service, and by the greater efficiency of modern tonnage. Scrapping is affected by the level of freight rates, by the level of scrap prices and by international and U.S. governmental regulations that require the maintenance of vessels within certain standards and mandate the retirement of tankers lacking double hulls.

Time Charter Market

A significant portion of the Company’s U.S. Flag fleet, its International Flag Product Carriers and upon delivery, the LNG fleet is, or will be, on time charters, providing a significant and predictable level of earnings, which is not subject to fluctuations in spot-market rates. Time charters constituted 31% of the Company’s TCE revenues in 2005, 15% in 2004 and 21% in 2003. Some of the Company’s older chartered-in vessels are chartered through the remainder of their commercial lives. The following table sets forth the percentage of the fleet based on number of vessels as of December 31, 2005, that traded in the spot market and the time charter market. The vessels in commercial pools are included in the spot market because these pools predominantly perform voyage charters.

Operating Fleet (weighted by ownership percentage)

*                    For the Aframax International pool, the percentage of vessels trading on time charters increased to 17% as of December 31, 2005 from 11% as of December 31, 2004.

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Fleet Summary

As of December 31, 2005, OSG’s International Flag and U.S. Flag operating fleet consisted of 89 vessels, 44% of which are chartered-in under operating or capital leases, the balance of which is owned.  In order to maximize returns on invested capital, particularly during periods of time when newbuilding prices and second hand vessel prices are near all-time highs, the Company charters-in tonnage, enabling it to expand its fleet without making additional capital commitments. Vessels chartered-in may be Bareboat Charters (where OSG is responsible for all Vessel Expenses) or Time Charters (where the shipowner pays Vessel Expenses). For more detailed information see the notes to the Detailed Fleet List later in this section.

 

OSG has one of the youngest International Flag fleets in the industry. The Company believes its modern, well maintained fleet is a significant competitive advantage in the global market. The table below reflects the average age of the Company’s owned International Flag fleet in comparison with the world fleet.

*                    Source:  Clarkson database as of January 1, 2006.

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International Fleet Operations

Crude Oil Tankers

In order to enhance vessel utilization and TCE revenues, the Company has placed its V-Plus, VLCC and all but one of its Aframax tankers as well as a number of Panamax tankers into commercial ventures that are responsible for the Commercial Management of these vessels. The pools collect revenue from customers, pay voyage-related expenses, and distribute TCE revenues to the participants, after deducting administrative fees, according to formulas based upon the relative carrying capacity, speed, and fuel consumption of each vessel.

·       Tankers International (“Tankers International”)—Tankers International was formed in December 1999, by OSG and other leading tanker companies in order to pool the commercial operation of their modern VLCC fleets. As of December 31, 2005, Tankers International had nine participants and managed a fleet of 47 modern VLCCs, including all 22 of the Company’s V-Plus and VLCC owned and chartered-in vessels.

Tankers International performs the Commercial Management of its participants’ vessels. The large number of vessels managed by Tankers International give it the ability to enhance vessel utilization through backhaul cargoes and COAs, thereby generating greater TCE revenues. In recent years, crude oil shipments from West Africa to Asia have expanded, increasing opportunities for vessels otherwise returning in ballast (i.e., without cargo) from Europe and North America to load cargoes in West Africa for delivery in Asia. Such combination voyages are used to maximize vessel utilization by minimizing the distance vessels travel in ballast.

By consolidating the Commercial Management of its substantial fleet, Tankers International is able to offer its customers access to an expanded fleet of high-quality VLCCs and V-Pluses. The size of the fleet enables Tankers International to become the logistics partner of major customers, providing new and improved tools to help them better manage their shipping programs, inventories, and risk.

·       Aframax Pool (“Aframax International”)—Since 1996, the Company and PDV Marina S.A., the marine transportation subsidiary of the Venezuelan state-owned oil company, have pooled the Commercial Management of their Aframax fleets. As of December 31, 2005, there were seven participants in Aframax International and the pool Commercially Managed 36 vessels (including 16 of the Company’s owned and chartered-in vessels) that generally trade in the Atlantic Basin, North Sea and the Mediterranean. The Aframax International pool has been able to enhance vessel utilization with backhaul cargoes and COAs, thereby generating higher TCE revenues than would otherwise be attainable in the spot market.

·       Panamax Joint Venture (“Panamax International”)—Panamax International, in which the Company has a 50% interest, was formed in April 2004 to provide for Commercial Management of the Panamax fleets of its two partners. As of December 31, 2005, Panamax International managed a fleet of 13 modern Panamaxes, which includes five of the Company’s Panamaxes, as well as four that are time chartered to the other pool partner.

