No. 4, 2004
Fikret Aliyev,
LUKOIL President's representative in Azerbaijan, Georgia and Turkey, General Director of JSC LUKOIL-Azerbaijan
THE STARTING POINTS OF OIL INDUSTRY
From the history of the first oil boom in the Caspian region
In his time, Jack London painted a colorful picture of the “gold rush” in the Klondike river basin more than a hundred years ago. Regrettably, there was no writer of his stature to describe the Apsheron “oil rush” that occurred about the same time in the vicinity of Baku, capital of Azerbaijan. Meanwhile, those events were extremely important for world economic development. Suffice it to say that in 1901 the Baku oil fields yielded 10.6 mln. tons of crude oil or 95% of Russia's oil production and more than 50% of the world's.
Nature's priceless gift
Azerbaijan is extremely fortunate both as regards the volume of its land reserves of hydrocarbons and the depths at which oil pools occur and the quality of its crude oil. At any rate, the oil-bearing beds around Baku are located at a relatively small depth, by present standards, while Azeri Light is one of the most sought-after brands on the world market.
Scientists have estimated that by the beginning of the 21th century over 925 mln. tons of crude oil had been produced at Azerbaijan's land oil fields alone.
It was back in hoary antiquity that oil production started in Azerbaijan. According to historians, as early as in the fourth century B.C. oil brought from the Apsheron peninsula was used to light the tent of Alexander the Great who led his legions along the southern coast of the Caspian sea, pushing the border of his empire farther and farther eastward. At that time, local inhabitants collected crude oil straight from pools that formed here and there on the ground.
But starting from the 10th century A.D. they dug oil wells near Baku, scooped the thick black liquid out with leather buckets and filled wineskins with it. Then, together with other goods carried by caravans, they brought it to Persia, Mesopotamia and India. In ancient times, crude oil was used in lamps for lighting homes and to treat various diseases of the skin and joints. Crude oil was also an important element of an incendiary composition used in warfare and known as “the Greek fire.”
Trading in oil was considered a profitable business already in the Middle Ages. By 1735 over 50 oil wells had appeared near Baku, and by the mid-19th century local businessmen had sunk on the Apsheron peninsula as many as 218 oil wells from two to 40 meters deep. Oil from the wells was poured into stone-lined pits called ambars. The record production of the Apsheron oil wells was about 1.7 tons a day. Their overall annual yield was up to 4,000 tons.
By 1872, however, the primitive oil-well method of producing oil had exhausted itself; the time for the industrial drilling of wells had come to Baku.
Historic decrees
An inquisitive reader might ask the following reasonable question: who produced the Apsheron oil in 19th-century Azerbaijan and who owned it?
Before 1813, when a conglomeration of feudal khanates existed on the territory of present-day Azerbaijan, it was the local feudal lords who owned the land on which oil wells had been dug and also the wells themselves. They leased out the wells for sums paid by leaseholders as stipulated in appropriate contracts. The system of contractual relations between the khans and the oil producers was called iltizam in Azerbaijani, which translates as “obligation” or “commitment.”
Having suffered a defeat in the Russo-Persian war of 1804-1813, the Persian government, on October 24, 1813, signed what came to be known as the Gulistan Peace Treaty with Russia. Under the terms of that treaty the Russian Empire incorporated the Baku, Gyandzha, Derbent, Karabakh, Kubin, Shekin, Shirvan and Talysh khanates as well as the Mugan steppe. However, the system of working the oil fields remained unchanged, except that now oil producers were to sign contracts on the leasing of oil wells with Russian government officials. It was also these officials who solely authorized the sinking of new wells in oil-bearing regions.
The reforms of the 1860s gave a powerful impetus to Russia's economic development. The industry received the manpower it needed, factories began replacing manufactures, and Russia's rates of economic growth began surpassing even those of the country's nearest Western neighbors. In the period from 1860 to 1900 Russia's industrial output grew seven times, which boosted demand for metal, coal and oil.
Developed in the 1870s were different designs of an internal combustion engine using liquid fuel. In 1888 in Russia, Captain Ogneslav Kostovich invented a gasoline internal combustion engine with a carburetor. Later on, in 1897, Rudolf Diesel, a German inventor, developed a new type of engine, which used petroleum for fuel and which was named after him. In 1899 serial production of diesel engines was started in St. Petersburg by the Ludvig Nobel works.
In other words, the economy demanded ever greater amounts of oil. Meanwhile, the feudal leasing system and Russia's developing capitalism turned out to be incompatible. As a consequence of this, in February 1872, Emperor Alexander II approved two fundamental documents: the Rules of Oil Production and the Exacting of Excise Duties from Photogen Production and the Rules of Turning Over to Private Producers the State-Owned Sources of Oil Leased Out in the Caucasian and Transcaucasian Regions. In accordance with these documents, the system of leasing out oil fields on the Apsheron peninsula was abolished as of January 1, 1873. All that means that finally the suffocating feudal bonds of the lease-holding system had been cast off and the oil business in Russia had obtained its long-awaited freedom.
In keeping with the Rules, plots of oil-bearing land on the Apsheron peninsula were turned over to private producers for a lump-sum payment after the holding of a public auction. The Rules permitted free prospecting for oil on all vacant state-owned lands in the Caucasus by “persons possessing any means, both Russian subjects and foreigners.” A businessman was allowed to rent a plot of unprospected oil-bearing land for a period of 24 years. A potential oil producer was required to pay an annual rental fee of 10 rubles per desyatina (2.7 acres) of rented land—regardless of whether his operation was successful in the future or not.
