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Share swap deal between BP and Rosneft

British Petroleum (BP) signed an agreement with Russia's state-controlled oil producer
Rosneft on Friday evening, under which BP will swap 5 percent of its stock, valued at 7.8
billion U.S. dollars, for 9.5 percent of Rosneft.

The agreement also allows BP to explore three blocks in Russia's Arctic Ocean that BP said
could contain billions of barrels of oil and gas.

BP had an existing 1.2-percent stake in Rosneft before this deal, after BP spent 1 billion
dollars on the shares during Rosneft's initial public offering in July 2006.

With exploration in the Gulf of Mexico still at a standstill and with no new wells drilled since
the accident last April, the deal is generally seen as BP shifting its sights to the east.

BRITISH PETROLIUM

BP p.l.c. is a global oil and gas company headquartered in London, United Kingdom. It is
the third-largest energy company and fourth-largest company in the world measured by
revenues and one of the six oil and gas "super majors". It is vertically-integrated and is active
in every area of the oil and gas industry, including exploration and production, refining,
distribution and marketing, petrochemicals, power generation and trading. It also has major
renewable energy activities, including in bio fuels, hydrogen, solar and wind power.

BP has operations in over 80 countries, produces around 3.8 million barrels of oil equivalent
per day and has 22,400 service stations worldwide. Its largest division is BP America, which
is the biggest producer of oil and gas in the United States and is headquartered in Houston,
Texas. As at 31 December 2009 it had total proven commercial reserves of 18.3 billion
barrels of oil equivalent. The name "BP" derives from the initials of one of the company's
former legal names, British Petroleum.

BP's track record of corporate social responsibility has been mixed. The company has been
involved in a number of major environmental and safety incidents and received criticism for

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its political influence. However, in 1997, it became the first major oil company to publicly
acknowledge the need to take steps against climate change, and in that year established a
company-wide target to reduce its emissions of greenhouse gases. BP currently invests over
$1 billion per year in the development of renewable energy sources, and has committed to
spend $8 billion on renewable in the 2005 to 2015 period.

Its primary listing is on the London Stock Exchange and it is a constituent of the FTSE 100
Index. It has a secondary listing on the New York Stock Exchange.

History

British Petroleum merged with Amoco (formerly Standard Oil of Indiana) in December 1998,
becoming BP Amoco plc. In 2000, BP Amoco acquired Arco (Atlantic Richfield Co.) and
Burmah Castrol plc. As part of the merger's brand awareness, helped the Tate Modern British
Art launch Ô
   
  In 2001 the company formally renamed itself as
BP plc and adopted the tagline "Beyond Petroleum," which remains in use today. It states that
BP was never meant to be an abbreviation of its tagline. Most Amoco stations in the United
States were converted to BP's brand and corporate identity. In many states BP continued to
sell Amoco branded petrol even in service stations with the BP identity as Amoco was rated
the best petroleum brand by consumers for 16 consecutive years and also enjoyed one of the
three highest brand loyalty reputations for petrol in the US, comparable only to Chevron and
Shell. In May 2008, when the Amoco name was mostly phased out in favour of "BP Gasoline
with Invigorate", promoting BP's new additive, the highest grade of BP petrol available in the
United States was still called Amoco Ultimate.

In April 2004, BP decided to move most of its petrochemical businesses into a separate entity
called Innovene within the BP Group. BP sought to sell the new company possibly via an
initial public offering (IPO) in the US, and filed IPO plans for Innovene with the NYSE on
12 September 2005. On 7 October 2005 BP announced that it had agreed to sell Innovene to
INEOS, a privately held UK chemical company for $9 billion, thereby scrapping its plans for
the IPO.

ROSNEFT
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Rosneft is the leader of Russia¶s petroleum industry, and ranks among the world¶s top
publicly traded oil and gas companies. The Company is primarily engaged in exploration and
production of hydrocarbons, production of petroleum products and petrochemicals, and
marketing of outputs. Rosneft has been included in the Russian Government¶s List of
Strategic Enterprises and Organizations. The state holds 75.16% in the Company (through
OJSC ROSNEFTEGAZ), while approximately 15% of shares are in free-float (see
shareholder structure).