Product Carriers

Building on its commercial platform and technical expertise managing Product Carriers, the Stelmar acquisition in early 2005 expanded OSG’s International Flag Product Carrier fleet to 29 vessels as of December 31, 2005. International Flag Handysize Product Carriers constitutes one of the Company’s reportable business segments. The Company’s substantial expansion of its presence in the product carrier market diversified OSG’s fleet and reduced its dependence on the crude oil sector.

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In addition, because the Product Carriers trade predominantly on time charters, they provide a more predictive stream of revenue than vessels that trade primarily in the spot market.

U.S. Flag Fleet Operations

The tax law changes that resulted from the American Jobs Creation Act passed by Congress in late 2004, coupled with converging events of a declining fleet capacity in the United States as a result of the phase out of single hull tankers required by the U.S. Oil Pollution Act of 1990 (“OPA 90”) and the expected continued growth in demand by U.S. consumers for crude oil and petroleum products transported by sea, served as the basis for OSG making a significant commitment to expanding its presence in the U.S. Flag and Jones Act market. Under the Jones Act, shipping between United States ports, including the movement of Alaskan crude oil to U.S. ports, is reserved for U.S. Flag vessels that are built in the U.S. and owned by U.S. companies, more than 75% owned and controlled by U.S. citizens. Four U.S. Flag Product Carriers qualify for and operate in trades protected by the Jones Act. In 2005, OSG actively pursued new commercial and government business opportunities, reflagged three Product Carriers (acquired through the Stelmar acquisition) to satisfy the requirements of the U.S. Government’s Military Security Program described below and bareboat chartered ten Jones Act Product Carriers that will be constructed at the Aker Philadelphia Shipyard and are scheduled for delivery from late 2006 through 2010. In addition to Product Carriers, OSG owns or operates two Dry Bulk Carriers and one Pure Car Carrier. The Company’s U.S. Flag vessels constitute one of the Company’s reportable business segments.

·       Dry Bulk Cargo—The Merchant Marine Act of 1936, as amended, requires that preference be given to U.S. Flag vessels, if available at reasonable rates, in the shipment of at least half of all U.S. government-generated cargoes and 75% of all food-aid cargoes. The Company’s two U.S. Flag Dry Bulk Carriers generate most of their revenue from these preference trades.

·       Military Security Program—Since late 1996, the Company’s U.S. Flag Pure Car Carrier has participated in the U.S. Maritime Security Program (the “Program”), which ensures that militarily useful U.S. Flag vessels are available to the U.S. Department of Defense in the event of war or national emergency. In February 2005, the Company signed four agreements with the Maritime Administrator of the Department of Transportation pursuant to which, in October 2005, the Company entered the three recently reflagged U.S. Flag Product Carriers and re-entered its U.S. Flag Pure Car Carrier into the Program. The terms of the three agreements relating to the reflagged Product Carriers are four years, subject to extension to a total of ten years in the event that the Company is awarded certain construction subsidies under the National Defense Tanker Vessel Construction Program (“NDTVCP”) and substitutes appropriate newbuild vessels constructed with such subsidies for the reflagged Product Carriers. Congressional funding of the NDTVCP has not been approved and there can be no assurance that Congress will provide such construction subsidies, that such subsidies will be awarded to the Company or that terms of these agreements will be extended if the Company does not substitute newbuild vessels constructed with such subsidies. Under the Company’s ten-year agreement relating to the Pure Car Carrier, the Company’s U.S. Flag Pure Car Carrier will continue in the Program through 2007, at which time the Company will need to substitute a modern U.S. Flag Car Carrier into the Program. Under the Program, the Company receives approximately $2.6 million per year for each vessel through 2008, $2.9 million per year for each vessel from 2009 through 2011, and $3.1 million per year for each vessel from 2012 through 2016, subject in each case to annual Congressional appropriations.

·       Capital Construction Fund—To encourage private investment in U.S. Flag vessels, the Merchant Marine Act of 1970 permits deferral of taxes on earnings from U.S. Flag vessels deposited into a Capital Construction Fund and amounts earned thereon, which can be used for the

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construction or acquisition of, or retirement of debt on, qualified U.S. Flag vessels (primarily those limited to foreign, Great Lakes, and noncontiguous domestic trades). The Company is a party to an agreement under such Act. Under the agreement, the general objective is for U.S. Flag vessels to be constructed or acquired through the use of assets accumulated in the fund. If the agreement is terminated or amounts are withdrawn from the Capital Construction Fund for non-qualified purposes, such amounts will then be subject to federal income taxes. Monies can remain tax-deferred in the fund for a maximum period of 25 years (commencing January 1, 1987 for deposits prior thereto). The Company had approximately $296 million in its Capital Construction Fund as of December 31, 2005. The Company’s balance sheet at December 31, 2005 includes a liability of approximately $93 million for deferred taxes on the fund deposits and earnings thereon.

