Archive

No. 4, 2003

Alexander Matveichuk, Cand. Sc. (History)

THE TRAIL BLAZERS


130 years ago Russia formed the world's first vertically integrated joint-stock oil company

The early morning of January 21, 1874, at 22 Angliyskaya Enmankment, the corner of Zamyatinsky Lane, St. Petersburg, was a usual one and nothing promised anything out of the ordinary. For Councilor of Commerce Vasily Kokorev that Wednesday was a continuation of yet another week of intense work. But the arrival of a governmental courier with an official letter was a bombshell after all.

On prying open the heavy wax seals, Vasily Kokorev took out a sheet of paper with the imperial letterhead on it and, feeling excited, read out loud: "Dear Sir, I am writing to inform you that respecting the Articles of Association of the Baku Oil Society the original writing is this: 'His Majesty the Emperor considered those Articles of Association and consented to approve the same by order of H.E.M. in St. Petersburg on January 18, 1874.' Accept, dear Sir, assurances of my absolute respect and devotion. State Secretary Kornilov."

A Russian proverb says that you can see big things properly only from afar. Not surprisingly, no one in Russia or elsewhere at that time could realize the historic importance of this event, the birth of the world's first vertically integrated oil company.

Blazing the trail to Caucasian oil

The predecessor of the Baku Oil Society (BOS) was the Transcaspian Trade Company. Created in 1857, it operated with success for 17 years and in effect laid the foundation of what was Russia's first stock company in the oil industry.

It was its successes that ushered in the next crucial stage in the Russian oil industry, a stage marked by transition from the manufactory to machine production. An essential role in the process belonged to the prominent Russian businesman Vasily Kokorev (1817-1889), who had become involved with the oil industry in response to the insistent pleas of Nikolay Tornau (1812 - 1882), a champion of greater Russian influence in Persia through an extensive proliferation of economic ties. In Russia, Baron Tornau had a reputation as a brilliant orientalist and the author of a number of studies on issues of Islamic legislation, including the monograph The Moslem Law.

State Secretary Vladimir Butkov wrote this in his letter of August 30, 1857, to Governor General of Caucasus Prince Baryatinsky: "...In the enclosed papers You will find a good business: the establishment by Kokorev of a company for trade with Asrabad. I feel sorry we did not ask your opinion concerning this business...."

In the letter of November 16, 1857, the chief of staff of the Caucasian army, General Dmitry Milyutin, sent to Governor General of Caucasus Prince Baryatinsky, also mentioned the firm: "...In what it concerns the Kokorev company, Your Excellency must have received Baron Tornau's letter informing about the final establishment of the board of this company...."

The founders of the Transcaspian Trade Company, along with Vasily Kokorev and Baron Tornau, were actual councilor of state Nikolay Novoselsky and merchants Ivan Mamontov and Pyotr Medyntsev. Somewhat later they were joined by the well-known entrepreneur Pyotr Gubonin, who had a reputation as a successful railway contractor.

The Surakhany Refinery

At stage one, the company bought 12 acres of land at Surakhany near Baku. The original plan was to build a refinery to produce lighting material, photogen - from kir (mineralized rock soaked with weathered petroleum - Auth.). The refinery design had been made by Munich University Prof. Justus Liebich (1803-1873), foreign alternate member of the St. Petersburg Academy of Sciences, who had helped the company to buy in Germany the necessary equipment: pig-iron converters for kir sublimation and spherical 100- pood boilers for redistillation (one pood, a Russian measure of weight, is 16, 38 kg). German chemist E. Moldegauer supervised the equipment's installation.

Soon it transpired, however, that the German kir sublimation method yielded very insignificant amounts of the final product, the kir itself containing merely as little as 20% of lighting oils. An urgent action was in order.

A very good friend of Vasily Kokorev's, Academician Mikhail Pogodin, who had taught for a long while at the Moscow University, told him about the oil studies of Moscow University Chemistry Master Vasily (Wilhelm) Eichler. In 1860, Kokorev invited Eichler "for consultations" to the Surakhany Refinery.

His proposals at first perplexed the experienced entrepreneur Kokorev, being about making some radical changes, namely, substituting refining for kir, and, accordingly, adopting a different kind of technology and equipment. The proposals called for new considerable investments. It ought to be mentioned, however, that the majority of Kokorev business undertakings always involved considerable elements of risk and the Surakhany project was no exception in this sense. Eventually he accepted Vasily Eichler's proposals.