History

Rosneft was one of the last vertically integrated oil companies to emerge from the
reorganization and large-scale privatization of Russia¶s oil industry in the years following the
dissolution of the Soviet Union.

Initially, Rosneft was established in 1993 as a state enterprise on the basis of assets
previously held by Rosneftegaz, the successor to the USSR Ministry of Oil and Gas. In 1995,
a Russian government decree transformed Rosneft into an open joint stock company (OJSC).

From 1995 to 1998, Rosneft¶s management changed constantly and as a result its assets were
left largely unmanaged. Oil production fell and oil refining collapsed to just one third of
production capacity.

The turnaround

In October 1998, the Russian government decided to strengthen the Company¶s management
so that Rosneft could once again become a key player on the Russian energy market. The
government appointed the Company¶s current president, Sergey Bogdanchikov.

The new management team under Bogdanchikov immediately began to implement bold plans
which ultimately lifted the Company out of the crisis.

As a result, Rosneft had become profitable again by 2000, and from then on, the Company
began a new period of strong growth, with average annual oil production increases of over
11%.

Growth strategy

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Improved management, consolidation of existing and newly acquired assets, strengthened
financial discipline and deepened scientific and technical integration all led to a significant
increase in the efficient use of resources and allowed the Company to adopt a program of
growth and expanded production.

In just four years, Rosneft increased its oil output sharply from 98.56 mln barrels (13.47 mln
tonnes) in 2000 to 148.26 mln barrels (20.27 mln tonnes) in 2004.

In 2001, the Company became Russia¶s official representative on projects with Production
Sharing Agreements (PSA). In 2002, Rosneft expanded its international activity by taking
part in a project in Algeria, and in 2003, it began producing oil at the Aday block near the
Caspian Sea in Western Kazakhstan. In 2005, Rosneft became a participant in the PSA to
develop the Kurmangazy structure on the Caspian shelf in Kazakhstan.

Rosneft is rigorously implementing its strategy of acquiring new assets in Russia, with a
particular focus on the geological characteristics of the fields and efficient transport.

Swap deal in Rosneft and BP

BP and Rosneft announced today that they have agreed a groundbreaking strategic global
alliance.

Rosneft and BP have agreed to explore and develop three license blocks - EPNZ 1, 2, 3 ± on
the Russian Arctic continental shelf. These licences were awarded to Rosneft in 2010 and
cover approximately 125,000 square kilometres in a highly prospective area of the South
Kara Sea. This is an area roughly equivalent in size and prospectively to the UK North Sea.

This historic agreement creates the first major equity-linked partnership between a national
and international oil company. Following completion of this agreement, Rosneft will hold 5
per cent of BP¶s ordinary voting shares in exchange for approximately 9.5 per cent of
Rosneft¶s shares. The share swap component of the alliance creates strategic alignment
to pursue joint projects and demonstrates mutual confidence in the growth potential of
both companies.

BP and Rosneft have also agreed to establish an Arctic technology centre in Russia which
will work with leading Russian and international research institutes, design bureaus and

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universities to develop technologies and engineering practices for the safe extraction of
hydrocarbon resources from the Arctic shelf. The technology centre will build on BP¶s deep
offshore experience and learning with full emphasis on safety, environmental integrity and
emergency spill response capability.

Rosneft and BP have agreed to continue their joint technical studies in the Russian Arctic to
assess hydrocarbon prospectively in areas beyond the Kara Sea. The parties will also seek
additional opportunities for international collaboration beyond their 50/50 joint venture
partnership in Ruhr Oel GmbH, a refining joint venture in Germany (subject to completion of
Rosneft¶s recent purchase of 50 per cent of Ruhr Oel from PDVSA).