·       Alaska Tanker Company—The Company maintains a 37.5% stake in Alaska Tanker Company, LLC (“ATC”), a joint venture that was formed in 1999 among OSG, BP p.l.c. (“BP”) and Keystone Shipping Company (“Keystone”), to provide marine transportation services in the environmentally sensitive Alaskan crude-oil trade. ATC, which is also owned 37.5% by Keystone and 25% by BP, manages the vessels carrying BP’s Alaskan crude oil. The Company’s U.S. Flag Crude Tankers were bareboat chartered to ATC, before such vessels were sold during 2005. The Company’s participation in ATC provides the Company with the ability to earn additional income (incentive hire) based upon ATC’s meeting certain predetermined performance standards. Such income, which is included in equity in income of joint ventures, amounted to $8.1 million in 2005, $7.1 million in 2004, and $7.6 million in 2003.

LNG

The Company’s LNG vessels will constitute one of the Company’s business segments upon delivery and commencement of operations, expected in late 2007, with reported operations to be included in equity in income of joint ventures.

In November 2004, after a competitive tender process, Qatar Liquefied Gas Company (II) selected a joint venture in which the Company has a 49.9% interest to time charter to it four LNG Carrier newbuildings for twenty-five years, with options to extend. The joint venture, which is between the Company and Qatar Gas Transport Company Limited (Nakilat), ordered four 216,000 cbm LNG Carriers at a total purchase price of $908 million for delivery in 2007 and 2008, at which times the time charters will begin. The Company will provide Technical Management for these state-of-the art vessels. Through the award of these time charters, the Company is strategically diversifying its business, entering a market that the Company believes offers significant opportunities.

Joint Ventures and Equity Method Investments

The following chart reflects the percentage of equity in income of joint ventures by each reportable segment.

 

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In October 2005, the Company sold seven tankers (three VLCCs and four Aframaxes) to DHT in connection with DHT’s initial public offering. These vessels are time chartered back to OSG at fixed rates for initial periods of five to six and one-half years. The charters provide for the payment of additional hire, on a quarterly basis, by OSG when the aggregate revenue earned by these vessels for the Company exceeds the sum of the basic hire paid during the quarter by the Company, as it did in the fourth quarter of 2005.

As a result of the 2005 sales of Front Tobago (a VLCC in which the Company held a 30% joint venture interest) and the Compass I (an Aframax in which OSG held a 50% joint venture interest) and the Company’s purchase of its partner’s 50.1% interest in a joint venture that owned four V-Pluses, the only operating vessels held in companies accounted for by the equity method at December 31, 2005 are those held through DHT, all of which are on time charters, with profit sharing.

The relative contribution of equity in income from joint ventures of the Company’s International Flag joint ventures (or investments accounted for by the equity method) in 2005 and 2004 increased compared with 2003 because of the significant increase in spot market rates earned by such vessels relative to the Company’s share of incentive hire received from ATC (U.S. Flag vessels), which does not fluctuate with rates.

In 2004, the Company completed a transaction with its partner covering six joint venture companies, each of which owned a VLCC. This transaction provided for an exchange of joint venture interests that resulted in the Company owning 100% of the Dundee, Sakura I and Tanabe, and the joint venture partner owning 100% of the Edinburgh, Ariake and Hakata. The results of the Dundee, Sakura I and Tanabe are included in the International Flag Crude Tankers segment from the effective date of the transaction.

In July 2004, a joint venture in which the Company has a 49.9% interest, acquired four double hull V-Pluses. The four V-Pluses, which are the only double hull V-Pluses in the world, are capable of carrying up to 3.2 million barrels of crude oil, more than 50% greater than VLCCs, at a lower delivered cost per barrel. These four vessels incorporate many design features intended to extend their trading lives to 40 years and enhance their safety and efficiency in the long haul crude trade. On June 1, 2005, a subsidiary of OSG acquired its partner’s 50.1% interest in this joint venture, then sold two of the four V-Pluses to the former joint venture partner in exchange for cash. The results of the two V-Pluses the Company owns, TI Africa and TI Oceania, are included in the International Flag Crude Tankers segment from the effective date of the transaction.

Competition

The shipping industry is highly competitive and fragmented with OSG competing with other owners of U.S. and International Flag tankers and dry cargo ships. Competitors include other independent shipowners, oil companies and state owned entities with their own fleets.