The German pig-iron retorts were soon replaced with 17 iron batch stills: 12 capable of holding 300 poods each, and five, 80 poods each. The spherical steam boilers gave way to cylinder ones, which enabled a more even oil heating. Natural gas, whose outlets were right in the Refinery territory, came to be used for fuel. The technological process included, for the first time ever, the alkaline refinement of kerosene distillate. Following these innovations, the final product output, after distillation of Balakhany crude oil, was already 25-30% instead of the former 15%. Now three poods of crude could yield one pood of lighting material, which was given a new name, "photonaphthil" poetically translated into Russian as "oil light."

But despite the adopted measures, the production results fell short of satisfying the founders. Profitability was yet to be achieved and the lighting material quality left much to be desired.

A new approach was needed to how to estimate the state of the refining business and define its prospects.

This time Vasily Kokorev decided to turn for help to the scientific community of St. Petersburg, which counted among its members such brilliant chemists as Alexander Voskresensky, Nikolay Zinin, Nikolay Sokolov, and Fyodor Ilish. Here one must again do justice to Kokorev's intuition, who made a totally unexpected move by inviting to Surakhany a St. Petersburg University chemistry lecturer, Dmitry Mendeleyev, whom he preferred to the "chemistry grandees of the capital city." The young, 29-year-old scientist had had no significant works on oil, but he had written his course, Organic Chemistry (1861), which had brought him the Demidov Prize. Besides, his colleagues praised him for his successful editing and translation of Technical Encyclopedia according to Wagner, or as it was called in that period, First Chemical Technology Encyclopedia.

Later the great scientist made this recollection about his first oil experience: "In 1863, V.A. Kokorev invited me, a reader at St. Petersburg University, to travel to Baku, to see the whole business and decide how to make the business profitable and, if it can't work, to shut the Refinery... So, in August 1863, I came to Baku for the first time. That was the start of my acquaintance with the oil business."

On August 23, 1863, the young scientist left St. Petersburg, arriving in Baku in early September of the same year. Dmitry Mendeleyev spent a mere 20 days in the Apsheron Peninsula, but they became really decisive for the subsequent development of the Russian oil industry.

Regrettably, the present writer failed to restore the full picture of those crucial days. But it is reasonably safe to suggest that he mostly worked to improve the oil distillation process. During three and a half weeks, Mendeleyev and Eichler held a series of experimental distillations, including reruns of distillates with the separation of 50-degree fractions. All of that enabled introduction of essential changes in the still design and the adding of the flow coolers. A very serious result was a new method for refining the lighting product, photonaphthil. The thing is, the kerosene distillate resulting from primary oil distillation contained both unsaturated hydrocarbons and acid and sulfur compounds. Kept in iron tanks, it grew red in color, a fact explained by it having naphthenic acids, which reacted with the iron. When burned, the product emitted an unpleasant smell and its unstable, smoky flame failed to provide sufficient lighting.

For this reason the scientists experimented with alkaline treatment of kerosene, using hydrochloric acid for later-stage acidification in order to remove the alkaline traces. After that they studied what effect the hydrochloric acid could have on the distillates when thoroughly mixed therewith. They soon managed to demonstrate such impressive results that even ten years after the experiments Dmitry Mendeleyev was able to write this: "...The refining methods used in the past decade at the Baku refinery, ones that had obviously been borrowed from no one, could be instructive for many."

Subsequently Dmitry Mendeleyev quite laconically summarized the result of his Apsheron Peninsula work: "...Part of those proposals, together with Mr. Eichler, was realized forthwith, something that served to enable the Surakhany refinery to produce profit despite the start of a dip in kerosene prices."

Baku-London-Paris

Strange though it may seem, the Russian kerosene, photonaphthil, was first recognized abroad at the Third World Exhibition in London in 1862. The jury praised highly the quality of products turned out by the Surakhany Refinery and awarded it a silver medal. Along with photonaphthil, the company displayed some other petroleum products: petrolene, nephtagil, oil soot, and paraffin.

In 1865, the Refinery for the first time participated in the Moscow Manufactory Exhibition. The Guide to the 1865 Moscow Exhibition of Russian Manufactory Products had this to say on that score: "The chief mineral oil exponent was the Transcaspian Trade Company V.A. Kokorev & Co. It displayed samples of photonaphthil, or Baku kerosene, both refined an unrefined. There were two brands of refined photonaphthil: one of 1864 and the other of 1865 make. The 1864 photonaphthil had 0.820 density, and the 1865 photonaphthil, 0.815 density. Comparing these two brands, one cannot but notice the particular purity of the latter (refining date 1865); it was white in color and purer than the imported Pennsylvania oil and it produced no smell while burning. It burns evenly and in this respect is not inferior to the best Pennsylvania oil... Mr. Kokorev's photonaphthil is well known in Moscow and in the entire Volga area and it competes with the imported Pennsylvania oil." The big silver medal of the 1865 Moscow Exhibition was conferred on the Transcaspian Trade Company's photonaphthil "in consideration of the importance of the production of mineral oil for Russia" and became the first award for Russian petroleum products at all-Russia exhibitions.

