Case Study: Statoil’s Clear Oversight of Trade Finance
Norway’s Statoil is an international energy company and the world’s third-largest net seller of crude oil, moving over 100m tons each year. With a growing call for trade finance arrangements from its counterparties, the company wanted clear oversight of all its transactions.
Statoil’s experience of trade finance is as a receiver of standby letters of credit (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. In 2013 the company invited each within the group to participate in the tender to become its main trade finance bank. Steinsson says that the group’s eventual choice of Nordea – with which it has a working relationship going back 20 years – was influenced by the bank’s trade finance capabilities; a strong presence in the main region where Statoil operates; and its electronic trade finance tools.
With the Norwegian bank as its main trade finance house bank, Statoil has 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. The bank also 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 was carried out in several phases. It 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 the bank’s experts. Steinsson adds that sophisticated trade finance tools – coupled with a strong working relationship between the bank and the energy company – ensured a smooth transition.
Following the transition period, Statoil’s operational department in Stavanger contacts the bank 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.”
The bank 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 address-ing,” says Steinsson. Statoil is now reviewing a further opportunity to work with the bank and implement solutions in the company’s other areas outside of trading.
Statoil now obtains a clear picture of all incoming LCs, receiving notification through Nordea’s trade finance portal when a LC is received while the bank also e-mails the transaction to the credit team.
Statoil also relies on the support that it receives at each stage of the process from negotiation through to final payment, says Steinsson. The bank provides advice on the LCs received and ensures their authenticity, also advising the company on dealing with regions such as Russia and Asia where trade finance can prove more complex.
This local knowledge is likely to prove increasingly valuable. “The future looks unstable,” says Steinsson. “We’re dealing with smaller refineries and independent trading houses that don’t have strong balance sheets, which 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 all of its 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 could receive payment for its cargo after 30 days but its counterparty might 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.”
Statoil has put in place trade finance processes in which it can have absolute confidence. Nordea is also enabling it to further develop its business through new finance arrangements for its smaller counterparties. In an increasingly uncertain and volatile market, the bank is also assisting Statoil in finding different ways of doing business while mitigating risk. A strong working relationship between the two means that the bank has a good understanding of Statoil’s internal processes, systems and business needs.