OSG’s vessels compete with all other vessels of a size and type required by the customer that can be available at the date specified. In the spot market, competition is based primarily on price, although charterers are becoming more selective with respect to the quality of the vessel they hire considering other key factors such as the vessel age, the reliability and quality of operations and preference for modern double hull vessels based on concerns about environmental risks associated with older vessels. Consequently owners of large modern double hull fleets have gained a competitive advantage over owners of older fleets. In the time charter market, factors such as the age and quality of the vessel and reputation of its owner and operator tend to be more significant in competing for business.

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As of December 31, 2005, OSG’s fleet of VLCCs and V-Pluses consisted of 22 vessels, all of which are commercially managed through Tankers International, a venture where several owners and operators pool their vessels together providing additional services and opportunities to both potential customers and pool members. Tankers International with a total of 47 VLCCs as of December 31, 2005, competes with more than 90 owners and has more tonnage than its main competitors, which include Frontline Ltd., Mitsui OSK Lines, Ltd., Nippon Yusen Kabushiki Kaisha, VELA International Marine Ltd., the shipping arm of the Saudi Arabian oil company, World-Wide Shipping Agency (S) Pte. Ltd and Kristen Navigation Inc.

OSG also operates as part of Aframax International, which consists of 36 Aframaxes trading primarily in the Atlantic Basin, North Sea and Mediterranean. More than 160 owners operate in the Aframax market sector with Aframax International being the second largest operator in this market sector. Aframax International’s main competitors include Teekay Shipping Corporation, Malaysian International Shipping Corporation Berhad, General Maritime Corp. and Minerva Marine Inc.

OSG’s main competitors in the highly fragmented Panamax trade include owners and pool operators. Nine of OSG’s Panamaxes operate as part of Panamax International, which is a joint venture that commercially manages 13 double hull vessels. Main competitors include the larger Star Tankers Heidenreich Marine Inc. and A/S Dampskibsselskabet Torm, as well as Glencore International AG, Jacob-Scorpio Pool Management S.A.M. and China Shipping Group.

In the Handysize Product Carrier segment, OSG owns or charters-in a fleet of 28 vessels that competes with over 200 owners and pool operators. Main competitors include the larger Glencore International AG, Handytankers K/S and Vitol Group, as well as Mitsui O.S.K. Lines, Ltd., OMI Corporation, China Ocean Group Companies (“COSCO”), Trafigura, A/S Dampskibsselskabet Torm and Dorado Tankers.

In the U.S. Flag trades, the Company competes with other owners of U.S. Flag vessels. Demand for U.S. Flag Product Carriers is linked to changes in refining activity levels and regional energy demands. U.S. Flag Product Carriers also compete with ocean-going barges, pipelines and are affected by the level of imports carried on International Flag Product Carriers. Competitors include Seacor Holdings, Inc., Maritrans Inc. and U.S. Shipping Partners L.P.

Environmental and Security Matters Relating to Bulk Shipping

Government regulation significantly affects the operation of the Company’s vessels. They are subject to international conventions, national, state and local laws and regulations in force in the countries in which the Company’s vessels may operate or are registered.

The Company’s vessels undergo regular and rigorous in-house safety reviews. In addition, a variety of governmental and private entities subject the Company’s vessels to both scheduled and unscheduled inspections. These entities include local port state control authorities (U.S. Coast Guard, harbour master or equivalent), Classification Societies, flag state administration (country of registry) and charterers, particularly terminal operators and oil companies. Certain of these entities require OSG to obtain permits, licenses and certificates for the operation of the Company’s vessels. Failure to maintain necessary permits or approvals could require OSG to incur substantial costs or temporarily suspend operation of one or more of the Company’s vessels.

The Company believes that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older tankers throughout the industry. Increasing environmental concerns have created a demand for tankers that conform to the stricter environmental standards. The Company is required to maintain operating standards for all of its tankers emphasizing operational safety, quality maintenance, continuous training of its officers and

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crews and compliance with international and U.S. regulations. OSG believes that the operation of its vessels will be in substantial compliance with applicable environmental laws and regulations; however, because such laws and regulations are frequently changed and may impose increasingly stringent requirements, OSG cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of its tankers.

