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ITEM 1 — FINANCIAL STATEMENTS
TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)

UNAUDITED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(in thousands of U.S. dollars, except unit and per unit data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	$			$			$			$

REVENUES (note 9d)		234,145			226,838			467,916			460,417


OPERATING EXPENSES
Voyage expenses		32,572			34,949			58,037			69,903
Vessel operating expenses (note 9d, 10)		75,197			61,108			150,327			124,496
Time-charter hire expense		18,182			23,424			38,452			48,462
Depreciation and amortization		46,163			47,924			91,733			92,932
General and administrative (note 9b, 9c, 9d, 10)		18,157			16,347			36,887			32,981
Loss on sale of vessel		—			—			171			—
Write-down of vessel (note 4a, 15)		8,194			—			9,094			—
Restructuring charge (note 7)		—			—			3,924			119

Total operating expenses		198,465			183,752			388,625			368,893

Income from vessel operations		35,680			43,086			79,291			91,524

OTHER ITEMS
Interest expense (note 6, 9b, 9c, 9d)		(8,890	)		(9,326	)		(17,359	)		(19,206	)
Interest income		150			238			279			403
Realized and unrealized loss on non-designated derivative instruments (note 10)		(38,720	)		(57,863	)		(27,880	)		(82,338	)
Foreign currency exchange gain (loss) (note 10)		367			2,249			(432	)		3,871
Other income — net (note 8)		1,159			1,409			2,469			3,890

Total other items		(45,934	)		(63,293	)		(42,923	)		(93,380	)

Income (loss) before income tax (expense) recovery		(10,254	)		(20,207	)		36,368			(1,856	)
Income tax (expense) recovery (note 11)		(3,037	)		10,453			(5,690	)		17,364

Net (loss) income		(13,291	)		(9,754	)		30,678			15,508

Non-controlling interest in net (loss) income		(1,937	)		(7,572	)		18,656			3,277
Dropdown Predecessor’s interest in net (loss) income (note 2)		—			653			—			186
General Partner’s interest in net (loss) income		1,331			664			3,338			1,683
Limited partners’ interest: (note 13)
Net (loss) income		(12,685	)		(3,499	)		8,684			10,362
Net (loss) income per common unit (basic and diluted)		(0.20	)		(0.08	)		0.14			0.26

Weighted-average number of units outstanding:
- Common units (basic and diluted) (note 13)		62,800,314			42,760,000			60,000,819			40,495,580

Cash distributions declared per unit		0.50			0.48			1.00			0.93

Related party transactions (note 9)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

Page 3 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)


	As at		As at
	June 30, 2011		December 31, 2010
	$		$
ASSETS
Current
Cash and cash equivalents		158,644		166,483
Accounts receivable		71,211		64,993
Vessels held for sale (note 4a)		8,300		—
Net investments in direct financing leases — current		19,588		21,157
Prepaid expenses		33,391		29,740
Due from affiliates (note 9e)		24,655		19,135
Current portion of derivative instruments (note 10)		13,189		6,180
Other current assets		1,284		1,288

Total current assets		330,262		308,976


Vessels and equipment (note 6)
At cost, less accumulated depreciation of $1,252,536 (December 31, 2010 - $1,200,325)		2,302,656		2,247,323
Advances on newbuilding contracts		44,600		52,184
Net investments in direct financing leases		41,134		50,413
Derivative instruments (note 10)		12,723		5,202
Other assets		17,611		22,652
Intangible assets — net		25,203		28,763
Goodwill — shuttle tanker segment		127,113		127,113

Total assets		2,901,302		2,842,626


LIABILITIES AND EQUITY
Current
Accounts payable		10,450		12,749
Accrued liabilities (note 10)		79,671		88,538
Due to affiliates (note 9e)		120,990		67,390
Current portion of long-term debt (note 6)		202,677		152,096
Current portion of derivative instruments (note 10)		48,303		45,793
Due to joint venture partners		14,500		—

Total current liabilities		476,591		366,566


Long-term debt (note 6)		1,714,458		1,565,044
Deferred income tax		3,136		1,605
Derivative instruments (note 10)		122,746		119,491
Other long-term liabilities		18,836		19,746

Total liabilities		2,335,767		2,072,452

Commitments and contingencies (note 6, 10, 12)

Redeemable non-controlling interest (note 12a)		39,604		41,725

Equity
Non-controlling interest		46,703		170,876
Partners’ equity		476,265		556,828
Accumulated other comprehensive income		2,963		745

Total equity		525,931		728,449

Total liabilities and total equity		2,901,302		2,842,626

Consolidation of variable interest entities (note 12c)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

Page 4 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands of U.S. dollars)


	Six Months Ended June 30,
	2011			2010
	$			$
Cash and cash equivalents provided by (used for)

OPERATING ACTIVITIES
Net income		30,678			15,508
Non-cash items:
Unrealized (gain) loss on derivative instruments (note 10)		(7,264	)		60,875
Depreciation and amortization		91,733			92,932
Loss on sale and write down of vessels and equipment		9,265			—
Deferred income tax expense (recovery) (note 11)		3,849			(21,080	)
Foreign currency exchange loss and other		10,250			1,166
Change in non-cash working capital items related to operating activities		25,655			9,026
Expenditures for drydocking		(11,660	)		(11,410	)


Net operating cash flow		152,506			147,017


FINANCING ACTIVITIES
Proceeds from drawdown of long-term debt		311,472			81,600
Scheduled repayments of long-term debt (note 6)		(69,429	)		(50,398	)
Prepayments of long-term debt		(50,360	)		(150,048	)
Advance from joint venture partner		14,500			—
Repayment of long-term debt relating to Dropdown Predecessor relating to Falcon Spirit (note 9b)		—			(32,834	)
Contribution by Teekay Corporation relating to acquisition of Rio das Ostras (note 9c)		2,000			—
Distribution to Teekay Corporation for the acquisition of Falcon Spirit (note 9b)		—			(11,295	)
Equity contribution from Teekay Corporation		—			5,020
Purchase of 49% interest in Teekay Offshore Operating L.P. (note 9a)		(160,000	)		—
Equity contribution from Teekay Corporation to Dropdown Predecessor relating to Falcon Spirit (note 9b)		—			805
Equity contribution from joint venture partner		2,250			333
Proceeds from issuance of common units		—			100,581
Expenses of equity offerings		(91	)		(5,043	)
Cash distributions paid by the Partnership		(61,335	)		(39,126	)
Cash distributions paid by subsidiaries to non-controlling interests		(19,642	)		(42,968	)
Other		—			(523	)


Net financing cash flow		(30,635	)		(143,896	)


INVESTING ACTIVITIES
Expenditures for vessels and equipment		(145,611	)		(4,813	)
Proceeds from sale of vessels and equipment		5,054			—
Investment in direct financing lease assets		370			(886	)
Direct financing lease payments received		10,477			11,607


Net investing cash flow		(129,710	)		5,908


(Decrease) increase in cash and cash equivalents		(7,839	)		9,029
Cash and cash equivalents, beginning of the period		166,483			109,407


Cash and cash equivalents, end of the period		158,644			118,436

Supplemental cash flow disclosure (note 14)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

Page 5 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN TOTAL EQUITY

(in thousands of U.S. dollars and units)


	PARTNERS’ EQUITY
									Other									Redeemable
									Comprehensive			Non-						Non-
	Limited Partner					General			Income (Loss)			controlling			Total			controlling
	Common					Partner			(Note 10)			Interest			Equity			Interest
	Units		$			$			$			$			$			$
Balance as at December 31, 2010		55,238		540,355			16,473			745			170,876			728,449			41,725

Net income		—		8,684			3,338			—			18,656			30,678			—
Reclassification of redeemable non-controlling interest in net income		—		—			—			—			(2,521	)		(2,521	)		2,521
Unrealized net gain on qualifying cash flow hedging instruments (note 10)		—		—			—			2,282			730			3,012			—
Realized net gain on qualifying cash flow hedging instruments (note 10)		—		—			—			(1,226	)		(285	)		(1,511	)		—
Cash distributions		—		(57,638	)		(3,697	)		—			(15,000	)		(76,335	)		(4,642	)
Contribution of capital from joint venture partner		—		—			—			—			2,250			2,250			—
Contribution of capital from Teekay Corporation to Rio das Ostras (note 9c)		—		1,960			40			—			—			2,000			—
Equity offering (note 9a, 13)		7,563		221,742			4,525			—			—			226,267			—
Purchase of 49% of Teekay Offshore Operating L.P. (note 9a)		—		(254,237	)		(5,189	)		1,162			(128,003	)		(386,267	)		—
Other		—		(91	)		—			—			—			(91	)		—


Balance as at June 30, 2011		62,801		460,775			15,490			2,963			46,703			525,931			39,604

The accompanying notes are an integral part of the unaudited consolidated financial statements.

Page 6 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

Basis of Presentation

		The unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (or GAAP). These financial statements include the accounts of Teekay Offshore Partners L.P., which is a limited partnership organized under the laws of the Republic of The Marshall Islands, its wholly owned or controlled subsidiaries and the Dropdown Predecessor, as described in Note 2 below and variable interest entities (or VIEs) for which Teekay Offshore Partners L.P. or its subsidiaries are the primary beneficiaries (see Note 12) (collectively, the Partnership). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

		Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted; therefore, these interim financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2010, which are included in the Partnership’s Annual Report on Form 20-F. In the opinion of management of our general partner, Teekay Offshore GP L.L.C. (or the General Partner), these interim unaudited consolidated financial statements reflect all adjustments, of a normal recurring nature, necessary to present fairly, in all material respects, the Partnership’s consolidated financial position, results of operations, changes in total equity and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of those for a full fiscal year. Historically, the utilization of shuttle tankers in the North Sea is higher in the winter months and lower in the summer months, as generally there is higher maintenance in the oil fields during the summer months, which leads to lower oil production, and thus, lower shuttle tanker utilization during that period. Significant intercompany balances and transactions have been eliminated upon consolidation.

Dropdown Predecessor

		On April 1, 2010, the Partnership acquired from Teekay Corporation a floating storage and offtake (or FSO) unit, the Falcon Spirit, together with its time-charter-out contract. This transaction was accounted for as a business acquisition between entities under common control. As a result, the Partnership’s consolidated statements of income, cash flows and comprehensive income for the six months ended June 30, 2010 include the results of the acquired vessel (referred to herein, together with the results of the Cidade de Rio das Ostras (or Rio das Ostras), described below, as the Dropdown Predecessor), from the date that the Partnership and the acquired vessel were both under common control of Teekay Corporation and had begun operations. The vessel began operations under the ownership of Teekay Corporation on December 15, 2009. The effect of adjusting the Partnership’s financial statements to account for the common control transfer of the Falcon Spirit increased the Partnership’s net income and comprehensive income by $0.9 million for the six months ended June 30, 2010.

		On October 1, 2010, the Partnership acquired from Teekay Corporation a floating production, storage and offloading (or FPSO) unit, the Rio das Ostras. This transaction was accounted for as a business acquisition between entities under common control. As a result, the Partnership’s consolidated statements of (loss) income and comprehensive (loss) income for the three and six months ended June 30, 2010 and the Partnership’s statement of cash flow for the six months ended June 30, 2010 have been retroactively adjusted to include the results of the Rio das Ostras FPSO unit from the date that the Partnership and the acquired vessel were both under common control of Teekay Corporation and had begun operations. Teekay Corporation had an 82% interest in the Rio das Ostras FPSO unit when it commenced operations on April 1, 2008. Teekay Corporation acquired the remaining 18% interest on June 30, 2008. Adjusting the Partnership’s financial statements to account for the common control transfer of the Rio das Ostras FPSO unit decreased the Partnership’s net loss and increased the Partnership’s comprehensive loss by $0.7 million and $0.3 million, respectively, for the three months ended June 30, 2010 and decreased the Partnership’s net income and comprehensive income by $0.7 million and $2.1 million, respectively, for the six months ended June 30, 2010.