Control over compliance with the Rules was vested with the Caucasian Mining Industry Administration headed by Ivan Shteitman, a mining engineer. Some 19th-century Russian businessmen turned out to be extremely lucky: within a short time they became oil tycoons. Among them were Vasily Kokorev and Pyotr Gubonin as well as Gadzhy Zeinalabdin Tagiyev, Musa Nagiyev and Shamsy Asadullayev – all natives of Azerbaijan. In the size of their wealth they were not second neither to the textile nor to vodka producing “kings.” For instance, the Gadzhy Tagiyev company, established in 1872 when Russia's total production of oil was only 25,600 tons, in 1885 produced 112,000 tons, or 7% of Baku's total oil production at the time. Similar amounts of oil were produced by the companies of Musa Nagiyev (founded in 1887) and Shamsy Asadullayev (founded in 1893).
All told, 29 joint-stock companies were engaged in crude oil production at the Baku oil fields in the 1874-1899 period.
A maximum production at the Baku oil fields was obtained in 1901 when 10.6 mln. tons of oil was produced – more than half the world's production that year. After that oil production started to go down, and this decline continued until 1920, when only 3 mln. tons was produced in Azerbaijan.
There is nothing surprising about such a course of events: at the oil fields near Baku (in the settlements of Bibi-Eibat, Ramany, Balakhany and Sabunchi), whose oil potential used to be as much as 500 mln. tons, nearly all of the oil reserves which lay close to the surface had been exhausted. And so, the oil companies had no alternative left to them but to start drilling wells leading toward deeper oil horizons. For that they needed appropriate technical equipment and, consequently, more investments, including foreign ones.
A British initiative
Prince Grigory Golitsyn, chief representative of the Russian government in the Caucasus in 1897-1904, had no illusions about the poor technical know-how, business acumen or money accumulations of the local population. “It is still very difficult to do without foreign capital in the Caucasus,” he remarked sorrowfully. Sergey Vitte, the Finance Minister of the Russian Empire, was in full agreement with him on that.
As a result, government resolutions were issued which encouraged in every way the inflow of foreign capital to the Apsheron oil fields.
One of the first investors in the Baku “oil Klondike” was an Englishman named James Wishaw who in 1890 bought the oil fields of the S. M. Shibayev company, and then, in 1897, those owned by Gadzhy Tagiyev.
Before long, some other British businessmen appeared on the Apsheron Peninsula, while in London numerous joint-stock companies were set up whose purpose was to operate the Caucasian oil fields. Those companies included: Kalantaroff Oil Co. Ltd. (1893), The European Petroleum Co. Ltd. (1896), the Anglo-Russian Petroleum Co. Ltd. (1897), Russian Petroleum and Liquid Fuel Co. Ltd. (1897), and the Ramany Syndicate Ltd. (1899).
A few years after the political events of 1905 the Caspian-Black Sea Oil Industry and Trade Society and the Mazut Company, which belonged to the Rothschild Banking House of Paris, passed to the control of the British-Dutch concern Royal Dutch/Shell Group.
Announced in 1912 in London was the establishment of a Russian corporation named OIL. Its founders were 20 Russian and foreign companies and banks.
As a result, the latest Western oil production technologies were introduced at the Baku oil fields, and thereby Western capital gave those oil fields a new lease of life. Operating in Baku in 1913 were as many as 3,500 oil wells. The Corporation of OIL company accounted for 28% of the petroleum they produced, Royal Dutch/Shell Group – for 20%, and the Nobel Brothers' Oil Production Partnership – for only 14%.
In all, prior to October 1917, foreign capital managed to invest about 110 mln. rubles in Baku's oil industry.
The routes of the Baku oil
During the first oil boom in Azerbaijan the transportation and export of the Apsheron oil proceeded along the same routes as today, i.e. the northern and the western routes.
Oil tankers, which carried most of the oil produced at the Baku oil fields, sailed north across the Caspian and further on up the Volga (the northern route). The western route was the 885-kilometer-long Baku-Batum pipeline (then the world's longest), which had a throughput capacity of 900,000 tons. It went into operation in 1907, ten years after its construction started.
The chief exporter of petroleum products during the first oil boom in Azerbaijan was the Caspian-Black Sea Oil Industry and Trade Society (founded in 1883) which accounted for 36% of the sales of the Baku kerosene, fuel oil, etc. The second in importance was the Nobel Brothers' Oil Production Partnership, which controlled 18% of Baku's export of petroleum products.
It is noteworthy that during the first oil boom in Azerbaijan a sizable part of the oil-producing equipment used there had not been imported from the United States, Great Britain or Japan but had been manufactured right there in Baku at plants recently built by various joint-stock companies. Such enterprises as the Caspian Engineering Works, the Nobel Brothers mechanical workshops, G. Bartdorf's mechanical and cast-iron works, and K. Khatisov's machine-building plant supplied pipes, drilling rigs, pumps and other equipment to the Baku oil fields.
The petroleum produced there was processed by more than 20 refineries. Some of them had the latest technical equipment. Furthermore, built for the berthing of oil tankers in the Baku Bay had been the required moorage facilities, as well as oil pipelines for the transportation of oil from the wells to the storage tanks (in 1889 their combined length was over 230 km), and fuel-burning electric power stations for providing the oil fields with electricity.
Political developments put a stop to the first oil boom in Azerbaijan: on May 24, 1920, the Baku Revolutionary Committee announced that the oil industry of the republic was being nationalized. As a result, 272 private companies, which were operating the Baku oil fields, were summarily liquidated right away. But that is a subject for another story.