International Environmental and Safety Restrictions and Regulations

Phase Out of Non Double Hull Tankers:

In April 2001, the International Maritime Organization (“IMO”) adopted regulations under the International Convention for the Prevention of Pollution from Ships, or MARPOL, requiring new tankers of 5,000 dwt and over, contracted for construction since July 6, 1993, to have double hull, mid-deck or equivalent design. At that time the regulations also required the phase out of non double hull tankers by 2015, with tankers having double sides or double bottoms permitted to operate until the earlier of 2017 or when the vessel reaches 25 years of age. Existing single hull tankers were required to be phased out unless retrofitted with double hull, mid-deck or equivalent design no later than 30 years after delivery. These regulations were adopted by over 150 nations, including many of the jurisdictions in which the Company’s tankers operate. Subsequent amendments to the MARPOL regulations accelerated the phase out of single hull tankers to 2005 for Category I vessels and 2010 for Category II vessels. Category I vessels are crude oil tankers of 20,000 dwt and above and product carriers of 30,000 dwt and above that are pre-MARPOL Segregated Ballast Tanks (“SBT”) carriers. Category II tankers are crude oil tankers of 20,000 dwt and above and product carriers of 30,000 dwt and above that are post-MARPOL SBT tankers. In addition, a Condition Assessment Scheme (“CAS”) will apply to all single hull tankers 15 years or older. Flag states, however, may permit the continued operation of Category II tankers beyond 2010, subject to satisfactory CAS results, but only to 2015 or 25 years of age, whichever comes earlier. Category II tankers fitted with double bottoms or double sides not used for the carriage of oil will be permitted to trade beyond 2010 to 25 years of age, subject to the approval of the flag state. Although flag states may grant life extensions to Category II tankers, port states are permitted to deny entry to their ports and offshore terminals to single hull tankers operating under such life extensions after 2010, and to double sided or double bottomed tankers after 2015.

MARPOL Regulation 13H bans the carriage of heavy grade oils in single hull tankers of more than 5,000 dwt after April 5, 2005, except that flag states may permit Category II tankers to continue to carry heavy grade oil beyond 2005, subject to satisfactory CAS results. This regulation predominantly affected heavy crude oil from Latin America, as well as heavy fuel oil, bitumen, tar and related products.

The IMO may adopt additional regulations in the future that could further restrict the operation of single hull vessels.

European Union (“EU”) regulation (EC) No. 417/2002, which was introduced in the wake of the sinking of the Erika off the coast of France in December 1999, provided a timetable for the phase out of single hull tankers from EU waters. In 2003, in response to the Prestige oil spill in November 2002, the EU adopted legislation that (a) banned all Category I single hull tankers over the age of 23 years immediately, (b) phased out all other Category I single hull tankers in 2005 and (c) prohibits all single hull tankers used for the transport of oil from entering its ports or offshore terminals after 2010, with double sided or double bottomed tankers permitted to trade until 2015 or until reaching 25 years of age, whichever comes earlier. The EU, following the lead of certain EU nations such as Italy and Spain, also banned all single hull tankers carrying heavy grades of oil from entering or leaving its ports or offshore terminals or anchoring in areas under its jurisdiction.

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Many users of oil transportation services operating around Europe are showing a willingness to pay a higher freight rate for double hull tankers than for single hull tankers. It is becoming increasingly more difficult to obtain clearance for single hull tankers from many countries and oil terminals.

OSG’s International Flag tanker fleet is comprised of modern double hull vessels, except for the 13 chartered-in Handysize Product Carriers, which do not qualify as double hull for MARPOL or EU purposes. The direct impact to the Company of the revised and accelerated IMO phase out schedule will be limited, as all of the Company’s crude oil tankers, and all but these 13 chartered-in International Flag Product Carriers, are double hull, and the charters-in expire prior to the date of the respective vessels’ IMO phase out. However, because six of these 13 vessels are not already chartered out through the end of their respective charters-in, they are less likely to command premium rates when their current time charters out end. The Company’s four double bottom U.S. Flag Product Carriers participate in the U.S. Jones Act trades and are therefore not affected by the IMO phase-out schedule. The U.S. has not adopted the 2001 amendments to the MARPOL regulations, which were viewed as less restrictive than OPA 90 regulations that were already in place. For additional information concerning a pending government investigation of the Company’s handling of waste oils, see Item 3. Legal Proceedings.

The IMO has also negotiated international conventions that impose liability for oil pollution in international waters and a signatory’s territorial waters.

Other International Environmental and Safety Regulations:

In September 1997, the IMO adopted Annex VI to the International Convention for the Prevention of Pollution from Ships to address air pollution from ships. Annex VI, which became effective in May 2005, sets limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions. All of the Company’s vessels are currently compliant with these regulations. Additional or new conventions, laws and regulations may be adopted that could adversely affect the Company’s ability to comply with applicable air pollution regulations in the future.

Under the International Safety Management Code, or ISM Code, promulgated by the IMO, vessel operators are required to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. OSG has developed such a safety management system. The ISM Code also requires that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel’s management with code requirements for a safety management system. No vessel can obtain a certificate unless its operator has been awarded a document of compliance, issued by the flag state of that vessel, under the ISM Code.