Adoption of New Accounting Policies

In January 2011, the Partnership adopted an amendment to Financial Accounting Standards Board (or FASB) Accounting Standards Codification (or ASC) 605, Revenue Recognition, that provides for a new methodology for establishing the fair value for a deliverable in a multiple-element arrangement. When a vendor specific objective or third-party evidence for deliverables in a multiple-element arrangement cannot be determined, the Partnership will be required to develop a best estimate of the selling price of separate deliverables and to allocate the arrangement consideration using the relative selling price method. The adoption of this standard did not have an impact on the Partnership’s consolidated financial statements.

Financial Instruments

Fair Value Measurements

For a description on how the Partnership estimates fair value, see Note 2 in the Partnership’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2010. The estimated fair value of the Partnership’s financial instruments and categorization using the fair value hierarchy for these financial instruments that are measured at fair value on a recurring basis are as follows:

Page 8 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)


		June 30, 2011						December 31, 2010
		Carrying			Fair			Carrying			Fair
	Fair Value	Amount			Value			Amount			Value
	Hierarchy	Asset (Liability)			Asset (Liability)			Asset (Liability)			Asset (Liability)
	Level⁽¹⁾	$			$			$			$
Cash and cash equivalents			158,644			158,644			166,483			166,483
Due from affiliates (note 9e)			24,655			24,655			19,135			19,135
Due to affiliates (note 9e)			(120,990	)		(120,990	)		(67,390	)		(67,390	)
Long-term debt (note 6)			(1,917,135	)		(1,825,649	)		(1,717,140	)		(1,620,355	)
Due to joint venture partner ⁽²⁾			(14,500	)		(14,500	)		—			—
Derivative instruments (note 10)
Interest rate swap agreements	Level 2		(181,711	)		(181,711	)		(175,784	)		(175,784	)
Cross currency swap agreement	Level 2		13,668			13,668			4,233			4,233
Foreign currency forward contracts	Level 2		12,516			12,516			6,909			6,909


(1)		The fair value hierarchy level is only applicable to each financial instrument on the consolidated balance sheets that is recorded at fair value on a recurring basis.

(2)		The fair value of the Partnership’s advances from its joint venture partner approximates its carrying amount due to the current nature of the balance.

The Partnership has determined that there were no non-financial assets or non-financial liabilities carried at fair value at June 30, 2011 and December 31, 2010, except for a 1992-built shuttle tanker, which was written down to an estimated fair value of $11.0 million at December 31, 2010 and a 1993-built conventional tanker, which was written down to an estimated fair value of $8.3 million at June 30, 2011. The fair value of the vessels were determined based on directly observable inputs (level 2).

Financing Receivables

The following table contains a summary of the Partnership’s financing receivables by type of borrower and the method by which the Partnership monitors the credit quality of its financing receivables on a quarterly basis:

June 30, 2011

December 31, 2010

Credit Quality Indicator

Grade

Direct financing leases

Payment activity

Performing

60,722

71,570

Segment Reporting

The following tables include results for the Partnership’s segments for the periods presented in these consolidated financial statements:


	Shuttle				Conventional
	Tanker				Tanker				FSO				FPSO
	Segment				Segment				Segment				Segment				Total
	Three Months Ended June 30,
	2011		2010		2011		2010		2011		2010		2011		2010		2011		2010
	$		$		$		$		$		$		$		$		$		$

Revenues		139,183		144,295		37,454		26,431		14,947		18,419		42,561		37,693		234,145		226,838
Voyage expenses		25,712		30,031		6,539		4,842		321		76		—		—		32,572		34,949
Vessel operating expenses		42,109		32,346		6,012		5,657		7,411		8,420		19,665		14,685		75,197		61,108
Time-charter hire expense		18,182		23,424		—		—		—		—		—		—		18,182		23,424
Depreciation and amortization		28,704		29,280		5,557		5,921		2,991		3,829		8,911		8,894		46,163		47,924
General and administrative ⁽¹⁾		13,197		11,603		758		1,139		1,242		1,009		2,960		2,596		18,157		16,347
Write-down of vessel		—		—		8,194		—		—		—		—		—		8,194		—

Income from vessel operations		11,279		17,611		10,394		8,872		2,982		5,085		11,025		11,518		35,680		43,086

Page 9 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)


	Shuttle				Conventional
	Tanker				Tanker				FSO				FPSO
	Segment				Segment				Segment				Segment				Total
	Six Months Ended June 30,
	2011		2010		2011		2010		2011		2010		2011		2010		2011		2010
	$		$		$		$		$		$		$		$		$		$

Revenues		277,415		286,288		73,217		57,996		32,438		39,069		84,846		77,064		467,916		460,417
Voyage expenses		44,740		59,085		12,685		10,493		612		325		—		—		58,037		69,903

Vessel operating expenses		82,894		66,509		11,837		11,371		16,559		16,825		39,037		29,791		150,327		124,496
Time-charter hire expense		38,452		48,462		—		—		—		—		—		—		38,452		48,462
Depreciation and amortization		56,136		54,235		11,602		11,663		6,172		9,246		17,823		17,788		91,733		92,932
General and administrative ⁽¹⁾		25,679		22,863		2,507		2,332		2,305		2,019		6,396		5,767		36,887		32,981
Loss on sale of vessel		—		—		—		—		171		—		—		—		171		—
Write-down of vessel		—		—		9,094		—		—		—		—		—		9,094		—
Restructuring charge		1,227		119		—		—		2,697		—		—		—		3,924		119

Income from vessel operations		28,287		35,015		25,492		22,137		3,922		10,654		21,590		23,718		79,291		91,524


(1)		Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources).

A reconciliation of total segment assets to total assets presented in the accompanying consolidated balance sheets is as follows:


	June 30, 2011		December 31, 2010
	$		$
Shuttle tanker segment		1,792,134		1,711,341
Conventional tanker segment		286,539		304,655
FSO segment		104,533		119,844
FPSO segment		520,045		513,886
Unallocated:
Cash and cash equivalents		158,644		166,483
Other assets		39,407		26,417

Consolidated total assets		2,901,302		2,842,626

Long-Term Debt


	June 30, 2011		December 31, 2010
	$		$
U.S. Dollar-denominated Revolving Credit Facilities due through 2018		1,237,132		1,066,909
Norwegian Kroner Bond due in 2013		111,373		103,061
U.S. Dollar-denominated Term Loans due through 2017		204,459		244,958
U.S. Dollar-denominated Term Loans due through 2023		364,171		302,212

Total		1,917,135		1,717,140
Less current portion		202,677		152,096

Long-term portion		1,714,458		1,565,044

As at June 30, 2011, the Partnership had nine long-term revolving credit facilities, which, as at such date, provided for borrowings of up to $1,372.4 million, of which $135.4 million was undrawn. The total amount available under the revolving credit facilities reduces by $89.6 million (remainder of 2011), $187.0 million (2012), $333.5 million (2013), $659.4 million (2014), $17.5 million (2015) and $85.4 million (thereafter). Six of the revolving credit facilities are guaranteed by the Partnership and certain of its subsidiaries for all outstanding amounts and contain covenants that require the Partnership to maintain the greater of a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of at least $75.0 million and 5.0% of the Partnership’s total consolidated debt. The Partnership also has a revolving credit facility of which Teekay Corporation guarantees $65.0 million of the final repayment. In addition to the Partnership covenants described above, Teekay Corporation is also required to maintain the greater of a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of at least $50.0 million and 5.0% of Teekay Corporation’s total consolidated debt which has recourse to Teekay Corporation. The remaining two revolving credit facilities are guaranteed by Teekay Corporation and contain covenants that require Teekay Corporation to maintain the greater of a minimum liquidity (cash and cash equivalents) of at least $50.0 million and 5.0% of Teekay Corporation’s total consolidated debt which has recourse to Teekay Corporation. The revolving credit facilities are collateralized by first-priority mortgages granted on 35 of the Partnership’s vessels, together with other related security.

Page 10 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

		On November 30, 2010, the Partnership issued NOK 600 million ($111.4 million) of senior unsecured bonds that mature in November 2013 in the Norwegian bond market. The Partnership capitalized issuance costs of $1.3 million, which is recorded in other non-current assets in the consolidated balance sheet, and is amortized over the term of the senior unsecured bonds. The bonds are listed on the Oslo Stock Exchange. Interest payments on the bonds are based on NIBOR plus a margin of 4.75%. The Partnership entered into a cross currency swap and an interest rate swap to swap the interest payments from NIBOR to a fixed rate of 1.12% and principal from Norwegian Kroner to US dollars. The LIBOR rate receivable from the interest rate swap is capped at 3.5% (see Note 10).

		As at June 30, 2011, five of the Partnership’s 50% owned subsidiaries each had an outstanding term loan, which in the aggregate totaled $204.5 million. The term loans reduce over time with quarterly and semi-annual payments and have varying maturities through 2017. These term loans are collateralized by first-priority mortgages on the five vessels to which the loans relate, together with other related security. As at June 30, 2011, the Partnership had guaranteed $57.3 million of these term loans, which represents its 50% share of the outstanding vessel mortgage debt of four of these 50% owned subsidiaries. The other owner and Teekay Corporation have guaranteed $102.2 million and $44.9 million, respectively.

		As at June 30, 2011, the Partnership had term loans outstanding for the shuttle tankers the Amundsen Spirit, the Nansen Spirit, the Peary Spirit, and the Rio das Ostras FPSO unit which in aggregate totaled $364.2 million. The Partnership has consolidated the Peary Spirit LLC as a variable interest entity in its consolidated financial statements since October 1, 2010 (see Note 12(c)). For the term loans for the Amundsen Spirit and the Nansen Spirit, one tranche reduces in semi-annual payments while the other tranche correspondingly is drawn up every six months with a final $29.1 million bullet payment due 2022 and 2023, respectively. The term loans for the Peary Spirit and the Rio das Ostras reduce over time with quarterly and semi-annual payments. These four term loans have varying maturities through 2023 and are collateralized by first-priority mortgages on the vessels to which the loans relate, together with other related security and are guaranteed by Teekay Corporation.

		Interest payments on the revolving credit facilities and the term loans are based on LIBOR plus a margin. At June 30, 2011, the margins ranged between 0.30% and 3.25%. The weighted-average effective interest rate on the Partnership’s variable rate long-term debt as at June 30, 2011 was 1.5%. This rate does not include the effect of the Partnership’s interest rate swaps (see Note 10).

		The aggregate annual long-term debt principal repayments required to be made subsequent to June 30, 2011 are $100.0 million (remainder of 2011), $207.5 million (2012), $419.4 million (2013), $805.1 million (2014), $59.7 million (2015), and $325.4 million (thereafter).

		As at June 30, 2011, the Partnership and Teekay Corporation were in compliance with all covenants related to the credit facilities and long-term debt.

Restructuring Charge

During the three months ended March 31, 2011, the Partnership sold the FSO unit, Karratha Spirit, and the time-charter-out contract for the Basker Spirit was terminated. The Partnership committed to plans for termination of the employment of certain seafarers of the two vessels. Under the plans, the Partnership recorded restructuring charges of $3.9 million in the six months ended June 30, 2011.

