Letter to the shareholders

Dear Shareholders,

We experienced a particularly favourable market trend during the first half of 2008 and part of the third quarter, whilst the latter part of the year saw the financial crisis emerging first in the international banking sector before spreading to the economy at large, causing oil prices to plummet and drastically reshaping market outlook.
Your Company managed to capitalize on the positive market trend that prevailed for most of the year, and, thanks to strong competitive positioning and high operational efficiency, was once more able to achieve record results, profit and new contract acquisitions.
Saipem’s share price (-56% in 2008, in line with the reference sector) reflected the difficult market conditions resulting from the global financial crises, which reduces oil & gas demand and prices and consequently investments by the oil industry.
All three Business Units contributed to the improved financial results, thanks to their improved operational efficiency and increased volume of operations.
The level of new contracts awarded to the Group in 2008 is particularly impressive (€13.9 billion) and includes the first contract for the realization of a liquefaction plant, which raises the backlog at December 31, 2008 to a new record of over €19 billion.  Principal areas of operations were West Africa and Kazakhstan in the Offshore sector; the Middle East and North Africa in the Onshore sector; West and North Africa in the Offshore Drilling sector; and Latin America and the Middle East in the Onshore Drilling sector.

The level of operational efficiency that was achieved confirmed that your Company is once again at the apex of its industry.  In terms of safety the LTIFR (Lost Time Injury Frequency Rate) index stood at 0.5 (0.71 in 2007).
Revenues amounted to €10.1 billion (€9.3 billion in 2007 on a perimeter-unchanged basis), operating profit stood at €1,084 million (€852 million in 2007 on a perimeter-unchanged basis) and adjusted net profit reached €724 million (€536 million in 2007 on a perimeter-unchanged basis).
Revenues and margin distribution across the various business units of your Company were as follows:  the Onshore sector accounted for 53% of revenues and 28% of margins; the Offshore sector generated 38% of revenues and 49% of margins; Drilling accounted for 9% of revenues and 23% of margins.

The complex investment programme begun in 2006, designed to strengthen and expand our assets in the Offshore Construction and Drilling sectors, continued in 2008 with a total outlay of €2,044 million.  In 2008, the principal investment projects completed in the Offshore Drilling sector were the construction of a jack-up and a tender assisted drilling barge, both under long-term contracts with Saudi Aramco and Eni respectively.  In the Onshore Drilling sector, 27 rigs were acquired and/or built, all of which are contracted out to various clients, mainly in Latin America.  In the Offshore Construction sector, projects completed in 2008 include the FPSO Gimboa under a long-term contract to Sonangol; and 3 utility barges to be deployed on behalf of Agip KCO for the Kashagan project. 
Construction continued on 3 deepwater drilling vessels, with completion expected in the first quarter of 2010, a jack-up and 5 onshore drilling rigs, all due to become operational in 2009.
Finally, in the Offshore Construction sector, works continued on the realization of a pipelayer and a field development ship, both equipped to carry out deepwater operations, a diving support vessel and a new fabrication yard for large offshore structures;  construction of vessels is expected to reach completion in 2011, whereas fabrication at the new yard is forecast to start by the end of 2010.
In January 2009, Saipem purchased the lay barge Piper, renamed Castoro 7, to strengthen its presence in the trunkline sector.
These initiatives complete the investment programme which is designed to strengthen our position in the Offshore Construction and Drilling sectors; other future investments, besides routine maintenance works, may originate from the award of contracts in the leased FPSO segment or possible requirements for assets on projects to consolidate local content;
The increase in volumes and the construction of new vessels were accompanied by a growth in human resources to approximately 38,000 persons at the end of 2008, and the strengthening both in Europe and India of engineering, project management and procurement expertise.

The programme for the disposal of non-core assets, begun in 2007, was completed in 2008 with the sale of the 30% holding in GTT, for a price of €310 million.

With regard to 2009 and the medium-term outlook, the dire forecasts for the development of the world economy led to a collapse, in the second half of 2008, of the (Brent) oil price from a historical high in July of close to 150 dollars to around 40 dollars/barrel at year end.
This sudden dramatic fall in the oil price, coupled with much tighter access to credit due to difficulties of the international banking sector, has led to a significant revision in oil companies’ spending plans.  Projects for the development of non-conventional oil and marginal oil field development appear economically incompatible with short-term oil price forecasts.  Moreover, the expectation that a fall in the prices of several raw materials will lead to lower costs in manufactured products, and tighter access to credit, may lead oil companies to delay the launch of new projects and to reschedule existing ones.
All of this makes interpretation of the oil services market difficult and uncertain in the short term.
Saipem faces this negative phase with a record backlog, and a business portfolio that includes Drilling and Engineering & Construction in all the more promising areas: oil field development, subsea operations, heavy lifting, pipelaying; and with activities in all the most prolific hydrocarbon provinces.  Our industrial model, which combines excellent engineering and execution with a strong presence in the countries where we operate, makes Saipem especially credible for the realization of complex projects in frontier areas; projects that are generally economically more robust, and that have planning and execution schedules that are less exposed to short-term variations in the price of hydrocarbons. 
These considerations underpin Saipem’s contention that it can weather this weak market, continuing to achieve the sort of performance that puts it in a position of excellence in its own sector.
In contrast with the short-term uncertainty, the medium-term prospects for the Oil Services Industry are much more solid and promising. 
The supply of Energy will continue to depend on oil and gas production, and increasingly on the development of fields in deep waters and remote areas.  The oil industry has experienced a decade of under-investment that has significantly affected the ability of the International Oil Companies to replace reserves. 
It therefore seems reasonable that as soon as the world economy shows signs of recovery, the price of hydrocarbons will again start to climb, and with it, investments by the Oil Industry. 
With the objective of fully exploiting the potential of a market which, following this negative interval, is expected to expand strongly in the medium-term, Saipem continues its own investment program with expenditure forecast at €1.6 billion in 2009.  These investments are approximately 50% in Drilling and are backed by long-term contracts that have already been acquired.  The remainder are in unique offshore vessels, designed to meet the challenges deriving from the production and transport of hydrocarbons in ultra-deep waters and in frontier environments.

March 12, 2009

On behalf of the Board of Directors

The Chairman
Marco Mangiagalli

The Deputy Chairman and
Chief Executive Officer
Pietro Franco Tali