All of the Company’s vessels are certified under the standards reflected in International Standards Organization’s 9002 quality assurance program and IMO’s International Safety Management safety and pollution prevention protocols. In 2002, the Company’s New York office obtained 14001 Certification for Environmental Management Systems. The International Safety Management Code requires a certificate of compliance to be obtained both for the vessel manager and for each vessel that it operates. The Company has obtained such certificates for its shoreside offices and for all of the vessels that it manages. OSG will be required to renew these documents of compliance and safety management certificates annually.

Noncompliance with the ISM Code and other IMO regulations may subject the shipowner or charterer to increased liability, may lead to decreases in available insurance coverage for affected

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vessels and may result in the denial of access to, or detention in, some ports. For example, the U.S. Coast Guard and EU authorities have indicated that vessels not in compliance with the ISM Code will be prohibited from trading in U.S. and EU ports.

Although the United States is not a party to these conventions, many countries have ratified and follow the liability plan adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969. Under this convention, depending on whether the country in which the damage results is a party to the 1992 Protocol to the International Convention on Civil Liability for Oil Pollution Damage, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain complete defenses. Under an amendment to the Protocol that became effective on November 1, 2003, for vessels of 5,000 to 140,000 gross tons (a unit of measurement for the total enclosed spaces within a vessel), liability will be limited to approximately $6.4 million plus $902 for each additional gross ton over 5,000. For vessels of over 140,000 gross tons, liability will be limited to approximately $128 million. As the convention calculates liability in terms of a basket of currencies, these figures are based on currency exchange rates on December 31, 2005. Under the 1969 Convention, the right to limit liability is forfeited where the spill is caused by the owner’s actual fault; under the 1992 Protocol, a ship-owner cannot limit liability where the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to states that are parties to these conventions must provide evidence of insurance covering the liability of the owner. In jurisdictions where the International Convention on Civil Liability for Oil Pollution Damage has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to that convention. The Company believes that its P&I insurance will cover the liability under the plan adopted by the IMO. See the discussion of Insurance below.

IMO regulations also require owners and operators of vessels to adopt Ship Oil Pollution Emergency Plans, or SOPEPs. Periodic training and drills for response personnel and for vessels and their crews are required.

The EU has adopted legislation that: (1) bans manifestly sub-standard vessels (defined as those over 15 years old that have been detained by port authorities at least twice in a six month period) from European waters, creates an obligation for port states to inspect at least 25% of vessels using these ports annually and provides for increased surveillance of vessels posing a high risk to maritime safety or the marine environment, and (2) provides the EU with greater authority and control over Classification Societies, including the ability to seek to suspend or revoke the authority of negligent societies. In addition, the EU is considering the adoption of criminal sanctions for certain pollution events, such as the unauthorized discharge of tank washings. It is impossible to predict what legislation or additional regulations, if any, may be promulgated by the EU or any other country or authority.

Domestic Environmental and Safety Restrictions and Regulations

The United States regulates the tanker industry with an extensive regulatory and liability regime for environmental protection and cleanup of oil spills, consisting primarily of OPA 90, and the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA. OPA 90 affects all owners and operators whose vessels trade with the United States or its territories or possessions, or whose vessels operate in the waters of the United States, which include the U.S. territorial sea and the 200 nautical mile exclusive economic zone around the United States. CERCLA applies to the discharge of hazardous substances (other than oil) whether on land or at sea. Both OPA 90 and CERCLA impact the Company’s operations.

Under OPA 90, vessel owners, operators and bareboat or demise charterers are ‘‘responsible parties’’ who are liable, without regard to fault, for all containment and clean-up costs and other

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damages, including property and natural resource damages and economic loss without physical damage to property, arising from oil spills and pollution from their vessels.

In general, OPA 90 limits the liability of responsible parties to the greater of $1,200 per gross ton or $10 million per tanker that is over 3,000 gross tons (subject to possible adjustment for inflation). The statute specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for discharge of pollutants within their waters. In some cases, states that have enacted this type of legislation have not yet issued implementing regulations defining tanker owners’ responsibilities under these laws. CERCLA, which applies to owners and operators of vessels, contains a similar liability regime and provides for cleanup, removal and natural resource damages associated with discharges of hazardous substances (other than oil). Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million.

These limits of liability do not apply, however, where the incident is caused by violation of applicable U.S. federal safety, construction or operating regulations, or by the responsible party’s gross negligence or wilful misconduct. Similarly, these limits do not apply if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with the substance removal activities. OPA 90 and CERCLA each preserve the right to recover damages under existing law, including maritime tort law.