Other Income — Net


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	$		$		$		$
Volatile organic compound emissions plant lease income		821		1,210		1,782		2,720
Miscellaneous		338		199		687		1,170

Other income — net		1,159		1,409		2,469		3,890

Related Party Transactions and Balances

	a)		On March 8, 2011, the Partnership acquired Teekay Corporation’s 49% interest in Teekay Offshore Operating L.P. (or OPCO) for a combination of $175 million in cash (less $15 million in distributions made by OPCO to Teekay Corporation between December 31, 2010 and the date of acquisition) and the issuance of 7.6 million of the Partnership’s common units to Teekay Corporation and a 2% proportionate interest to the General Partner in a private placement (see Note 13). The acquisition increased the Partnership’s ownership of OPCO to 100%. The excess of the proceeds paid by the Partnership over Teekay Corporation’s historical book value of $128.0 million for the 49% interest in OPCO was accounted for as an equity distribution to Teekay Corporation of $258.3 million.

	b)		On April 1, 2010, the Partnership acquired Teekay Corporation’s 100% interest in a FSO unit, the Falcon Spirit, together with its time-charter-out contract, for a purchase price of $44.1 million. The purchase was partially financed through proceeds from a public offering of common units. The Falcon Spirit is chartered to a subsidiary of Occidental Petroleum of Qatar Ltd., on a fixed-rate time-charter-out contract for 7.5 years (beginning December 2009) with an option for the charterer to extend the contract for an additional 1.5 years. The acquisition consisted of the Partnership acquiring Teekay Corporation’s equity interest in Teekay Al Raayan LLC for $11.3 million and Teekay Corporation’s interest in amounts due to Teekay Corporation from Teekay Al Raayan LLC for $32.8 million.

Page 11 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

			For the six months ended June 30, 2010, $0.3 million of general and administrative expenses (consisting primarily of vessel management fees and legal and professional fees) and $0.4 million of interest expense from credit facilities that were used to finance the acquisition of the Falcon Spirit were incurred by Teekay Corporation and have been allocated to the Partnership as part of the results of the Dropdown Predecessor.

	c)		On October 1, 2010, the Partnership acquired from Teekay Corporation the Rio das Ostras FPSO unit, which is on a long-term charter to Petroleo Brasileiro SA (or Petrobras), for a purchase price of $157.7 million, plus working capital of $12.4 million. The purchase agreement provides that Teekay Corporation shall reimburse the Partnership for upgrade costs in excess of the upgrade estimate as of the closing date. During the three and six months ended June 30, 2011, Teekay Corporation reimbursed the Partnership for $1.0 million and $2.0 million, respectively, of such upgrade costs, which is reflected as a capital contribution.

			For the three and six months ended June 30, 2010, the following costs attributable to the operations of the Rio das Ostras were incurred by Teekay Corporation, and have been allocated to the Partnership as part of the results of the Dropdown Predecessor:

	•		General and administrative expenses (consisting primarily of salaries, defined benefit pension plan benefits, and other employee related costs, office rent, legal and professional fees, and travel and entertainment) of $1.5 million and $3.3 million, respectively.

	•		Interest expense from credit facilities that were used to finance the acquisition of the Rio das Ostras of $0.8 million and $1.3 million, respectively.

	•		Loss from changes in the foreign exchange rate on the foreign exchange forward contracts of ($0.6) million and ($0.8) million, respectively, is reflected in other comprehensive (loss) income.

During the three and six months ended June 30, 2011, nine conventional tankers, two shuttle tankers and two FSO units of the Partnership were employed on long-term time-charter-out contracts with subsidiaries of Teekay Corporation, and two conventional tankers of the Partnership were employed on long-term time-charter-out contracts with a joint venture in which Teekay Corporation has a 50% interest. In addition, during the three and six months ended June 30, 2011, two shuttle tankers of the Partnership were employed on short-term contracts with subsidiaries of Teekay Corporation. Teekay Corporation and its wholly owned subsidiaries provide substantially all of the Partnership’s commercial, technical, crew training, strategic and administrative services needs. In addition, the Partnership reimburses the General Partner for expenses incurred by the General Partner that are necessary or appropriate for the conduct of the Partnership’s business. Revenues (expenses) from such related party transactions were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	$			$			$			$
Revenues⁽¹⁾		45,813			32,536			88,101			70,316
Vessel operating expenses⁽²⁾		(1,626	)		(1,171	)		(2,882	)		(2,237	)
General and administrative^(3)(4)(5)		(15,456	)		(11,994	)		(30,144	)		(24,256	)
Interest expense⁽⁶⁾		—			(808	)		—			(3,048	)


(1)		Revenue from long-term time-charter-out contracts and short-term time-charter-out contracts with subsidiaries or affiliates of Teekay Corporation.

(2)		Crew training fees charged from Teekay Corporation.

(3)		Commercial, technical, strategic and administrative management fees charged by Teekay Corporation.

(4)		Amounts include $0.3 million and $0.5 million, respectively, during the three and six months ended June 30, 2011, and $0.1 million and $0.3 million, respectively, during the three and six months ended June 30, 2010 of reimbursements of costs incurred by the General Partner.

(5)		Amounts are net of $1.1 million and $2.1 million, respectively, during the three and six months ended June 30, 2011, and $0.9 million and $1.8 million, respectively, during the three and six months ended June 30, 2010 of management fees from ship management services provided by the Partnership to a subsidiary of Teekay Corporation.

(6)		Interest paid to Teekay Corporation for financing the Partnership’s acquisition of a FPSO unit and interest allocated from Teekay Corporation as a result of the Dropdown Predecessor.

At June 30, 2011, due from affiliates totaled $24.7 million (December 31, 2010 — $19.1 million) and due to affiliates totaled $121.0 million (December 31, 2010 — $67.4 million). Due to and from affiliates are non-interest bearing and unsecured obligations, and are expected to be settled within the next fiscal year in the normal course of operations.

10.

Derivative Instruments and Hedging Activities

		The Partnership uses derivatives to manage certain risks in accordance with its overall risk management policies.

		Foreign Exchange Risk

		The Partnership economically hedges portions of its forecasted expenditures denominated in foreign currencies with foreign currency forward contracts. Certain foreign currency forward contracts are designated, for accounting purposes, as cash flow hedges of forecasted foreign currency expenditures.

Page 12 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)


		As at June 30, 2011, the Partnership was committed to the following foreign currency forward contracts:


	Contract Amount		Fair Value / Carrying
	in Foreign		Amount of Asset/(Liability)				Average		Expected Maturity
	Currency		(in thousands of U.S. Dollars)				Forward		2011		2012
	(thousands)		Hedge		Non-hedge		Rate⁽¹⁾		(in thousands of U.S. Dollars)
Norwegian Kroner		418,000		3,711		7,272		6.39		27,925		37,585
British Pound		2,940		—		243		0.66		2,548		1,919
Euro		10,700		—		1,290		0.76		7,972		6,176

				3,711		8,805				38,445		45,680


(1)		Average forward rate represents the contracted amount of foreign currency one U.S. Dollar will buy.

		The Partnership incurs interest expense on its Norwegian Kroner-denominated bonds. The Partnership entered into a cross currency swap to economically hedge the foreign exchange risk on the principal and interest. As at June 30, 2011, the Partnership was committed to one cross currency swap with the notional amounts of NOK 600 million and $98.5 million, which exchanges a receipt of floating interest based on NIBOR plus a margin of 4.75% with a payment of floating interest based on LIBOR plus a margin of 5.04%. In addition, the cross currency swap locks in the transfer of principal to $98.5 million upon maturity in exchange for NOK 600 million. The positive fair value of the cross currency swap as at June 30, 2011 was $13.7 million. The Partnership has not designated, for accounting purposes, the cross currency swap as a hedge.

		Interest Rate Risk

		The Partnership enters into interest rate swaps, which exchange a receipt of floating interest for a payment of fixed interest to reduce the Partnership’s exposure to interest rate variability on its outstanding floating-rate debt. The Partnership has not designated, for accounting purposes, its interest rate swaps as cash flow hedges of its U.S. Dollar LIBOR-denominated borrowings.

		As at June 30, 2011, the Partnership was committed to the following interest rate swap agreements:


				Fair Value /
				Carrying			Weighted-
				Amount of			Average		Fixed
	Interest	Principal		Assets			Remaining		Interest
	Rate	Amount		(Liability)			Term		Rate
	Index	$		$			(years)		(%)⁽¹⁾
U.S. Dollar-denominated interest rate swaps⁽²⁾	LIBOR		800,000		(119,388	)		12.1		4.6
U.S. Dollar-denominated interest rate swaps⁽³⁾	LIBOR		669,000		(61,568	)		6.0		4.0
U.S. Dollar-denominated interest rate swap ⁽²⁾⁽⁴⁾	LIBOR		98,500		(755	)		2.4		1.1


			1,567,500		(181,711	)


(1)		Excludes the margin the Partnership pays on its variable-rate debt, which as at June 30, 2011, ranged between 0.30% and 3.25%.

(2)		Notional amount remains constant over the term of the swap.

(3)		Principal amount reduces quarterly or semi-annually.

(4)		The LIBOR rate receivable is capped at 3.5%.

		Tabular disclosure

		The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the Partnership’s balance sheets.


	Current							Current
	portion of							portion of
	derivative		Derivative		Accrued			derivative			Derivative
	assets		assets		liabilities			liabilities			liabilities
As at June 30, 2011
Foreign currency contracts — cash flow hedges		3,119		592		—			—			—
Foreign currency contracts — not designated as hedges		6,997		1,808		—			—			—
Cross currency swap — not designated as hedges		3,073		10,323		272			—			—
Interest rate swaps — not designated as hedges		—		—		(10,662	)		(48,303	)		(122,746	)

		13,189		12,723		(10,390	)		(48,303	)		(122,746	)


As at December 31, 2010
Foreign currency contracts — cash flow hedges		1,606		718		—			(47	)		—
Foreign currency contracts — not designated as hedges		2,543		2,481		—			(361	)		(31	)
Cross currency swap — not designated as hedges		2,031		2,003		199			—			—
Interest rate swaps — not designated as hedges		—		—		(10,939	)		(45,385	)		(119,460	)

		6,180		5,202		(10,740	)		(45,793	)		(119,491	)

Page 13 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

For the periods indicated, the following table presents the effective portion of gains (losses) on foreign currency forward contracts designated and qualifying as cash flow hedges that were (1) recognized in other comprehensive (loss) income, (2) recorded in accumulated other comprehensive income (or AOCI) during the term of the hedging relationship and reclassified to earnings, and (3) recognized in the ineffective portion of gains (losses) on derivative instruments designated and qualifying as cash flow hedges.


	Three Months Ended June 30, 2011									Three Months Ended June 30, 2010
Balance							Balance
Sheet							Sheet
(AOCI)	Statement of (Loss) Income						(AOCI)			Statement of (Loss) Income
Effective	Effective		Ineffective				Effective			Effective			Ineffective
Portion	Portion		Portion				Portion			Portion			Portion

1,029		174		(83	)	Vessel operating expenses		(8,369	)		45			(1,198	)	Vessel operating expenses

		572		69		General and administrative expenses					(803	)		(840	)	General and administrative expenses

1,029		746		(14	)			(8,369	)		(758	)		(2,038	)


	Three Months Ended June 30, 2011									Three Months Ended June 30, 2010
Balance							Balance
Sheet							Sheet
(AOCI)	Statement of (Loss) Income						(AOCI)			Statement of (Loss) Income
Effective	Effective		Ineffective				Effective			Effective			Ineffective
Portion	Portion		Portion				Portion			Portion			Portion

3,012		781		(267	)	Vessel operating expenses		(10,724	)		(3	)		(2,322	)	Vessel operating expenses

		730		199		General and administrative expenses					(1,468	)		(1,554	)	General and administrative expenses

3,012		1,511		(68	)			(10,724	)		(1,471	)		(3,876	)

As at June 30, 2011, the Partnership’s accumulated other comprehensive income consisted of unrealized gains on foreign currency forward contracts designated as cash flow hedges. As at June 30, 2011, the Partnership estimated, based on the current foreign exchange rates, that it would reclassify approximately $2.4 million of net gains on foreign currency forward contracts from accumulated other comprehensive income to earnings during the next 12 months.