If in 1865 the whole of the Apsheron Peninsula produced 100,000 poods of lighting oil, in 1867 the Transcaspian Trade Company Refinery alone turned out the same amount of photonaphthil.

In 1867, the Transcaspian Trade Company's Surakhany Refinery became a participant in the World Exhibition in Paris. The Guide to the Russian Section of the Paris World Exhibition provided this sufficiently terse information about it: "The photonaphthil refinery was founded in 1859, refines as much as 400,000 poods of oil to 200,000 poods of photonaphthil worth about 900,000 rubles. It employs as many as 170 workers." Dmitry Mendeleyev repeatedly visited the company's stand at the Exhibition in April and May of 1867. Later he wrote a work, Modern Development of Certain Chemical Productions in Application to Russia and Apropos of the 1867 World Exhibition, which convincingly demonstrated prospects for further headway in the Russian oil industry.

The company again sent its products to the next All-Russia Manufactory Exhibition held in St. Petersburg from 15 May to 15 July, 1870. A report about the exhibition says this: "Kokorev's Baku Refinery exists since 1857, produces 150,000 poods of photonaphthil, and already provides undoubtedly important services, supplying this lighting material to the Volga guberniyas (Regions) and extending its sales to the central ones...."

The exhibition brought the Transcaspian Trade Company the top award as expressed in the "right to use on its signs and products the images of the state coat-of-arms ... for the manufacture from the Caucasian oil of lighting oils of a very high quality in the course of extensive production at a refinery founded at the very start of introduction of mineral oil lighting."

Great expectations

February 17, 1872, saw a significant event in the history of Russia's oil industry: emperor Alexander II approved by order of H.E.M. the Rules on the Oil Industry, which abolished, as of January 1, 1873, the farming of revenues in the Apsheron Peninsula. This meant the main thing: the stifling feudal fetters of the farming system at long last fell down and the national oil business received a long-awaited freedom.

The Rules established that the oil-bearing plots of land in the Apsheron Peninsula should be privatized via public biddings for a lump sum. The document allowed an unhindered oil prospecting in all vacant state lands in the Caucasus "by persons of all estates, both Russian subjects and foreigners." Stake-based land allotments were permitted at no less than one acre and no farther than 80 sazhens (one sazhen, an old Russian measure of length, is equal to 2.13 meters) around a stake. An entrepreneur was obliged to start oil production in his allotment within the first two years from the receipt of the title to the land. He was due to pay a ten-rubles-per-sazhen lease for the use of the allotted land. The lease limit was set at 24 years.

Upon receiving the Rules on the Oil Industry, the Tiflis-based Main Directorate of the Caucasian Governorship General formed a special commission, which divided the main oil-bearing areas of the Apsheron Peninsula into 48 groups, each measuring 10 acres.

The first biddings for oil-bearing plots of land in the Apsheron Peninsula took place in December 1872, and the Transcaspian Trade Company was a most active participant. The organizers set the size of plots with oil wells at 10 acres each. The company had money enough for six oil-bearing plots at Balakhany. Apart from the selling price, the company had a duty to pay 100 rubles a year for each plot.

Climbing the oil vertical

An analysis of the existing state of affairs against the background of the rising rivalry amongst oil companies led the principal shareholders of the Transcaspian Trade Company, Vasily Kokorev and Pyotr Gubonin, to the necessity of creating a major stock company capable of embracing the entire spectrum of oil production, the making of petroleum products, and marketing thereof.

In late 1873, they started organizing the BOS. In a bid to explain his position to future shareholders, Vasily Kokorev published a small book, An Explanatory Note to Articles of Association of Baku Oil Society (1874), which convincingly substantiated the advantages of a massed capital for success in industrial oil production, as well as in the production and marketing of petroleum products.

At long last January 18 (30), 1874, saw the long-awaited decision by order of H.E.M. establishing the first vertically integrated joint-stock oil company. Its founders were councilor of state Pyotr Gubonin and councilor of commerce Vasily Kokorev.