It is a groundbreaking deal between 2 of the largest oil companies. Russia is centrally

important to global energy with nearly 20% of the daily gas production and about 13% of
today's oil production. This initiative, to explore and develop the new sources of oil and gas
is good news for Europe, for the UK, energy security and worldwide. As we move overtime
Russia's oil and gas will play a major role in fuelling the world and a key role for Europe».

Underpinning this alliance is a new type of relationship based on a significant cross-

shareholding, and bringing together technology, exploration and safe and responsible field
development skills. We are very pleased to welcome Rosneft as a strategic partner and major
shareholder in the BP Group.´

In its operations, our future joint venture will utilize the experience and expertise of BP, one
of the leaders in the global oil and gas industry. This project is unique in its complexity and
scale both for Russia and the global oil and gas industry.

BP is working with national oil companies using its leading exploration skills and expertise to
meet this demand. This is a trend which will increase as access to resource becomes scarcer.

This landmark deal creates a deep partnership which represents a new stage in these
relationships. The exchange of shares demonstrates our mutual commitment. The BP board
believes that the combination of assets and skills will unlock significant value and thus the
issue of shares to Rosneft is in the interests of all shareholders.

The aggregate value of the shares in BP to be issued to Rosneft is approximately $7.8bn as at

close of trading in London on 14 January 2011. The transaction is subject to certain listing

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approvals and the completion of certain administrative requirements and is expected to
complete within a few weeks. BP and Rosneft view their cross-shareholdings as long term
and strategic.

Rosneft is Russia¶s leading oil producing company. It produces some 2.4 million barrels of
oil equivalent (boe), and has reserves of 15,146 billion boe. It produces oil in all key regions
of Russia. Rosneft reported (pre tax) profits for the year end 31 December 2009 of $8,519m
and gross assets (as at 30 September 2010) of $87,984m.

Analysis

In January 2006, BP and Rosneft launched a scientific research study to evaluate the Russian
Arctic.

In 1998, BP and Rosneft started an alliance that eventually led to the formation of three joint
ventures to conduct exploration on the Russian continental shelf, offshore Sakhalin.

The reserve figures quoted above have been estimated by Rosneft on an SEC (life of field)
basis.

The swap ratio is based upon the volume weighted average prices of the shares of the two
companies across all exchanges in which significant numbers of shares of the companies,
(and associated American Depositary Receipts and Global Depositary Receipts), are traded
(Moscow, London, New York) over the fifteen trading days in which all three exchanges
were open, beginning 9th December, 2010 and ending 12th January 2011.

BP has agreed to issue 988,694,683 ordinary shares to Rosneft; Rosneft has agreed to transfer
1,010,158,003 ordinary shares to BP.

The shareholdings being exchanged are subject to mutual lock-up restrictions for a period of
two years (subject to limited exceptions). After the lock-up period, the exchanged
shareholdings of BP and Rosneft will be subject to certain disposal restrictions.

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 (i).cÎhy and how company faces the credit riskß

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Œii). cHow does company manage their credit risks through SÎAP systems?

Compamies uses two type of swap to mange credit risk :

1.c Credit Default Swaps

A Credit Default Swap is another mechanism for distributing the default risk of securities and
loans, enabling lenders and investors to improve risk management and better achieve their
financial goals. In this case, one party makes periodic basis points payments and another
party makes payments for the principal if the "credit default" event occurs. The pricing of
such a derivative depends upon the credit quality of the reference credit, supply and demand
for the reference credit, and prevailing credit spreads.

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Credit Default Swap Cash Flows

Banks that want to reduce or eliminate their exposure to a particular loan or basket of loans
can buy a CDS without the borrower's knowledge or consent (which may be required when
the loans are sold outright). Manufacturing companies that depend upon a limited number of
customers for revenue can buy a CDS on their customers' payment obligations. Investors who
need to protect themselves against default but cannot or do not want to sell the at-risk security
for accounting, tax or regulatory reasons, can buy a Credit Default Swap. Investors can pick
up additional yield without buying an asset, holding it on their balance sheet and funding it.
Building on the basic swap structure, investors can swap the default risk of one credit with
that of another credit. This can help companies diversify their portfolios while avoiding the
transaction costs associated with buying and selling many individual securities or loans.