Realized and unrealized (losses) gains of interest rate swaps and foreign currency forward contracts that are not designated for accounting purposes as cash flow hedges, are recognized in earnings and reported in realized and unrealized (loss) gain on non-designated derivative instruments in the consolidated statements of (loss) income. The effect of the (loss) gain on derivatives not designated as hedging instruments on the consolidated statements of (loss) income is as follows:

Page 14 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	$			$			$			$
Realized (losses) gains relating to:
Interest rate swaps		(13,769	)		(12,057	)		(27,471	)		(24,844	)
Foreign currency forward contracts		1,204			(340	)		1,622			(495	)

		(12,565	)		(12,397	)		(25,849	)		(25,339	)

Unrealized gains (losses) relating to:
Interest rate swaps		(26,969	)		(42,190	)		(6,204	)		(53,139	)
Foreign currency forward contracts		814			(3,276	)		4,173			(3,860	)

		(26,155	)		(45,466	)		(2,031	)		(56,999	)


Total realized and unrealized losses on non-designated derivative instruments		(38,720	)		(57,863	)		(27,880	)		(82,338	)

Realized and unrealized gains of the cross currency swap are recognized in earnings and reported in foreign currency exchange gain (loss) in the consolidated statements of (loss) income. For the three and six months ended June 30, 2011, unrealized gains of $3.1 million and $9.4 million, respectively (2010 — $nil for both periods), and realized gains of $0.8 million and $1.4 million, respectively, (2010 — $nil for both periods) were recognized in earnings.

The Partnership is exposed to credit loss in the event of non-performance by the counterparties, all of which are financial institutions, to the foreign currency forward contracts and the interest rate swap agreements. In order to minimize counterparty risk, the Partnership only enters into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.

11.

Income Tax (Expense) Recovery

The components of the provision for income tax (expense) recovery are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	$			$			$			$
Current		(357	)		(1,941	)		(1,841	)		(3,716	)
Deferred		(2,680	)		12,394			(3,849	)		21,080

Income tax (expense) recovery		(3,037	)		10,453			(5,690	)		17,364

12.

Commitments and Contingencies

	a)		During 2010, an unrelated party contributed a shuttle tanker with a value of $35.0 million to the Partnership for a 33% equity interest in the subsidiary. The equity issuance resulted in a dilution loss of $7.4 million. The non-controlling interest owner in the subsidiary holds a put option which, if exercised, would obligate the Partnership to purchase the non-controlling interest owner’s 33% share in the entity for cash in accordance with a defined formula. The redeemable non-controlling interest is subject to remeasurement if the formulaic redemption amount exceeds the carrying value.

	b)		The Partnership may, from time to time, be involved in legal proceedings and claims that arise in the ordinary course of business. The Partnership believes that any adverse outcome, individually or in the aggregate, of any existing claims would not have a material effect on its financial position, results of operations or cash flows, when taking into account its insurance coverage and indemnifications from charterers or Teekay Corporation.

	c)		The Partnership consolidates certain VIEs. In general, a VIE is a corporation, partnership, limited-liability company, trust or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. A party that is a variable interest holder is required to consolidate a VIE if it has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

			On October 1, 2010, the Partnership agreed to acquire all of Teekay Corporation’s interests in Peary Spirit LLC, which owns the newbuilding shuttle tanker Peary Spirit. On that date Peary Spirit LLC became a VIE and the Partnership became its primary beneficiary. The Partnership has consolidated Peary Spirit LLC in its consolidated financial statements since October 1, 2010. The purchase of the Peary Spirit LLC coincided with the commencement of the time-charter-out contract for the Peary Spirit in August 2011.

Page 15 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

The following table summarizes the balance sheets of Peary Spirit LLC as at June 30, 2011 and December 31, 2010:


	As at			As at
	June 30, 2011			December 31, 2010
	$			$
ASSETS
Prepaid expenses		1,163			—
Vessels and equipment
At cost, less accumulated depreciation of $514		129,579			—
Advances on newbuilding contracts		—			52,195
Other assets		1,475			1,486

Total assets		132,217			53,681

LIABILITIES AND DEFICIT
Accrued liabilities		696			56
Current portion of long-term debt		8,063			1,037
Advances from affiliates		37,997			28,760
Long-term debt		88,688			23,843

Total liabilities		135,444			53,696
Total deficit		(3,227	)		(15	)

Total liabilities and total deficit		132,217			53,681

The assets and liabilities of Peary Spirit LLC are reflected in the Partnership’s consolidated financial statements at historical cost as the Partnership and the VIE are under common control. The Partnership’s maximum exposure to loss as of June 30, 2011, as a result of its commitment to purchase Teekay Corporation’s interests in Peary Spirit LLC, is limited to the purchase price of its interest in the Peary Spirit, which is expected to be approximately $133 million. The assets of Peary Spirit LLC cannot be used by the Partnership and the creditors of Peary Spirit LLC have no recourse to the general credit of the Partnership.

In June 2011, the Partnership entered into a new long-term contract with a subsidiary of BG Group plc (or BG) to provide shuttle tanker services in Brazil. The contract with BG will be serviced by four newbuilding shuttle tankers to be constructed by Samsung Heavy Industries (or Samsung) in South Korea for a total cost of approximately $446 million (excluding capitalized interest and miscellaneous construction costs). As at June 30, 2011, payments made towards these commitments totaled $44.6 million and the remaining payments required to be made under these newbuilding contracts were $78.1 million (2012) and $323.3 million (2013). Upon their scheduled delivery in mid- to late-2013, the vessels will commence operations under 10-year, fixed-rate time-charter-out contracts. The contract with BG also includes certain extension options and vessel purchase options exercisable by the charterer.

13.

Partners’ Equity and Net (Loss) Income Per Common Unit

Private Placement

On March 8, 2011, the Partnership issued 7.6 million common units to Teekay Corporation and a 2% proportionate interest to the General Partner as part of the consideration for the Partnership’s acquisition of the remaining 49% interest in OPCO (see Note 9a). As a result of the transaction, Teekay Corporation’s ownership of the Partnership was increased from 28.26% to 36.90%, including the 2% General Partner’s interest.

Net (Loss) Income Per Common Unit

Net (loss) income per common unit is determined by dividing net (loss) income, after deducting the amount of net (loss) income attributable to the Dropdown Predecessor, the non-controlling interest and the General Partner’s interest, by the weighted-average number of common units outstanding during the applicable period.

The General Partner’s and common unit holders’ interests in net (loss) income are calculated as if all net (loss) income was distributed according to the terms of the Partnership’s partnership agreement, regardless of whether those earnings would or could be distributed. The partnership agreement does not provide for the distribution of net (loss) income; rather, it provides for the distribution of available cash, which is a contractually defined term that generally means all cash on hand at the end of each quarter less the amount of cash reserves established by the Partnership’s board of directors to provide for the proper conduct of the Partnerships’ business, including reserves for maintenance and replacement capital expenditures and anticipated capital requirements. Unlike available cash, net (loss) income is affected by non-cash items such as depreciation and amortization, unrealized gains and losses on derivative instruments and unrealized foreign currency translation gains and losses.

Page 16 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

During the quarters ended June 30, 2011 and 2010, cash distributions exceeded $0.4025 per common unit and, consequently, the assumed distributions of net (loss) income resulted in the use of the increasing percentages to calculate the General Partner’s interest in net (loss) income for the purposes of the net (loss) income per common unit calculation.

Pursuant to the partnership agreement, allocations to partners are made on a quarterly basis.

14.

Supplemental Cash Flow Information

The Partnership’s consolidated statement of cash flows for the six months ended June 30, 2010 reflects the Dropdown Predecessor as if the Partnership had acquired the Dropdown Predecessor when the vessels began operations under the ownership of Teekay Corporation. For non-cash changes related to the Dropdown Predecessor, see Note 9.

The contribution from the non-controlling interest owner described in Note 12a has been treated as a non-cash transaction in the Partnership’s consolidated statement of cash flows.

15.

Write-down of Vessel

The Partnership’s consolidated statements of (loss) income for the three and six months ended June 30, 2011 include total write-downs of $8.2 million and $9.1 million, respectively, for impairment on a 1993-built conventional tanker, as the conventional tanker’s carrying value exceeded its estimated fair value. The fair value of the conventional tanker was calculated based on the estimated sales price of the vessel. The write-downs are included within the Partnership’s conventional tanker segment.

16.

Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued amendments to FASB ASC 820, Fair Value Measurement, which clarify or change the application of existing fair value measurements, including: that the highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets; that a reporting entity should measure the fair value of its own equity instrument from the perspective of a market participant that holds that instrument as an asset; to permit an entity to measure the fair value of certain financial instruments on a net basis rather than based on its gross exposure when the reporting entity manages its financial instruments on the basis of such net exposure; that in the absence of a Level 1 input, a reporting entity should apply premiums and discounts when market participants would do so when pricing the asset or liability consistent with the unit of account; and that premiums and discounts related to size as a characteristic of the reporting entity’s holding are not permitted in a fair value measurement. These amendments are effective for the Partnership on January 1, 2012. The Partnership is currently assessing the potential impacts, if any, of these amendments on its consolidated financial statements.

17.

Subsequent Events

Private Placement

In July 2011, the Partnership issued 0.7 million common units to an institutional investor for net proceeds, including the General Partner’s 2% proportionate capital contribution, of $20.4 million. Upon completion of the private placement, the Partnership had 63.5 million common units outstanding. The Partnership used the proceeds from the issuance of common units to partially finance the shipyard installments for the four Suezmax newbuilding shuttle tankers.

Page 17 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
JUNE 30, 2011
PART I — FINANCIAL INFORMATION


ITEM 2		— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are an international provider of marine transportation, oil production and storage services to the offshore oil industry. We operate shuttle tankers, floating storage and offtake (or FSO) units, floating production, storage and offloading (or FPSO) units and conventional crude oil tankers. Our current fleet consists of 40 shuttle tankers (including five chartered-in vessels, and four committed newbuildings), two FPSO units, five FSO units and 10 conventional oil tankers.

SIGNIFICANT DEVELOPMENTS

On March 8, 2011, we acquired the remaining 49% interest in Teekay Offshore Operating L.P. (or OPCO) from Teekay Corporation for a combination of $175 million in cash (less $15 million in distributions made by OPCO to Teekay Corporation between December 31, 2010 and the date of acquisition) and 7.6 million of common units (and associated general partner interest) to Teekay Corporation.

On October 1, 2010, we agreed to acquire from Teekay Corporation a newbuilding shuttle tanker, the Peary Spirit, for approximately $133 million, concurrent with the commencement of its time-charter-out contract in early August 2011.

In June 2011, we entered into a new long-term contract with a subsidiary of BG Group plc (or BG) to provide shuttle tanker services in Brazil. The contract with BG will be serviced by four Suezmax newbuilding shuttle tankers, which upon their scheduled delivery in mid- to late-2013, will commence operations under ten-year, fixed-rate time-charter-out contracts. The contract with BG also includes certain extension options and vessel purchase options exercisable by the charterer.

On July 7, 2011, we issued 0.7 million common units to an institutional investor in a private placement for net proceeds of $20.4 million (including our general partner’s $0.4 million proportionate capital contribution). We used the proceeds from the issuance of common units to partially finance the shipyard installments for the four Suezmax newbuilding shuttle tankers.

Potential Additional Shuttle Tanker, FSO and FPSO Projects

Pursuant to an omnibus agreement we entered into in connection with our initial public offering in December 2006, Teekay Corporation is obligated to offer to us its interest in certain shuttle tankers, FSO units, FPSO units and joint ventures it may acquire in the future, provided the vessels are servicing contracts with remaining durations of three years or greater. We also may acquire other vessels that Teekay Corporation may offer us from time to time in the future.

Pursuant to the omnibus agreement and a subsequent agreement, Teekay Corporation is obligated to offer to sell to us the Petrojarl Foinaven FPSO, an existing FPSO unit of Teekay Petrojarl AS (or Teekay Petrojarl), a wholly owned subsidiary of Teekay Corporation, prior to July 9, 2012. The purchase price for the Petrojarl Foinaven FPSO unit would be its fair market value plus any additional tax or other similar costs to Teekay Petrojarl that would be required to transfer the FPSO unit to us.