OPA 90 also requires owners and operators of vessels to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet the limit of their potential strict liability under the statute. The U.S. Coast Guard has enacted regulations requiring evidence of financial responsibility consistent with the maximum limits of liability described above for OPA 90 and CERCLA (combined), or $1,500 per gross ton for tankers. Under the regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance, guaranty or an alternative method subject to approval by the Director of the U.S. Coast Guard National Pollution Funds Center. Under OPA 90 regulations, an owner or operator of more than one tanker is required to demonstrate evidence of financial responsibility for the entire fleet in an amount equal only to the financial responsibility requirement of the tanker having the greatest maximum strict liability under OPA 90  and CERCLA. OSG has provided the requisite guarantees and has received certificates of financial responsibility from the U.S. Coast Guard for each of its tankers required to have one.

OSG has insurance for each of its tankers with pollution liability insurance in the amount of $1 billion. However, a catastrophic spill could exceed the insurance coverage available, in which event there could be a material adverse effect on the Company’s business.

Under OPA 90, oil tankers for which a contract for construction or major conversion was put in place after June 30, 1990 are required to have double hulls. Furthermore, OPA 90 calls for the elimination of all single hull vessels by the year 2010 on a phase-out schedule that is based on size and age, unless the tankers are retrofitted with double hulls. The law permits then existing single hull vessels to operate until 2015 if they discharge at deep water ports, or lighter (i.e., offload cargo) more than 60 miles offshore.

The Company’s four double bottom U.S. Flag Product Carriers will be affected by the OPA 90 phase-out schedule in 2012 and 2013; however, two of these vessels are operated under capital leases expiring in 2011, before their phase-out dates. The other two vessels will be close to 30 years old at the dates they are first affected by the OPA 90 phase-out schedule. The OPA 90 phase-out dates for the Company’s non double hull International Flag Product Carriers are subsequent to their respective IMO phase-out dates.

OPA 90 also amended the Federal Water Pollution Control Act to require owners and operators of vessels to adopt vessel response plans for reporting and responding to oil spill scenarios up to a ‘‘worst case’’ scenario and to identify and ensure, through contracts or other approved means, the availability of necessary private response resources to respond to a ‘‘worst case discharge.’’  The plans must include contractual commitments with clean-up response contractors in order to ensure

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an immediate response to an oil spill. The Company has developed and filed its vessel response plans with the U.S. Coast Guard and has received approval of such plans. The U.S. Coast Guard has announced its intention to propose similar regulations requiring certain vessels to prepare response plans for the release of hazardous substances.

OPA 90 also requires periodic training programs and drills for shore and response personnel and for vessels and their crews.

OPA 90 does not prevent individual U.S. states from imposing their own liability regimes with respect to oil pollution incidents occurring within their boundaries. In fact, most U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more stringent than U.S. federal law.

Security Regulations

As of July 1, 2004, all ships involved in international commerce and the port facilities that interface with those ships must comply with the new International Code for the Security of Ships and of Port Facilities (“ISPS Code”). This includes passenger ships, cargo ships over 500 gross tons, and mobile offshore drilling rigs. The ISPS Code, which was adopted by the IMO in December 2002, provides a set of measures and procedures to prevent acts of terrorism, which threaten the security of passengers and crew and the safety of ships and port facilities. All of OSG’s Ship Security Plans for its vessels have been approved by the appropriate regulatory authorities and have been implemented.

All of the Company’s ships have obtained an International Ship Security Certificate from a recognized security organization approved by the appropriate flag states and each vessel has developed and implemented an approved Ship Security Plan.

Insurance

Consistent with the currently prevailing practice in the industry, the Company presently carries protection and indemnity (“P&I”) insurance coverage for pollution of $1.0 billion per occurrence on every vessel in its fleet. P&I insurance is provided by mutual protection and indemnity associations (“P&I Associations”). The P&I Associations that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. Each P&I Association has capped its exposure to each of its members at approximately $4.25 billion. As a member of a P&I Association which is a member of the International Group, the Company is subject to calls payable to the Associations based on its claim record as well as the claim records of all other members of the individual Association of which it is a member, and the members of the pool of P&I Associations comprising the International Group. The Company is currently a member of three P&I Associations with each of its vessels insured by one of these three Associations. While the Company has historically been able to obtain pollution coverage at commercially reasonable rates, no assurances can be given that such insurance will continue to be available in the future.

The Company carries marine hull and machinery and war risk insurance, which includes the risk of actual or constructive total loss, for all of its vessels. The vessels are each covered up to at least their fair market value, with deductibles ranging from $100,000 to $250,000 per vessel per incident. The Company is self insured for hull and machinery claims in amounts in excess of the individual vessel deductibles up to a maximum aggregate loss of $3,000,000 per policy year.

