Case study: Statoil seeks clear oversight of trade finance
If you receive letters of credit (LCs) worth hundreds of millions of dollars, you’ll want a robust trade finance system. Facing a growing call from its smaller counterparties for trade finance arrangements, international energy company Statoil has sought greater control over its transactions.
Statoil is an international energy company and the world’s third-largest net seller of crude oil, moving more than 100 million tons each year. With a growing call for trade finance arrangements from its counterparties, the company wanted a clear oversight of all its transactions.
Statoil’s experience of trade finance is as a receiver of standby LCs from smaller counterparties.
“We typically receive around 700 to 1,000 LCs each year,” says Gunnar Steinsson, Statoil’s head of credit, marketing and trading. “That might not sound like many, but the values involved can run up to hundreds of millions of dollars.
“We need a robust trade finance system, which gives us all the information we require in one place – we can’t afford to lose money on any transaction.”
Statoil has relationships with more than 15 core banks. Two years ago, the company invited its core banks to participate in the tender to become its main trade finance bank.
“All the banks submitted a tender,” says Steinsson. “But ultimately we chose Nordea as it demonstrated the best competence and expertise in trade finance, and it has a strong presence in the main region in which we operate. We were also very impressed with the sophistication of Nordea’s electronic trade finance tools.”
With Nordea as its main trade finance house bank, Statoil now has a clear oversight of its arrangements in this area. All of its incoming LCs are routed through Nordea, which checks they have been issued by an approved bank, giving Statoil complete peace of mind.
And Statoil is also benefiting from Nordea’s expert knowledge of trade finance. Nordea advises Statoil on risk pricing and entry into new markets, and supports knowledge-sharing on LC terms across the company’s credit teams.
The transition from Statoil’s previous trade finance banking arrangement to Nordea was carried out in several phases. This involved creating new web portals for trade finance, and setting up access rights and authorisation processes.
Nordea also worked with Steinsson’s team to establish appropriate formats for guarantees and embed new working practices. The project was co-ordinated by a member of the internal credit team in partnership with dedicated experts from Nordea.
“The sophistication of Nordea’s trade finance tools ensured that the transition was as smooth as possible,” says Steinsson. “But even more important to successful implementation was the great working relationship we have with Nordea. I’ve been at Statoil for five years, but the company’s involvement with Nordea stretches back at least 20 years.”
Following the transition period, Statoil has continued to benefit from Nordea’s commitment to maintaining strong relationships with its partners.
“Our operational department in Stavanger is in contact with Nordea at least twice a week,” says Steinsson. “Nordea helps ensure that the guarantees we receive can be trusted and seeks clarification if the language or format used is unclear. We can then ship with confidence that we’ll receive payment.”
Nordea also facilitates review meetings every quarter to look for any possible process improvements or areas for business development.
“One of the issues raised involved training new members of our operational team, which Nordea has supported us in addressing,” says Steinsson. “We’re now looking at a new opportunity to work with Nordea and draw on its expertise to implement solutions in other areas of Statoil outside of trading.”
Steinsson has been impressed with Nordea’s secure and efficient tools for handling trade finance transactions, which give the company a clear picture of all incoming LCs. Statoil receives notification through the trade finance portal when a LC is received – and to maintain a personal touch, Nordea also emails the transaction to the credit team.
But it is the support and expertise that the bank offers – from negotiation through to final payment – that really adds value, according to Steinsson. Nordea provides advice on the LCs received and ensures their authenticity. It also advises Statoil on dealing with regions such as Russia and Asia where trade finance can prove more complex.
“We rely on Nordea’s expert knowledge,” says Steinsson. “The value that Nordea provides is as much about its expertise and advice as the tools it provides to manage transactions efficiently.”
And Steinsson believes that Nordea’s expertise will prove increasingly valuable.
“The future looks unstable,” he says. “We’re dealing with smaller refineries and independent trading houses that don’t have strong balance sheets, and that means the need for documentary or standby LCs, as well as other financing elements, will rise.”
A growing number of Statoil’s counterparties with low credit ratings are now seeking supply chain finance solutions.
“Our smaller counterparties are asking for longer payment terms to help them manage their cash flow,” says Steinsson. “We’ve traditionally been quite firm about sticking to our standard payment terms. But we recognise that there is a growing need for additional financing mechanisms for some counterparties and someone has to offer this.”
To address this issue, the company is seeking advice from Nordea and its other core banks on solutions that will not negatively impact its own balance sheet. It is currently investigating options such as discounted LCs.
Under such an arrangement, Statoil might receive payment for its cargo after 30 days, but its counterparty may not have to pay before 90 or 120 days, using bank financing under LC terms. This means the counterparty can refine and sell the oil to a distributor in that time, and then pay the bank.
“We’re not involved in many arrangements like this yet,” says Steinsson. “But we are being approached two or three times a month by counterparties asking for this type of solution and we recognise that this could open up new business opportunities.”
“We value the efficiency of Scandinavian banking in general and of its IT systems,” says Steinsson. “Nordea adds even greater value through its expertise and the close working relationship it maintains with us.”
With Nordea’s support, Statoil has put in place trade finance processes in which it can have absolute confidence. And Nordea’s expert advice is also enabling it to further develop its business by helping it put in place new finance arrangements for its smaller counterparties.
In an increasingly uncertain and volatile market, Nordea is also assisting Statoil in finding different ways of doing business while mitigating risk.
The strong working relationship between the two companies means that Nordea has a good understanding of Statoil’s internal processes, systems and business needs. When Statoil needs support with an existing process or new venture, it turns to Nordea first.