Teekay Corporation is obligated to offer us an additional newbuilding shuttle tanker, the Scott Spirit, within 365 days after its delivery, provided the vessel is servicing a time-charter-out contract in excess of three years in length.

On October 19, 2010, Teekay Corporation announced that it had signed a contract with Petroleo Brasileiro SA (or Petrobras) to provide a FPSO unit for the Tiro and Sidon fields located in the Santos Basin offshore Brazil. The contract with Petrobras will be serviced by a newly converted FPSO unit, to be named the Petrojarl Cidade de Itajai, which is currently under conversion from an existing Aframax tanker at Sembcorp Marine’s Jurong Shipyard in Singapore, for a total estimated cost of approximately $370 million. This new FPSO unit is scheduled to deliver in mid-2012, when it will commence operations under a nine-year, fixed-rate time-charter-out contract with Petrobras with six additional one-year extension options exercisable by Petrobras. Pursuant to the omnibus agreement, Teekay Corporation is obligated to offer to us its interest in this FPSO unit at Teekay Corporation’s fully built-up cost within 365 days after the commencement of the charter to Petrobras.

In May 2011, Teekay Corporation entered into a joint venture agreement with Odebrecht Oil & Gas S.A. (a member of the Odebrecht group) to jointly pursue FPSO projects in Brazil. As part of the joint venture agreement, Odebrecht is a 50% partner in the Tiro Sidon FPSO project and Teekay Corporation is currently working with Odebrecht on other FPSO project opportunities which, pursuant to the omnibus agreement, may result in the future sale of additional FPSO units to us.

In June 2011, Teekay Corporation entered into a new contract with BG Norge Limited to provide a harsh weather FPSO unit to operate in the North Sea. The contract will be serviced by a newly-built FPSO unit to be constructed by Samsung Heavy Industries for a fully-built cost of approximately $1 billion. Pursuant to the omnibus agreement, Teekay Corporation is obligated to offer to us its interest in this FPSO project at Teekay Corporation’s fully built-up cost within 365 days after the commencement of the charter, which is expected to be during the second quarter of 2014.

Page 18 of 32

RESULTS OF OPERATIONS

There are a number of factors that should be considered when evaluating our historical financial performance and assessing our future prospects and we use a variety of financial and operational terms and concepts when analyzing our results of operations. These can be found in Item 5 — “Operating and Financial Review and Prospects” in our Annual Report on Form 20-F for the year ended December 31, 2010. In accordance with United States generally accepted accounting principles (or GAAP), we report gross revenues in our income statements and include voyage expenses among our operating expenses. However, shipowners base economic decisions regarding the deployment of their vessels upon anticipated time charter equivalent (or TCE) rates, and industry analysts typically measure bulk shipping freight rates in terms of TCE rates. This is because under time charters and bareboat charters the customer usually pays the voyage expenses, while under voyage charters and contracts of affreightment the shipowner usually pays the voyage expenses, which typically are added to the hire rate at an approximate cost. Accordingly, the discussion of revenue below focuses on net revenues (i.e. revenues less voyage expenses) and TCE rates of our four reportable segments where applicable. TCE rates represent net revenues divided by revenue days. Please read Item 1 — Financial Statements: Note 5 — Segment Reporting.

We manage our business and analyze and report our results of operations on the basis of four business segments: the shuttle tanker segment, the conventional tanker segment, the FSO segment and the FPSO segment, each of which are discussed below.

Shuttle Tanker Segment

As at June 30, 2011, our shuttle tanker fleet consisted of 35 vessels that operate under fixed-rate contracts of affreightment, time charters and bareboat charters. Of the 35 shuttle tankers, six were owned through 50% owned subsidiaries, three through a 67% owned subsidiary and five were chartered-in. All of these shuttle tankers provide transportation services to energy companies, primarily in the North Sea and Brazil. Our shuttle tankers service the conventional spot market from time to time.

The following table presents our shuttle tanker segment’s operating results for the three and six months ended June 30, 2011 and 2010, and compares its net revenues (which is a non-GAAP financial measure) for the three and six months ended June 30, 2011 and 2010 to revenues, the most directly comparable GAAP financial measure, for the same periods. The following table also provides a summary of the changes in calendar-ship-days by owned and chartered-in vessels for our shuttle tanker segment:


(in thousands of U.S. dollars, except	Three Months Ended June 30,
calendar-ship-days and percentages)	2011		2010		% Change

Revenues		139,183		144,295		(3.5	)
Voyage expenses		25,712		30,031		(14.4	)

Net revenues		113,471		114,264		(0.7	)
Vessel operating expenses		42,109		32,346		30.2
Time-charter hire expense		18,182		23,424		(22.4	)
Depreciation and amortization		28,704		29,280		(2.0	)
General and administrative ⁽¹⁾		13,197		11,603		13.7

Income from vessel operations		11,279		17,611		(36.0	)


Calendar-Ship-Days
Owned Vessels		2,772		2,548		8.8
Chartered-in Vessels		493		624		(21.0	)

Total		3,265		3,172		2.9


(in thousands of U.S. dollars, except	Six Months Ended June 30,
calendar-ship-days and percentages)	2011		2010		% Change

Revenues		277,415		286,288		(3.1	)
Voyage expenses		44,740		59,085		(24.3	)

Net revenues		232,675		227,203		2.4
Vessel operating expenses		82,894		66,509		24.6
Time-charter hire expense		38,452		48,462		(20.7	)
Depreciation and amortization		56,136		54,235		3.5
General and administrative ⁽¹⁾		25,679		22,863		12.3
Restructuring charge		1,227		119		931.1

Income from vessel operations		28,287		35,015		(19.2	)


Calendar-Ship-Days
Owned Vessels		5,472		5,013		9.2
Chartered-in Vessels		1,034		1,300		(20.5	)

Total		6,506		6,313		3.1


(1)		Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the shuttle tanker segment based on estimated use of corporate resources).

The average size of our owned shuttle tanker fleet for the three and six months ended June 30, 2011 increased compared to the same periods last year, primarily due to:

•

the purchase from Teekay Corporation of two newbuilding shuttle tankers, the Amundsen Spirit and the Nansen Spirit, in October 2010 and December 2010, respectively (or the 2010 Newbuilding Shuttle Tanker Acquisitions); and

•

the acquisition of one previously time-chartered-in vessel in February 2010 by our majority owned subsidiary (or the 2010 Shuttle Tanker Acquisition).

Page 19 of 32

The average size of our chartered-in shuttle tanker fleet decreased for the three and six months ended June 30, 2011, compared to the same periods last year, primarily due to:

•

the redelivery of two time-chartered-in vessels to their owners in February 2010 and November 2010, respectively; and

•

the 2010 Shuttle Tanker Acquisition.

Net Revenues. Net revenues decreased for the three months ended June 30, 2011 from the same period last year, primarily due to:

•

a decrease of $10.0 million for the three months ended June 30, 2011 due to fewer revenue days relating to contracts of affreightment due to declining oil production at mature oil fields in the North Sea and a decrease in revenue days from our shuttle tankers operating in the conventional spot market from decreased demand for conventional crude transportation;

•

a decrease of $3.0 million for the three months ended June 30, 2011 due to the redelivery of one vessel to us in March 2011 upon termination of the time-charter-out contract and minimal re-chartering of such vessel during the quarter;

•

a decrease of $1.7 million for the three months ended June 30, 2011 due to voyage expenses incurred in connection with the Peary Spirit newbuilding shuttle tanker, which we have consolidated as a variable interest entity in our consolidated financial statements since October 1, 2010;

•

a net decrease of $1.4 million for the three months ended June 30, 2011 due to a decrease in rates from shuttle tankers operating in the conventional tanker market, partially offset by an increase in revenues from entering into new contracts during 2010 and an increase in rates as provided in certain time-charter-out contracts;

•

a decrease of $1.4 million for the three months ended June 30, 2011 compared to the same period last year due to an increase in the number of off-hire days resulting from more scheduled drydockings in the time-chartered-out fleet; and

•

a decrease of $0.3 million for the three months ended June 30, 2011 due to higher bunker prices as compared to the same period last year;

partially offset by

•

an increase of $10.4 million for the three months ended June 30, 2011 due to the 2010 Newbuilding Shuttle Tanker Acquisitions;

•

an increase of $3.3 million for the three months ended June 30, 2011 compared to the same period last year due to less unexpected repair off-hire days; and

•

an increase of $3.3 million for the three months ended June 30, 2011 due to an increase in reimbursable bunker costs as provided for in new contracts during 2010.

Net Revenues. Net revenues increased for the six months ended June 30, 2011 from the same period last year, primarily due to:

•

an increase of $20.9 million for the six months ended June 30, 2011 due to the 2010 Newbuilding Shuttle Tanker Acquisitions;

•

an increase of $5.2 million for the six months ended June 30, 2011 due to an increase in reimbursable bunker costs as provided for in new contracts during 2010;

•

an increase of $2.9 million for the six months ended June 30, 2011 compared to the same period last year due to less unexpected repair off-hire days; and

•

a net increase of $2.4 million for the six months ended June 30, 2011 due to an increase in revenues from entering into new contracts during 2010 and an increase in rates as provided in certain bareboat and time-charter-out contracts, partially offset by a decrease in rates from shuttle tankers operating in the conventional tanker market;

partially offset by

•

a decrease of $17.1 million for the six months ended June 30, 2011 due to fewer revenue days from our shuttle tankers due to declining oil production at mature oil fields in the North Sea and a decrease in revenue days from our shuttle tankers operating in the conventional spot market from decreased demand for conventional crude transportation;

•

a decrease of $3.9 million for the six months ended June 30, 2011 due to the redelivery of one vessel to us in March 2011 upon termination of the time-charter-out contract and minimal re-chartering of such vessel during the quarter;

•

a decrease of $2.6 million for the six months ended June 30, 2011 compared to the same period last year due to an increase in the number of off-hire days resulting from more scheduled drydockings in the time-chartered-out fleet;

•

a decrease of $1.7 million for the six months ended June 30, 2011 due to voyage expenses incurred in connection with the Peary Spirit newbuilding shuttle tanker, which we have consolidated as a variable interest entity in our consolidated financial statements since October 1, 2010; and

•

a decrease of $0.8 million for the six months ended June 30, 2011 due to higher bunker prices as compared to the same period last year.

Page 20 of 32

Vessel Operating Expenses. Vessel operating expenses increased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to:

•

increases of $3.3 million and $6.8 million, respectively, for the three and six months ended June 30, 2011, due to the 2010 Newbuilding Shuttle Tanker Acquisitions;

•

increases of $3.7 million and $4.8 million, respectively, for the three and six months ended June 30, 2011, in crew and manning costs as compared to the same periods last year resulting primarily from a planned increase in wages;

•

increases of $2.6 million and $5.9 million, respectively, for the three and six months ended June 30, 2011, due to an increase in the number of vessels drydocked, and costs related to services and spares. Certain repair and maintenance items are more efficient to complete while a vessel is in drydock. Consequently, repair and maintenance costs will typically increase in periods when there is an increase in the number of vessels drydocked; and

•

an increase of $0.9 million for the three and six months ended June 30, 2011, due to vessel operating expenses incurred in connection with the delivery and repositioning voyage of the Peary Spirit newbuilding shuttle tanker, which we have consolidated as a variable interest entity in our consolidated financial statements since October 1, 2010;

partially offset by

•

a decrease of $0.8 million for the six months ended June 30, 2011 relating to the settlement of a claim from a customer in 2010; and

•

decreases of $0.6 million and $1.4 million, respectively, for the three and six months ended June 30, 2011, relating to the net realized and unrealized changes in fair value of our foreign currency forward contracts that are or have been designated as hedges for accounting purposes.