The first paragraph of the Articles of Association defined the Society's goal: "To produce oil and nephtagil, to make lighting and other products from the same and to sell them, there shall be established a joint-stock company called Baku Oil Society...." The next paragraph specified the Society's material assets: "The Society shall now lawfully possess some refineries, lands, ships, oil wells, cellars and storehouses, both owned personally by councilor of commerce Kokorev and by him jointly with councilor of state Gubonin, this under the owners' joint agreement with the Society and in accordance with an inventory due to be presented to the first general shareholders meeting." The capital assets were set at 2,500,000 rubles and assured by the issue of 25,000 shares with the face value of 1.25 ruble each.

It was emphasized in particular that "the Society shall acquire the right conferred on Kokorev, as kerosene maker, at different times, to use on its products and signs the images of medals and the state coat-of-arms."

The first general shareholders meeting took place in St. Petersburg on June 9, 1874, the company officially starting its operation a month later.

The BOS report for its first 1874/1875 year (the period from July 1, 1874, to April 1, 1875) gives the details of the company's possessions. The oil-producing sector included: "Six groups at Balakhany, measuring around 60 acres with drilling wells and oil wells. The Sabunchi lands measuring around 22 acres with wells and a basin. Oil basins and other buildings that were under construction by July 1, 1874."

The refining sector included: "The Refinery with the buildings, installations, machines and combustible gas rising from the ground that appertain to it, all worth a total of 1,200,000 rubles. The cost of a new section, currently under construction, and the equipment that is found therein is accepted at 13,669 rubles."

The BOS transport sector embraced a flotilla, based on the Zykh wharf, which had six sail schooners, the steamship Artelshchik, and six barges. In Baku the BOS also owned a wharf of its own, where it kept a schooner and a barge for transporting petroleum residues. In 1875, it built the sail schooner Vasily, a boat, and five barges at Tsaritsyn, and also bought the steam schooner Tranzund.

The marketing sector comprised the Baku office, 11 agencies and four "commissioner's offices." The agencies with their buildings and storehouses were based in Moscow, Saratov, Samara, Tsaritsyn, Kazan, Simbirsk, Sarapul, Perm, Nizhni Novgorod, Yaroslavl, and Astrakhan. The BOS "commissioner's offices" operated in Rybinsk, Penza, Vologda, and Vyatka. In Moscow alone, the BOS built six storehouses on leased land, measuring two acres 700 square sazhens, which could hold a total of 3,500 barrels. The Moscow agency operated a store retailing petroleum products, which was quite popular with the Muscovites.

The Society's Board was in St. Petersburg and headed by an energetic manager, Nikolay Ignatyevsky. It had as its members the financial and mining specialists R. Kraft, I. Milyutin, and K. Gusev. Later they were joined by I. Gorbov and D. Polivanov.

As early as three years later the BOS achieved impressive results, emerging as the Russian oil industry leader. In the accounting year 1874/1875, it produced 965,700 poods of oil and 297,300 poods of kerosene; in 1875/76, 2,379,500 poods and 520,300 poods respectively; and in 1876/77, 3,753,000 poods (32.3% of Russia's national oil production) and 903,300 poods respectively. The kerosene supply rate growth was impressive as well. In 1874/75, the BOS brought to Central Russia 373,400 poods of kerosene, the figure almost doubling to 727,800 poods the next year.

In 1875, the BOS had 10 wells in the Balakhany oil field, varying in depth from 23 to 35 sazhens with flow rates ranging from 600 to 10,000 poods a day.

The production organization at the company's refinery was invariably in the focus of attention of Russian scientists and engineers.

In 1875, the prominent refining specialist and production engineer Alexander Letny stressed this: "The Transcaspian Trade Company's Refinery, currently that of the BOS, may be accepted as model both in the amount of production and the quality of its products...."

In spring 1876, the prominent Russian scientist and Mining Institute Professor Konon Lisenko visited the BOS oil fields and the refinery. After his visit to the Surakhany Refinery he wrote this: "The BOS's Surakhany Refinery owns 25 stills with the capacity of from 620 to 660 vedros [buckets] and five stills with the capacity of 208 vedros... The Refinery also has a vast cooperage, metal workshop and smithy. The BOS has, apart from the above, a cooperage factory near Baku itself and can produce as many as 40,000 barrels a year. The rest of the buildings are either stores and storehouses or living quarters for the employees. There are rails between certain buildings. The Refinery territory is within a stone wall, which is adjoined in the north by a Zoroastrian monastery. In general, the main strength of the BOS's Surakhany Refinery is, apart from the good qualities of its kerosene, in the vast cooperage and auxiliary shops, to whose rational running I wish to draw the attention of big oil producers." Somewhat later he specifically stressed this: "For the success of the oil technology it is, of course, necessary that the management of factories be entrusted to educated and knowledgeable technologists. Up till now this can be found only at the BOS's Refinery...."

