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. Last Updated: 07/27/2016

Oil Giants Stick a Finger in The Wind

After several years of reaping record revenues, industry-wide consolidation and double-digit production growth, Russia's oil companies are getting down to perhaps their most daunting challenge — their image.

How best to tackle the issue? A public relations agency, of course.

LUKoil, Yukos, Tyumen Oil Co. and Sibneft teamed up earlier this year to hire the Moscow-based Mission-L, better known for designing and implementing regional electoral campaigns, to assess Russians' feelings about the oil industry. The results took even oil executives by surprise.

"Public opinion was more positive than we expected," Tatyana Lukyanenko, general director of Mission-L, said of a recent round-table discussion the agency had with the oil companies to present the findings. "Most people understand how important oil companies are to Russia."

With 325 million tons, or 2.4 billion barrels, extracted last year, Russia is the world's second-largest oil producer. Roughly a third of production is exported, bringing billions of dollars into federal and regional coffers. In addition, whole regions depend on a single refining facility or oil field for most tax revenues. In many areas, oil determines whether a city thrives or becomes a ghost town.

While no one disagrees that oil is important to the country, Russia is still grappling with its own shadow of John D. Rockefeller, the magnate who almost single-handedly created the Standard Oil trust that was disbanded by the U.S. Supreme Court in 1911.

Russia's oil sector also lacks the freewheeling spirit of America's independent producers, who promulgated the myth that anyone could get rich. In America, it just required a license and a little luck.

Put simply, Russian oil has an image problem at home and abroad, LUKoil vice president Leonid Fedun told journalists earlier this month.

"In the world there are developed oil companies, those with heavy state involvement like Petrobras and Petrochina and Russian companies," Fedun said. "No one looks at the third category."

Russia's oil barons didn't come from humble beginnings, and few rose through the ranks to the top. They used their Kremlin connections to buy oil assets at rock-bottom prices at controversial privatization auctions.

Fortunately for the companies born of those auctions, privatization has faded from the public's short-term memory, according to Mission-L's findings.

"It has already been forgotten," Lukyanenko said. "But not completely. When our respondents were reminded of those events, their reactions were sharply negative."

What respondents did remember, however, was the glory of the Soviet oil industry, the monumental oil fields and the strong respect earned by the country's neftyaniki, or oil men.

This finding created quite a stir at the roundtable talks that led to fervent discussion among representatives from the four oil companies.

Lukyanenko recommended that they hang on to this nostalgic tidbit and use it in advertising and image promotion.

"At first, they were completely against that idea," she said. "They said they wanted to do away with the old and create a completely new image.

"That's not going to happen with the generation that grew up under communism. I remember being taught that oil was necessary and that the oil men were great. You can't try to force something new on them — it'll just bounce off."

The agency surveyed 4,500 people in Moscow, Tyumen, Tomsk and Volgograd, cities whose participation in the oil sector varies from active to nonexistent. In addition, information about opinions were collected from focus groups and in-depth interviews.

Not surprisingly, those who lived in oil-producing or oil-refining regions had a higher opinion of oil companies than those who didn't. But within the cities that oil companies considered their hubs, industry perceptions were based on personal opinions of the dominating company rather than the sector as a whole.

Volgograd stood out as one exception. Ten percent of LUKoil's extraction originates in the region, and company officials consider it a "zone of strategic interest," according to the Noviye Izvestia newspaper.

Oil, however, isn't very popular there, the survey found. The PR agency concluded that LUKoil's popularity fell during Volgograd's gubernatorial race last year. Although the candidate supported by LUKoil, incumbent Governor Nikolai Maksyuta, won re-election with 36.6 percent of the vote, LUKoil's image suffered because of election campaigning.

A rival sponsored commercials showing LUKoil employees wearing Nazi-style clothing with the LUKoil symbol replacing the swastika. The LUKoil "soldiers," re-enacting the behavior of Germans during the World War II invasion of the Volga region, knocked on doors and demanded, "Eggs, chicken, milk."

Dmitry Avdeyev, oil analyst at United Financial Group, expressed skepticism about the oil companies' need for such a survey, saying that their bottom lines depend much more on exports than brand-driven retail sales.

"It's possible that they are thinking of the future," Avdeyev said. "But I think it's more tied to regional politics, which also greatly affects the economics of the oil industry."

The survey also found that the oil industry's support base isn't something that can be determined geographically. Those who sympathize most with oil are middle-level or top managers who have adjusted psychologically and emotionally to life after communism. Those who have been left off worse have a negative image of the sector.

"What the industry needs to do is to create an all-inclusive narrative, a kind of story," Lukyanenko said. "It can be built on the foundations of Soviet glory, and they can go from there. If they don't take it upon themselves, someone else will do it for them."

John Williamson, a board member of Wolff Olins, a London-based brand consultancy, said such a process is already happening, and the image of Russian oil was being created by default.

"At home, oil companies are often perceived as an economic engine that is important to a country's modernization," he said. "Outside of that, LUKoil and other Russian oils have to consciously create their own brand."

Where the oil companies go from here with the findings remains to be seen.

Sibneft declined to offer detailed comments about the survey.

"We found it a useful means of assessing public opinion in the regions," said Sibneft spokesman Nick Halliwell.

Representatives from the other three oil companies were equally cagey.

No matter what they decide to do at home, experts said, the companies will find that they have a long way to go to catch up with Western firms when it comes to image.

Since the rise of energy conservation and the green movement, companies such as ExxonMobil, Shell/Royal Dutch and BP have actively fought to keep a clean image. BP, once known as British Petroleum, is now gaining recognition as being "Beyond Petroleum." BP has spent millions of dollars remaking itself as an energy company, not just a global oil conglomerate.

Russian companies will need to do the same in order to stand a chance of real expansion into Western Europe, said Williamson, whose Wolff Olins has advised Germany's E.ON Energie and Suez, a French global services group.

"The minute LUKoil tries to enter the German retail market, Greenpeace will be all over them, Germans being the environmentally sensitive people they are," Williamson said.

But there is a bigger issue that dwarfs oil. "Russia is also part of the perception. People see the unstable economy, the pollution, the corruption and the politics," Williamson said.