Time-Charter Hire Expense. Time-charter hire expense decreased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to:

•

decreases of $3.7 million and $9.0 million, respectively, for the three and six months ended June 30, 2011, due to the redelivery of two time-chartered-in vessels to their owners in February 2010 and November 2010;

•

a decrease of $2.3 million for the six months ended June 30, 2011 due to the 2010 Shuttle Tanker Acquisition; and

•

a decrease of $2.0 million for the three months ended June 30, 2011 due to decreased spot in-chartering of vessels and utilizing owned fleet capacity;

partially offset by

•

increases of $0.3 million and $0.5 million, respectively, for the three and six months ended June 30, 2011, due to increases in rates on certain contracts in the time-chartered-in fleet; and

•

increases of $0.1 million and $0.6 million, respectively, for the three and six months ended June 30, 2011, due to less off-hire in the time-chartered-in fleet.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased for the three months ended June 30, 2011 from the same period last year, primarily due to adjustments to the carrying value of certain capitalized drydocking expenditures in 2010, partially offset by the 2010 Newbuilding Shuttle Tanker Acquisitions. Depreciation and amortization expense increased for the six months ended June 30, 2011 from the same period last year, primarily due to the 2010 Newbuilding Shuttle Tanker Acquisitions and the 2010 Shuttle Tanker Acquisition, partially offset by adjustments to the carrying value of certain capitalized drydocking expenditures in 2010.

Restructuring Charges. Restructuring charges were $1.2 million for the six months ended June 30, 2011 resulting from the termination of the time-charter-out contract of one of our vessels. Restructuring charges were $0.1 million for the six months ended June 30, 2010, relating to the completion of the reflagging of seven of our vessels from Norwegian flag to Bahamian flag and a change in the nationality mix of our crews. Under this plan, we recorded restructuring charges of approximately $4.9 million in total since the plan began in 2009.

Conventional Tanker Segment

As of June 30, 2011, we have a fleet of 11 Aframax conventional crude oil tankers, nine of which operate under fixed-rate time charters with Teekay Corporation. The remaining two vessels, which have additional equipment for lightering, operate under fixed-rate bareboat charters with Skaugen PetroTrans, Teekay Corporation’s 50% owned joint venture.

Page 21 of 32

The following table presents our conventional tanker segment’s operating results for the three and six months ended June 30, 2011 and 2010, and compares its net revenues (which is a non-GAAP financial measure) for the three and six months ended June 30, 2011 and 2010 to revenues, the most directly comparable GAAP financial measure, for the same periods. The following table also provides a summary of the changes in calendar-ship-days by owned vessels for our conventional tanker segment:


(in thousands of U.S. dollars, except	Three Months Ended June 30,
calendar-ship-days and percentages)	2011		2010		% Change

Revenues		37,454		26,431		41.7
Voyage expenses		6,539		4,842		35.0

Net revenues		30,915		21,589		43.2
Vessel operating expenses		6,012		5,657		6.3
Depreciation and amortization		5,557		5,921		(6.1	)
General and administrative ⁽¹⁾		758		1,139		(33.5	)
Write-down of vessel		8,194		—		100.0

Income from vessel operations		10,394		8,872		17.2


Calendar-Ship-Days
Owned Vessels		1,001		1,001		—


(in thousands of U.S. dollars, except	Six Months Ended June 30,
calendar-ship-days and percentages)	2011		2010		% Change

Revenues		73,217		57,996		26.2
Voyage expenses		12,685		10,493		20.9

Net revenues		60,532		47,503		27.4
Vessel operating expenses		11,837		11,371		4.1
Depreciation and amortization		11,602		11,663		(0.5	)
General and administrative ⁽¹⁾		2,507		2,332		7.5
Write-down of vessel		9,094		—		100.0

Income from vessel operations		25,492		22,137		15.2


Calendar-Ship-Days
Owned Vessels		1,991		1,991		—


(1)		Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the conventional tanker segment based on estimated use of corporate resources).

Net Revenues. Net revenues increased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to:

•

net increases of $5.5 million and $9.1 million, respectively, in net bunker revenues for the three and six months ended June 30, 2011, due to an increase in bunker index prices compared to the same periods last year and lower bunker consumption due to higher idle days; and

•

increases of $3.6 million and $3.7 million, respectively, for the three and six months ended June 30, 2011, due to a decrease in the number of off-hire days from scheduled drydockings compared to the same periods last year.

Vessel Operating Expenses. Vessel operating expenses increased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to increases of $0.3 million and $0.5 million, respectively, in crew and manning costs for the three and six months ended June 30, 2011, resulting primarily from planned increases in wages.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to an increase in salvage values on certain of our vessels effective at the beginning of 2011.

Write-down of Vessel. Write-down of vessel for the three and six months ended June 30, 2011 relates to the valuation impairment of one conventional tanker. We sold the vessel and terminated its existing charter contract in August 2011. The value of the vessel was written down to its estimated sales price of $8.3 million.

FSO Segment

Our FSO fleet consists of five vessels that operate under fixed-rate time charters or fixed-rate bareboat charters. FSO units provide an on-site storage solution to oil field installations that have no oil storage facilities or that require supplemental storage. Our revenues and vessel operating expenses for the FSO segment are affected by fluctuations in currency exchange rates, as a significant component of revenues are earned and vessel operating expenses are incurred in Norwegian Kroner and Australian Dollars for certain vessels. The strengthening or weakening of the U.S. Dollar relative to the Norwegian Kroner and Australian Dollar may result in a significant decreases or increases, respectively, in our revenues and decreases or increases, respectively, in vessel operating expenses.

Page 22 of 32

The following table presents our FSO segment’s operating results for the three and six months ended June 30, 2011 and 2010, and compares its net revenues (which is a non-GAAP financial measure) for the six months ended June 30, 2011 and 2010 to revenues, the most directly comparable GAAP financial measure, for the same periods. The following table also provides a summary of the changes in calendar-ship-days for our FSO segment:


(in thousands of U.S. dollars, except	Three Months Ended June 30,
calendar-ship-days and percentages)	2011		2010		% Change

Revenues		14,947		18,419		(18.9	)
Voyage expenses		321		76		322.4

Net revenues		14,626		18,343		(20.3	)
Vessel operating expenses		7,411		8,420		(12.0	)
Depreciation and amortization		2,991		3,829		(21.9	)
General and administrative ⁽¹⁾		1,242		1,009		23.1

Income from vessel operations		2,982		5,085		(41.4	)


Calendar-Ship-Days
Owned Vessels		455		546		(16.7	)


(in thousands of U.S. dollars, except	Six Months Ended June 30,
calendar-ship-days and percentages)	2011		2010		% Change

Revenues		32,438		39,069		(17.0	)
Voyage expenses		612		325		88.3

Net revenues		31,826		38,744		(17.9	)
Vessel operating expenses		16,559		16,825		(1.6	)
Depreciation and amortization		6,172		9,246		(33.2	)
General and administrative ⁽¹⁾		2,305		2,019		14.2
Loss on sale of vessel		171		—		100.0
Restructuring charge		2,697		—		100.0

Income from vessel operations		3,922		10,654		(63.2	)


Calendar-Ship-Days
Owned Vessels		981		1,086		(9.7	)


(1)		Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the FSO segment based on estimated use of corporate resources).

We acquired the Falcon Spirit FSO unit from Teekay Corporation in April 2010. However, as a result of the inclusion of the Dropdown Predecessor, the Falcon Spirit has been included for accounting purposes in our results as if it was acquired on December 15, 2009, when the vessel began operations under the ownership of Teekay Corporation. For information about the Dropdown Predecessor, please read Note 2 to our Consolidated Financial Statements included in this report.

On March 18, 2011 we sold one of our FSO units, the Karratha Spirit, for proceeds of $5.1 million, resulting in a loss of $0.2 million. As described below, we committed to plans for termination of the employment of certain seafarers of this vessel resulting in restructuring charges.

Net Revenues. Net revenues decreased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to:

•

decreases of $3.8 million and $4.2 million, respectively, for the three and six months ended June 30, 2011, due to lower revenues related to the sale of the Karratha Spirit in March 2011;

•

decreases of $1.4 million and $4.3 million, respectively, for the three and six months ended June 30, 2011, due to a lower charter rate on the Navion Saga in accordance with the charter contract that took effect in the second quarter of 2010; and

•

a decrease of $0.9 million for the six months ended June 30, 2011, due to a one-time reimbursement from a customer for certain crewing costs in the three months ended March 31, 2010;

partially offset by

•

increases of $1.8 million and $2.6 million, respectively, for the three and six months ended June 30, 2011, due to foreign currency exchange differences as compared to the same periods last year.

Page 23 of 32

Vessel Operating Expenses. Vessel operating expenses decreased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to:

•

decreases of $2.9 million and $3.3 million, respectively, for the three and six months ended June 30, 2011 related to the sale of the Karratha Spirit in March 2011;

partially offset by

	•		increases of $1.0 million and $1.5 million, respectively, for the three and six months ended June 30, 2011, due to the weakening of the U.S. Dollar against the Australian Dollar as compared to the same periods last year;

	•		increases of $0.6 million and $0.9 million, respectively, for the three and six months ended June 30, 2011, due to an increase in crew and manning costs as compared to the same periods last year resulting primarily from a planned increase in wages; and

•

increases of $0.3 million and $0.5 million, respectively, for the three and six months ended June 30, 2011, due to an increase in the consumption and use of consumables, lube oil, and freight.

Depreciation and amortization. Depreciation and amortization expense decreased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to:

•

decreases of $0.5 million and $2.5 million, respectively, for the three and six months ended June 30, 2011 as the costs relating to the conversion of the Navion Saga from a shuttle tanker to a FSO unit were fully depreciated at the end of the fixed term of its contract in April 2010; and

•

decreases of $0.4 million and $0.6 million, respectively, for the three and six months ended June 30, 2011 related to the sale of the Karratha Spirit in March 2011.

Loss on sale of vessel. Loss on sale of vessel for the six months ended June 30, 2011 relates to the sale of the Karratha Spirit in March 2011.

Restructuring charge. Restructuring charges for the six months ended June 30, 2011 were incurred in connection with the termination of employment for certain of the crew members of the Karratha Spirit following the sale of the vessel in March 2011.

FPSO Segment

Our FPSO fleet consists of the Petrojarl Varg and Rio das Ostras, which are owned by us and operate under fixed-rate time charters. FPSO units provide production, processing and storage services to oil companies operating offshore oil field installations. These services are typically provided under long-term, fixed-rate charter contracts or FPSO service contracts. Historically, the utilization of FPSO units and other vessels in the North Sea is higher in the winter months, as favorable weather conditions in the summer months provide opportunities for repairs and maintenance to our vessels and the offshore oil platforms, which generally reduces oil production.

The following table presents our FPSO segment’s operating results for the three and six months ended June 30, 2011 and 2010 and also provides a summary of the calendar-ship-days for our FPSO segment:


(in thousands of U.S. dollars, except	Three Months Ended June 30,
calendar-ship-days and percentages)	2011		2010		% Change

Revenues		42,561		37,693		12.9
Vessel operating expenses		19,665		14,685		33.9
Depreciation and amortization		8,911		8,894		0.2
General and administrative ⁽¹⁾		2,960		2,596		14.0

Income from vessel operations		11,025		11,518		(4.3	)


Calendar-Ship-Days
Owned Vessels		182		182		—


(in thousands of U.S. dollars, except	Six Months Ended June 30,
calendar-ship-days and percentages)	2011		2010		% Change

Revenues		84,846		77,064		10.1
Vessel operating expenses		39,037		29,791		31.0
Depreciation and amortization		17,823		17,788		0.2
General and administrative ⁽¹⁾		6,396		5,767		10.9

Income from vessel operations		21,590		23,718		(9.0	)


Calendar-Ship-Days
Owned Vessels		362		362		—


(1)		Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the FPSO segment based on estimated use of corporate resources).

We acquired the Rio das Ostras from Teekay Corporation in October 2010. However, as a result of the inclusion of the Dropdown Predecessor, the Rio das Ostras has been included for accounting purposes in our results as if it was acquired on April 1, 2008, when Teekay Corporation acquired its initial 82% interest in the Rio das Ostras. For more information about the Dropdown Predecessor, please read Note 2 to our Consolidated Financial Statements included in this report.