An important stage came when the company launched the production of petroleum lubes at its Surakhany Refinery. In the first place the credit for it goes to the mining engineer Alexey Doroshenko, Refinery's manager. He had a production line installed to obtain lubricants from petroleum residues, which previously had been branded as wastes and mostly burned. Basically the technological process was the following: a body of fuel oil was heated to 300 degrees Celsius, after which overheated water vapor was blown through it, carrying along oil fractions and conveying these via an iron pipe to a cooling device, where they were separated from the water. Later on the mining engineer Semyon Kvitka wrote this: "If, generally speaking, the oil industry is eternally indebted to V.I. Ragozin for organizing the production of lubricating oils, Alexey Doroshenko earned his own share of respect and gratitude from the Baku people for having organized that business in Baku."

Given the expanding amounts of oil production and refining, the BOS management had to go on improving the production, developing the infrastructure, and introducing modern equipment and new technological solutions.

On February 17, 1879, BOS put into operation a kerosene pipeline from the Surakhany Refinery to the Zykh wharf. After that, Sweden's Chrichton Yard (Abo) was commissioned to build the Surakhany, a tanker worth $75,000, capable of transporting 5,000 tons of kerosene. All of that had a considerable effect on transport sector efficiency.

It is worth noting that Russian engineers the BOS employed in different periods made a very important contribution to the development of the Russian oil industry. One may name graduates of the St. Petersburg Mining Institute Alexey Doroshenko (graduated in 1876), Semyon Kvitka (1879), Nikolay Wiener (1877), Nikolay Grinyov (1881), Mikhail Zuyev (1883), Valerian Zatursky (1894), Vladimir Karpinsky (1897), Daniil Veremenko (1898); production engineer Vladimir Abramovich of St. Petersburg Technological Institute (graduated 1867); mechanical engineer Kirill Nekrasov of the Moscow Technical School (graduated 1894), and many others.

Rivaling the leader

The founding, on May 19, 1879, of a second vertically integrated company, The Nobel Brothers Partnership (Branobel), marked the beginning of a new stage in the history of the Russian oil industry. The BOS and the Branobel got involved in a stiff rivalry for the supremacy on the Russian "oil Olympus."

For a number of reasons, including on account of Vasily Kokorev's and Pyotr Gubonin's withdrawal from the oil business, the BOS step by step relinquished its Russian oil leadership. The process was also aggravated due to the appearance of new aggressive companies, such as Caspian-Black Sea Oil Industry and Trade Society (1886), Caspian Partnership (1886), Oil Industry and Trade Society "Mirzoyev Brothers and Co" (1886) and a number of others. Although the BOS increased production on the annual basis - 11,288,300 poods in 1888; 14,000,000 poods in 1889; 18,000,000 poods in 1890 - it was still behind the leader, The Nobel Brothers Partnership for Oil Production.

In 1899, BOS produced a total of 23,464,000 poods, whereas The Nobel Brothers Partnership figure was almost four times that amount: 93,260,000 poods.

In 1901, the BOS capital assets amounted to 2,300,000 rubles and its Board was headed by railway engineer Vyacheslav Bradke. The company made certain attempts to recover the lost ground, but the economic crisis of 1901-1903 and the August 1905 tragedy frustrated its plans.

The company management attempted to attract foreign investments in order to promote production. In 1907, BOS shares were for the first time floated at the Paris Exchange, but the move failed to change the company's position in any perceptible way.

By 1914, the BOS reduced its capital assets to 678,550 rubles. It possessed 299 development wells. Its annual output was 25,000,000 poods of oil (4.4% of the national production). It employed a total of 1,430 persons.

The wave of tempestuous events of October 1917 reached the Apsheron Peninsula as well. On October 31, the Baku Soviet of Workers' and Soldiers' Deputies passed the resolution to impose the Soviet power in the guberniya, the first such decision in the Transcaucasia area. Seven months later, on June 1, 1918, the Baku Council of People's Commissars, based on a cable from the People's Commissar for the Affairs of the Nationalities, Joseph Stalin, approved a decree nationalizing the entire oil industry. The new regime laid hands on the entire BOS property and that was it for Russia's oldest oil company.

Today, as one looks back at the history of the world's first vertically integrated company, BOS, one can see clearly that a trailblazer's path is always incredibly difficult and thorny, but it is his example that shows the right direction, which many others follow without much problem.



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