The Company currently maintains loss of hire insurance to cover loss of charter income resulting from accidents or breakdowns of its vessels that are covered under the vessels’ marine hull and machinery insurance. Loss of hire insurance covers up to 120 days lost charter income per vessel per incident in excess of the first 60 days lost for each covered incident which is borne by the Company.

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Taxation of the Company

The following summary of the principal United States tax laws applicable to the Company, as well as the conclusions regarding certain issues of tax law, are based on the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed U.S. Treasury Department regulations, administrative rulings, pronouncements and judicial decisions, all as of the date of this Annual Report. No assurance can be given that changes in or interpretation of existing laws will not occur or will not be retroactive or that anticipated future circumstances will in fact occur. The Company’s views should not be considered official, and no assurance can be given that the conclusions discussed below would be sustained if challenged by taxing authorities.

Substantially all of the Company’s International Flag vessels are owned or operated by foreign corporations that are subsidiaries of OSG International, Inc., a wholly owned subsidiary of the Company incorporated in the Marshall Islands (“OIN”). These corporations have made special U.S. tax elections under which they are treated as “branches” of OIN rather than separate corporations for U.S. federal income tax purposes. For 2005, OIN and its subsidiaries contributed substantially all of the Company’s pre-tax income.

As a result of changes made by the American Jobs Creation Act of 2004 (“2004 Act”), as discussed below, for taxable years beginning after December 31, 2004, the Company is no longer required to report in taxable income on a current basis the undistributed foreign shipping income earned by OIN under the “Subpart F” provisions of the Code.

Taxation to OIN of its Shipping Income:  In General

OIN derives substantially all of its gross income from the use and operation of vessels in international commerce. This income principally consists of hire from time and voyage charters for the transportation of cargoes and the performance of services directly related thereto, which is referred to herein as “shipping income.”

Shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the U.S. will be considered to be 50% derived from sources within the United States. Shipping income attributable to transportation that both begins and ends in the United States will be considered to be 100% derived from sources within the United States. OIN does not engage in transportation that gives rise to 100% U.S. source income. Shipping income attributable to transportation exclusively between non-U.S. ports will be considered to be 100% derived from sources outside the United States. Shipping income derived from sources outside the U.S. will not be subject to any U.S. federal income tax. OIN’s vessels will operate in various parts of the world, including to or from U.S. ports. Unless exempt from U.S. taxation under Section 883 of the Code, OIN will be subject to U.S. federal income taxation of 4% of its U.S. source shipping income on a gross basis without the benefit of deductions.

Application of Code Section 883

Under Section 883 of the Code, OIN will be exempt from the foregoing U.S. taxation of its U.S source shipping income if it is a “controlled foreign corporation” within the meaning of Section 957 of the Code and, under Treasury regulations that were promulgated prior to the enactment of the 2004 Act, more than 50% of OIN’s shipping income is includible in the gross income of U.S. persons that own 10% or more of OIN’s stock. While OIN is a controlled foreign corporation, as a result of the passage of the 2004 Act, the Company is longer required to include OIN’s undistributed shipping income in its income under Subpart F of the Code. In these circumstances, prior to a recent written IRS announcement, it was unclear whether the IRS would interpret the Treasury regulations as currently written in a manner that would deprive OIN of the benefits of Section 883 of the Code. The IRS has now clarified that it will interpret the Treasury regulations in a manner that will allow OIN to

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continue to benefit from the application of Section 883 of the Code. To the extent OIN is unable to qualify for exemption from tax under Section 883, OIN’s U.S. source shipping income will become subject to the 4% gross basis tax regime described below.

Taxation to OSG of OIN’s Shipping Income

For taxable years beginning on or after January 1, 1987 and ending on or before December 31, 2004, the Company, as a 10% shareholder of controlled foreign corporations, was subject to current taxation on the shipping income of its foreign subsidiaries. To make U.S.-controlled shipping companies competitive with foreign-controlled shipping companies, through the passage of the 2004 Act, Congress repealed the current income inclusion by 10% shareholders of the shipping income of controlled foreign corporations. Accordingly, for years beginning on or after January 1, 2005, the Company is not required to include in income OIN’s undistributed shipping income.

For taxable years beginning on or after January 1, 1976 and ending on or before December 31, 1986, the Company was not required to include in income the undistributed shipping income of its foreign subsidiaries that was reinvested in qualified shipping assets. For taxable years beginning on or after January 1, 1987, the Company is required to include in income the deferred shipping income from this period to the extent that at the end of any year the investment in qualified shipping assets is less than the corresponding amount at December 31, 1986. By virtue of the nature of OIN’s business, the Company anticipates that the recognition of this deferred income will be postponed indefinitely. This is discussed in more detail in Note K to the Company’s consolidated financial statements set forth in Item 8.

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Detailed Fleet List as of December 31, 2005