Page 24 of 32

Revenues. Revenues increased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to:

	•		increases of $2.9 million and $2.7 million, respectively, for the three and six months ended June 30, 2011, due to increased rates on the Rio das Ostras effective April 2011 as provided in the existing charter contract;

	•		increases of $1.5 million and $1.7 million for the three and six months ended June 30, 2011, due to foreign currency exchange differences as compared to the same periods last year; and

•

increases of $0.4 million and $3.5 million, respectively, for the three and six months ended June 30, 2011, relating to back-pay for services previously rendered to the charterer of the Rio das Ostras.

Vessel Operating Expenses. Vessel operating expenses increased for the three and six months ended June 30, 2011 from the same periods last year, primarily due to:

•

increases of $2.5 million and $3.0 million, respectively, for the three and six months ended June 30, 2011, due to the weakening of the U.S. Dollar against the Norwegian Kroner compared to the same periods last year;

•

increases of $1.4 million and $2.8 million, respectively, for the three and six months ended June 30, 2011, due to planned crew and manning wage increases; and

•

increases of $1.3 million and $3.4 million, respectively, for the three and six months ended June 30, 2011, due to increased repairs on the Rio das Ostras while on yard stay.

Other Operating Results

General and Administrative Expenses. General and administrative expenses increased to $18.2 million and $36.9 million for the three and six months ended June 30, 2011, respectively, from $16.3 million and $33.0 million, respectively, for the same periods last year, mainly relating to an increase in management fees payable to subsidiaries of Teekay Corporation for services rendered to us, due mainly to increases in office costs, and a one-time management fee charged to us by Teekay Corporation associated with the portion of stock-based compensation grants of Teekay Corporation’s former Chief Executive Officer that had not yet vested prior to the date of his retirement on March 31, 2011.

Interest Expense. Interest expense, which excludes realized and unrealized gains and losses from interest rate swaps, decreased to $8.9 million and $17.4 million for the three and six months ended June 30, 2011, respectively, from $9.3 million and $19.2 million for the same periods last year, primarily due to:

•

decreases of $1.6 million and $3.2 million for the three and six months ended June 30, 2011, respectively, mainly from lower debt balances relating to the Falcon Spirit FSO unit and the Rio das Ostras FPSO unit (including the Dropdown Predecessor); and

•

net decreases of $0.9 million and $3.2 million for the three and six months ended June 30, 2011, respectively, related to scheduled repayments and prepayments of debt during 2011 and 2010, partially offset by increased debt from the 2010 Newbuilding Shuttle Tanker Acquisitions and increased debt from the Peary Spirit newbuilding shuttle tanker, which we have consolidated as a variable interest entity in our consolidated financial statements since October 1, 2010;

partially offset by

•

increases of $2.1 million and $4.0 million for the three and six months ended June 30, 2011, respectively, from the issuance of NOK 600 million senior unsecured bonds in November 2010; and

•

an increase of $0.5 million for the six months ended June 30, 2011, mainly related to loan costs.

Realized and Unrealized (Losses) Gains on Non-designated Derivatives. Net realized and unrealized losses on non-designated derivatives were ($38.7) million and ($27.9) million for the three and six months ended June 30, 2011, respectively, compared to ($57.9) million and ($82.3) million, respectively, for the same periods last year, as detailed in the table below:


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
(in thousands of U.S. dollars)	$			$			$			$
Realized (losses) gains relating to:
Interest rate swaps		(13,769	)		(12,057	)		(27,471	)		(24,844	)
Foreign currency forward contracts		1,204			(340	)		1,622			(495	)

		(12,565	)		(12,397	)		(25,849	)		(25,339	)

Unrealized gains (losses) relating to:
Interest rate swaps		(26,969	)		(42,190	)		(6,204	)		(53,139	)
Foreign currency forward contracts		814			(3,276	)		4,173			(3,860	)

		(26,155	)		(45,466	)		(2,031	)		(56,999	)


Total realized and unrealized losses on non-designated derivative instruments		(38,720	)		(57,863	)		(27,880	)		(82,338	)

Page 25 of 32

Foreign Currency Exchange Gains (Losses). Foreign currency exchange gains (losses) were $0.4 million and ($0.4) million for the three and six months ended June 30, 2011, respectively, compared to gains of $2.2 million and $3.9 million, respectively, for the same periods last year. Our foreign currency exchange losses and gains, substantially all of which are unrealized, are due primarily to the relevant period-end revaluation of Norwegian Kroner-denominated monetary assets and liabilities for financial reporting purposes. Gains reflect a stronger U.S. Dollar against the Norwegian Kroner on the date of revaluation or settlement compared to the rate in effect at the beginning of the period. Losses reflect a weaker U.S. Dollar against the Norwegian Kroner on the date of revaluation or settlement compared to the rate in effect at the beginning of the period. For the three and six months ended June 30, 2011, foreign currency exchange losses and gains include realized gains of $0.8 million and $1.4 million, respectively, (2010 — nil) and unrealized gains of $3.1 million and $9.4 million, respectively, (2010 — nil) on the cross currency swap.

Income Tax (Expense) Recovery. Income tax expense was ($3.0) million and ($5.7) million, respectively, for the three and six months ended June 30, 2011 compared to income tax recoveries of $10.5 million and $17.4 million, respectively, for the same periods last year. The $13.5 million and $23.1 million increase to income tax expense during the three and six months ended June 30, 2011, respectively, was primarily due to an increase in deferred income tax expense relating to unrealized foreign exchange translation gains.

Other Income. Other income was $1.2 million and $2.5 million, respectively, for the three and six months ended June 30, 2011 compared to $1.4 million and $3.9 million, respectively, for the same periods last year, which was primarily comprised of leasing income from our volatile organic compound equipment. The leasing income is decreasing as the contracts near completion.

Liquidity and Capital Resources

Liquidity and Cash Needs

As at June 30, 2011, our total cash and cash equivalents were $158.6 million, compared to $166.5 million at December 31, 2010. Our total liquidity, including cash, cash equivalents and undrawn long-term borrowings, was $294.0 million as at June 30, 2011, compared to $557.6 million as at December 31, 2010. The decrease in liquidity is primarily the result of our acquisition of the remaining 49% of OPCO from Teekay Corporation on March 8, 2011, and the payment of the first installment on our four Suezmax newbuilding shuttle tankers.

In addition to distributions on our equity interests, our primary short-term liquidity needs are to fund general working capital requirements and drydocking expenditures, while our long-term liquidity needs primarily relate to expansion and investment capital expenditures and maintenance capital expenditures and debt repayment. Expansion capital expenditures are primarily for the purchase or construction of vessels to the extent the expenditures increase the operating capacity of or revenue generated by our fleet, while maintenance capital expenditures primarily consist of drydocking expenditures and expenditures to replace vessels in order to maintain the operating capacity of or revenue generated by our fleet. Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures.

We believe that our existing cash and cash equivalents and undrawn long-term borrowings, in addition to all other sources of cash including cash from operations, will be sufficient to meet our existing liquidity needs for at least the next 12 months. Generally, our long-term sources of funds are from cash from operations, long-term bank borrowings and other debt or equity financings, or a combination thereof. Because we distribute all of our available cash, we expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and expansion and investment capital expenditures, including opportunities we may pursue under the omnibus agreement with Teekay Corporation and other of its affiliates.

Cash Flows. The following table summarizes our sources and uses of cash for the periods presented:


	Six Months Ended June 30,
(in thousands of U.S. dollars)	2011			2010

Net cash flow from operating activities		152,506			147,017
Net cash flow used for financing activities		(30,635	)		(143,896	)
Net cash flow (used for) from investing activities		(129,710	)		5,908

Operating Cash Flows. Net cash flow from operating activities increased to $152.5 million for the six months ended June 30, 2011, from $147.0 million for the same period in 2010, due primarily to a net increase in changes to non-cash working capital items, decreases in voyage expenses and time-charter hire expenses, a net increase in rates on our shuttle tankers, the acquisitions of the Amundsen Spirit and Nansen Spirit shuttle tankers, increases in the bunker index prices and daily hire rates on our conventional fleet and the redelivery of two time-chartered-in vessels, partially offset by an increase in vessel operating expenses.

Financing Cash Flows. During the six months ended June 30, 2011, scheduled debt repayments and prepayments on debt totaled $119.8 million. We used net proceeds from long-term debt of $311.5 million mainly to finance our acquisition of the remaining 49% of OPCO from Teekay Corporation, the acquisition of the Peary Spirit newbuilding shuttle tanker and to finance the first installment of the four Suezmax newbuilding shuttle tankers.

On March 22, 2010, we completed a public offering of 5.1 million common units (including 660,000 common units acquired by the underwriters upon exercise of their overallotment option). The total net proceeds from the offering (including our general partner’s total contribution of $2.0 million) were $95.5 million. We used the net proceeds to repay the remaining $60.0 million of the Teekay Corporation vendor financing related to the September 2009 acquisition of the Petrojarl Varg FPSO unit and to finance a portion of the April 2010 acquisition of Teekay Corporation’s interest in the Falcon Spirit FSO unit.

During the six months ended June 30, 2010, scheduled debt repayments and prepayments on debt totaled $200.4 million. Net proceeds from long-term debt were $81.6 million.

Page 26 of 32

Cash distributions paid by our subsidiaries to non-controlling interests during the six months ended June 30, 2011 and 2010 totaled $19.6 million and $43.0 million, respectively. Cash distributions paid by us to our unitholders and our general partner during the six months ended June 30, 2011 and 2010, totaled $61.3 million and $39.1 million, respectively. The decrease in distribution to non-controlling interests and increase in distributions to our unitholders is mainly attributed to our acquisition of OPCO in early March 2011. Subsequent to June 30, 2011, cash distributions on our outstanding common units and general partner interest related to the three months ended June 30, 2011 of $34.0 million were declared and subsequently paid on August 12, 2011.

Investing Cash Flows. During the six months ended June 30, 2011, net cash flow used for investing activities was $129.7 million, primarily relating to expenditures for vessels and equipment, including the first installment payment of $44.6 million on our four Suezmax newbuilding shuttle tankers and the final installment payment of $77.9 million for the Peary Spirit newbuilding shuttle tanker, partially offset by $5.1 million in proceeds from the vessel sale and scheduled lease payments of $10.5 million received from the leasing of our volatile organic compound emissions equipment and direct financing lease assets.

During the six months ended June 30, 2010, net cash flow from investing activities was $5.9 million, primarily relating to scheduled lease payments of $11.6 million received from the leasing of our volatile organic compound emissions equipment and direct financing lease assets, partially offset by expenditures for vessels and equipment.

Credit Facilities

As at June 30, 2011, our total debt was $1.92 billion, compared to $1.72 billion as at December 31, 2010. Our revolving credit facilities and term loans are described in Item 1 — Financial Statements: Note 6 — Long-Term Debt of this report. All of our vessel financings are collateralized by the applicable vessels. The term loans used to finance five of our 50%-owned subsidiaries and our revolving credit facility agreements contain typical covenants and other restrictions, including, in some cases, those that restrict the relevant subsidiaries from:

•

incurring or guaranteeing indebtedness;

•

changing ownership or structure, including by mergers, consolidations, liquidations and dissolutions;

•

making dividends or distributions when in default of the relevant loans;

•

making capital expenditures in excess of specified levels;

•

making certain negative pledges or granting certain liens;

•

selling, transferring, assigning or conveying assets; or

•

entering into a new line of business.

We conduct our funding and treasury activities within corporate policies designed to minimize borrowing costs and maximize investment returns while maintaining the safety of the funds and appropriate levels of liquidity for our purposes. We hold cash and cash equivalents primarily in U.S. Dollars.