R.c Total Return Swaps ŒTRSs)

A Total Return Swap is a derivative instrument that allows an investor to receive the total
economic return of an asset (income plus or minus any change in capital value) without
actually buying the asset. Exhibit 1 is a diagram of TRS cash flows. One party pays the total
economic return on a notional amount of principal to another party in return for periodic
fixed or floating rate payment (plus some spread). The underlying reference credit (e.g.
LIBOR) can be any financial asset, basket of assets or an index.

Total Return Swap Cash Flows

Banks use this product as a way of transferring the risk exposure of an asset to another
interested party. Investors seeking exposure to a bank portfolio use TRSs to enhance their
yield. For example, a bank might agree to pay total return on a $50 million loan portfolio to
an insurance company in exchange for semi-annual payments of LIBOR plus 100 basis
points. This allows the bank to reduce its exposure to the credit risk portion of the portfolio
without selling the loans. The insurance company, on the other hand, obtains exposure to the
portfolio without bearing the expense of originating and administering these loans, except via
the bank's margin on the swap. The swap enables banks to keep the entire asset on their
books, but maintain only the desired amount of credit exposure.

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Investors can leverage and diversify their portfolios to achieve higher yields by taking on this
credit exposure. A TRS enables the investor to make loans synthetically without the
administrative burden of documenting the loan agreement and periodically resetting the
interest rate. TRSs can provide an extremely economic way of using leverage to maximize
return on capital.

Œiii).c The Challenges faced while implementing credit risk management system.

The main challenges for the credit risk management are following:-

1.c Pre-trade check turnaround times are too slow in companies and banks, adding
latency, for example 80-300 milisecond- to the process poses a real disadvantage. As
a result, such checks for time sensitive clients are not always implemented, due to
lack of technology that is fast enough to make a significant difference.
2.c The carve-out and allocation of lines across different channels, and maintenance of
positions against carve-outs for give-ups are seen as problematic, potentially resulting
in loss of opportunity for both buy and sell side and unmanaged credit risk.
3.c It is inability of some system to account for netting or roll-over trades, which has the
tendency to be reported as credit violation. It creates an inefficiency that had
previously been avoided by the presence of sales traders conducting orders via the
phone, in which credit control officer would have been contacted.
4.c Additionally banks may face a challenging risk in determining credit positions of
clients that are using structured products- and these are approximated and then parked
to overnight. For those banks and companies seeking to grow structured product
business, while not noted today as a major drives for change, will require credit
management facilities that cater for these products. In few cases companies without
adequate systems identified a need to implement a solution for collateral management.

(iv).c Student¶s comments and conclusion on understanding about the management system.

Well in my opinion the improvements to existing credit management system would be

welcomed in pre deal credit checks, which are at some institutions limited to non actives
clients. Prime brokerage clients such as hedge funds, are not always covered by existing

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 pre trade credit checks, hence providing such services in timely manner might be an
impressive option for sell sides to consider.
Similarly, carve out and structured product management solutions are priority tasks.

Time is indeed a factor in pushing the demand for pre-trade checks, which are presently
perceived as too slow and therefore turnaround times less 80 millliseconds may well
change the demand.

It is envisaged that any improvements to credit risk management practices would

necessitate the integration of multi-asset class capability that reflects clients credit
exposure.
Sell-sides see this as an attractive but sizeable undertaking and therefore recognize it as
secondary in their list of priorities. However, there is widespread recognition of a need,
over time, to make a step change improvements in the real-time accuracy of credit
exposure management, pre-trade in a manner that minimizes the implied latency added
to the pricing process and maximizes the deployment of credit across channels.

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