Contractual Obligations and Contingencies

The following table summarizes our long-term contractual obligations as at June 30, 2011:


			Balance		2012		2014
			of		and		and		Beyond
	Total		2011		2013		2015		2015
	(in millions of U.S. Dollars)

Long-term debt⁽¹⁾		1,917.1		100.0		626.9		864.8		325.4
Chartered-in vessels (Operating leases)		131.9		30.8		80.2		20.9		—
Newbuilding installments⁽²⁾		401.4		—		401.4		—		—

Total contractual obligations		2,450.4		130.8		1,108.5		885.7		325.4


(1)		Excludes expected interest payments of $14.0 million (remainder of 2011), $40.3 million (2012 and 2013), $9.6 million (2014 and 2015) and $78.2 million (beyond 2015). Expected interest payments are based on LIBOR, plus margins which ranged between 0.30% and 3.25% as at June 30, 2011, and on NIBOR plus a margin of 4.75%.

(2)		Excludes capitalized interest and miscellaneous construction costs. Please read Item 1 — Financial Statements: Note 12(d) — Commitments and Contingencies.

Page 27 of 32

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with GAAP, which require us to make estimates in the application of our accounting policies based on our best assumptions, judgments and opinions. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Accounting estimates and assumptions discussed in this section of the Form 20-F are those that we consider to be the most critical to an understanding of our financial statements, because they inherently involve significant judgments and uncertainties. For a description of our material accounting policies, please read Item 5 — Operating and Financial Review and Prospects in our Annual Report on Form 20-F for the year ended December 31, 2010. As at June 30, 2011, there were no significant changes to accounting estimates or assumptions from those discussed in the Form 20-F.

At June 30, 2011, the shuttle tanker segment had goodwill attributable to it. Based on conditions that existed at June 30, 2011, we do not believe that there is a reasonable possibility that the goodwill attributable to this reporting unit might be impaired for the remainder of the year. However, certain factors that impact this assessment are inherently difficult to forecast and, as such, we cannot provide any assurance that an impairment will or will not occur in the future. An assessment for impairment involves a number of assumptions and estimates that are based on factors that are beyond our control. These are discussed in more detail in the following section entitled “Forward-Looking Statements”.

FORWARD-LOOKING STATEMENTS

This Report on Form 6-K contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Exchange Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) concerning future events and our operations, performance and financial condition, including, in particular, statements regarding:

	•		our future growth prospects;

	•		results of operations and revenues and expenses;

	•		offshore and tanker market fundamentals, including the balance of supply and demand in the offshore and tanker market;

	•		future capital expenditures and availability of capital resources to fund capital expenditures;

	•		offers of shuttle tankers, FSOs and FPSOs and related contracts from Teekay Corporation and our accepting the offers;

	•		obtaining offshore projects that we or Teekay Corporation bid on or may be awarded;

	•		delivery dates of and financing for newbuildings or existing vessels;

	•		vessel operating and crewing costs for vessels;

	•		entrance into joint ventures and partnerships with companies;

	•		the commencement of service of newbuildings or existing vessels;

	•		the duration of drydockings;

	•		potential newbuilding order cancellations;

	•		the future valuation of goodwill;

	•		our liquidity needs;

	•		our compliance with covenants under our credit facilities;

	•		our hedging activities relating to foreign exchange, interest rate and spot market risks;

	•		the ability of the counterparties for our derivative contracts to fulfill their contractual obligations; and

	•		our exposure to foreign currency fluctuations, particularly in Norwegian Kroner.

Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”, “will be”, “will continue”, “will likely result”, “plan”, “intend” or words or phrases of similar meanings. These statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to: changes in production of oil from offshore oil fields; changes in the demand for offshore oil transportation, production and storage services; greater or less than anticipated levels of vessel newbuilding orders or greater or less than anticipated rates of vessel scrapping; changes in trading patterns; changes in our expenses; changes in applicable industry laws and regulations and the timing of implementation of new laws and regulations; potential inability to implement our growth strategy; competitive factors in the markets in which we operate; potential for early termination of long-term contracts and our potential inability to renew or replace long-term contracts; loss of any customer, time charter or vessel; shipyard production or vessel delivery delays; our potential inability to raise financing to purchase additional vessels; our exposure to currency exchange rate fluctuations; changes to the amount of proportion of revenues and expenses denominated in foreign currencies; and other factors detailed from time to time in our periodic reports filed with the SEC, including our Annual Report on Form 20-F for the year ended December 31, 2010. We do not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.

Page 28 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
JUNE 30, 2011

PART I — FINANCIAL INFORMATION


ITEM 3		— QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to the impact of interest rate changes primarily through our floating-rate borrowings. Significant increases in interest rates could adversely affect operating margins, results of operations and our ability to service debt. From time to time, we use interest rate swaps to reduce exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with the floating-rate debt.

In order to minimize counterparty risk, we only enter into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.

The tables below provide information about financial instruments as at June 30, 2011 that are sensitive to changes in interest rates. For long-term debt, the table presents principal payments and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected contractual maturity dates.


	Expected Maturity Date
	Balance																					Fair
	of															There-						Value
	2011			2012			2013			2014			2015			after			Total			Liability		Rate⁽¹⁾
	(in millions of U.S. dollars, except percentages)
Long-Term Debt:
Variable Rate (²⁾		100.0			207.5			419.4			805.1			59.7			325.4			1,917.1			1,825.6		1.5	%

Interest Rate Swaps:
Contract Amount ⁽³⁾⁽⁴⁾		55.5			226.3			230.5			91.7			216.8			746.7			1,567.5			181.7		4.2	%
Average Fixed Pay Rate⁽²⁾		3.0	%		2.6	%		2.1	%		4.9	%		4.5	%		5.1	%		4.2	%


(1)		Rate refers to the weighted-average effective interest rate for our debt, including the margin paid on our floating-rate debt and the average fixed pay rate for interest rate swaps. The average fixed pay rate for interest rate swaps excludes the margin paid on the floating-rate debt, which as of June 30, 2011 ranged between 0.30% and 3.25% based on LIBOR and 4.75% based on NIBOR.

(2)		Interest payments on floating-rate debt and interest rate swaps are based on LIBOR or NIBOR.

(3)		The average variable receive rate for interest rate swaps is set quarterly at the 3-month LIBOR or semi-annually at the 6-month LIBOR.

(4)		Includes an interest rate swap where the LIBOR rate receivable is capped at 3.5% on a notional amount of $98.5 million maturing in 2013.

Foreign Currency Fluctuation Risk

Our functional currency is U.S. dollars because virtually all of our revenues and most of our operating costs are in U.S. Dollars. We incur certain vessel operating expenses and general and administrative expenses in foreign currencies, the most significant of which is the Norwegian Kroner and, to a lesser extent, Australian Dollars, Brazilian Reals, British Pounds, Euros and Singapore Dollars. There is a risk that currency fluctuations will have a negative effect on the value of cash flows.

We may continue to seek to hedge certain of our currency fluctuation risks in the future. At June 30, 2011, we were committed to the following foreign currency forward contracts:


	Contract Amount		Average		Expected Maturity
	in Foreign Currency		Forward		2011		2012
	(thousands)		Rate⁽¹⁾		(in thousands of U.S. Dollars)
Norwegian Kroner		418,000		6.39	$	27,925	$	37,585
British Pound		2,940		0.66		2,548		1,919
Euro		10,700		0.76		7,972		6,176

					$	38,445	$	45,680


(1)		Average forward rate represents the contracted amount of foreign currency one U.S. Dollar will buy.

Page 29 of 32

We incur interest expense on our Norwegian Kroner-denominated bonds. We have entered into a cross currency swap to economically hedge the foreign exchange risk on the principal and interest. As at June 30, 2011, we were committed to one cross currency swap with the notional amounts of NOK 600 million and $98.5 million, which exchanges a receipt of floating interest based on NIBOR plus a margin of 4.75% with a payment of floating interest based on LIBOR plus a margin of 5.04%. In addition, the cross currency swap locks in the transfer of principal to $98.5 million upon maturity in exchange for NOK 600 million.

Although the majority of transactions, assets and liabilities are denominated in U.S. Dollars, we had Norwegian Kroner-denominated deferred income taxes of approximately 55.3 million (U.S. Dollar $10.3 million) at June 30, 2011. We have not entered into any forward contracts to protect against currency fluctuations on any future taxes.

Commodity Price Risk

We are exposed to changes in forecasted bunker fuel costs for certain vessels being time-chartered-out and for vessels servicing certain contracts of affreightment. We may use bunker fuel swap contracts as economic hedges to protect against changes in bunker fuel costs. As at June 30, 2011, we were not committed to any bunker fuel swap contracts.

Page 30 of 32

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
JUNE 30, 2011

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

See “Item 8. Financial Information — Legal Proceedings” in our Annual Report on Form 20-F for the year ended December 31, 2010.

Item 1A — Risk Factors

In addition to the other information set forth in this Report on Form 6-K, you should carefully consider the risk factors discussed in Part I, “Item 3. Key Information — Risk Factors” in our Annual Report on Form 20-F for the year ended December 31, 2010, which could materially affect our business, financial condition or results of operations.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

On July 7, 2011, we issued 0.7 million common units to an institutional investor in a private placement for net proceeds of $20.4 million (including our general partner’s $0.4 million proportionate capital contribution). The common units were subsequently registered under a registration statement filed and declared effective by the Securities and Exchange Commission. We used the proceeds from the issuance of common units to partially fund the acquisition of the four Suezmax newbuilding shuttle tankers.

Item 3 — Defaults Upon Senior Securities

None

Item 4 — Reserved

Item 5 — Other Information

None

Item 6 — Exhibits

None

THIS REPORT ON FORM 6-K IS HEREBY INCORPORATED BY REFERENCE INTO THE FOLLOWING REGISTRATION STATEMENT OF THE PARTNERSHIP:

•		REGISTRATION STATEMENT ON FORM S-8 (NO. 333-147682) FILED WITH THE SEC ON NOVEMBER 28, 2007

•		REGISTRATION STATEMENT ON FORM F-3 (NO. 333-174221) FILED WITH THE SEC ON MAY 13, 2011

•		REGISTRATION STATEMENT ON FORM F-3 (NO. 333-175685) FILED WITH THE SEC ON JULY 21, 2011

Page 31 of 32


PART I: FINANCIAL INFORMATION			PAGE

Item 1. Financial Statements (Unaudited)

Unaudited Consolidated Statements of (Loss) Income for the three and six months ended June 30, 2011 and 2010			3

Unaudited Consolidated Balance Sheets as at June 30, 2011 and December 31, 2010			4

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010			5

Unaudited Consolidated Statements of Changes In Total Equity for the six months ended June 30, 2011			6

Unaudited Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2011 and 2010			7

Notes to the Unaudited Consolidated Financial Statements			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18

Item 3. Quantitative and Qualitative Disclosures about Market Risk			29

PART II: OTHER INFORMATION			31

SIGNATURES			32


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	$			$			$			$
Net (loss) income		(13,291	)		(9,754	)		30,678			15,508


Other comprehensive income (loss):
Unrealized net gain (loss) on qualifying cash flow hedging instruments (note 10)		1,029			(8,369	)		3,012			(10,724	)
Realized net (gain) loss on qualifying cash flow hedging instruments (note 10)		(746	)		758			(1,511	)		1,471
Pension adjustment		—			(302	)		—			(586	)

Other comprehensive income (loss)		283			(7,913	)		1,501			(9,839	)


Comprehensive (loss) income		(13,008	)		(17,667	)		32,179			5,669

Non-controlling interest in comprehensive (loss) income		(1,937	)		(10,993	)		19,101			(879	)
Dropdown Predecessor’s interest in comprehensive (loss) income (note 2)		—			(274	)		—			(1,169	)
Partners’ interest in comprehensive (loss) income		(11,071	)		(6,400	)		13,078			7,717


	TEEKAY OFFSHORE PARTNERS L.P.

	By: Teekay Offshore GP L.L.C., its general partner

Date: August 25, 2011	By:	/s/ Peter Evensen Peter Evensen
		Chief Executive Officer and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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