Archive

No. 3, 2005

Vladimir Mishin

BREAKING THROUGH THE OIL BLOCKADE


An export oil pipeline was laid from the Caspian to the Black sea shore 75 years ago

April 30, 1930, is a landmark in the history of the Soviet oil industry. The first export pipeline intended for the transportation of Caspian oil went into commercial operation then. In less than two years, a sweeping-scale pipeline project was carried out without outside help to effect a breakthrough of the oil blockade and to permit massive deliveries of Soviet oil to the world market.

Roving the French labyrinth

Having brought Azerbaijan back under their control, on May 24, 1920, the Bolsheviks amalgamated 272 private oil companies into the Azneft government-owned company, with engineer Alexander Serebrovsky in charge, for the development of the Apsheron Peninsula oil fields. Apart from oil production, the new company pursued sidelines such as refining, transportation, domestic and export trade in oil and petroleum products. In 1924-1925, Azneft's oil export amounted to 945,000 tons and, by 1928-1929, soared to 2.6 million tons, a 2.8-fold increase.

Caspian crude oil and petroleum product transportation to the Black Sea ports by rail remained a bottleneck. Therefore, the designing and constructing of the Baku-Batumi oil pipeline topped the list of the Azneft management's priorities in the late 1920s. The project hit the drawing boards as early as 1924, and the ground for the pipeline was actually broken in May 1928. The new 10-inch Baku-Batumi pipeline with a throughput of 1.64 million tons a year was intended to cut Caspian oil transportation costs to the Black Sea to less than a third compared with carriage by rail.

Thus, the strategic role of the new Baku-Batumi pipeline consisted in that it lowered dramatically the cost of transporting Caspian oil, produced by Azneft in Azerbaijan, to the Black Sea whence tankers took it straight to the world market.

Besides, the new pipeline had yet another important mission to accomplish: Mikhail Barinov, the Head of Azneft, wrote in his letter of September 5, 1928, to the USSR Supreme Economic Council's Mining and Fuel Department: "The idea of piping oil from Baku to Batumi is to bring Baku oil closer to the export port of Batum where that oil will be refined into petroleum products the amount and quality of which will be determined by external market requirements mostly."

Initially, the USSR's political leadership had planned to draw foreign investments in the Baku-Batumi construction project. "Your Excellency," the manager of the French bank Bauer Marechal Co. wrote to Leonid Krasin, the USSR Ambassador to France, in a letter of August 18, 1925, "referring to our verbal negotiations concerning the establishment of a joint venture for the construction and operation of an oil pipeline in the Caucasus, namely the second Baku-Batumi oil pipeline the construction of which has already been decided upon, I have the honor of assuring you that our group is ready, in principle, to participate in that operation. As provided for during the negotiations, the laying of the oil pipeline is to be accompanied by the construction of tankers for carrying oil to the countries of consumption."

In other words, Paris insisted on setting up a single transport corridor through which oil from the Baku fields would be delivered by land to Batumi first and then to French ports by the Black and Mediterranean seas.

The USSR was interested in developing such partnership, in principle. In a letter of August 18, 1925, Georgy Lomov, Chairman of the Board of the USSR Petroleum Syndicate, sent to Paris for negotiations, reported to Lev Trotsky, the Head of the Chief Concessions Authority (and one of the leaders of the October 1917 coup) as follows: "Pursuant to the resolution of the Chief Concessions Authority we entered into negotiations for the construction of the Baku-Batum pipeline. With our international relations being what they are, France is the country in which it is possible and desirable to find a contractor for carrying out the above-mentioned pipeline construction project."

Indeed, there was a realization in the USSR that France was increasingly uncomfortable about its dependence on such world oil trusts as the American Standard Oil and the British Shell. As a result, Paris reasonably considered forming a national group to supply France with oil and petroleum products from sources independent of the above-mentioned world trusts. Accordingly, Companie Francaise de Petrol was set up in France under the auspices of official Paris.

From the very outset, negotiations between Soviet diplomats and industrial captains with the Companie Francaise de Petrol group revealed that the French were seriously interested in the Baku-Batum pipeline construction project and saw the signing of an agreement with the USSR on the matter as an impulse to the livening up of Russian petroleum products sales in France.

Georgy Lomov reported to Moscow that "negotiations with that group may bring positive results already in the immediate future."

Curiously, the principal items of the likely Soviet-French pipeline construction agreement were almost identical to the provisions of the contract for the construction of the Baku-Tbilisi-Ceyhan oil pipeline concluded almost 75 years later.

In 1925, Moscow and Paris planned, first of all, to set up a joint Soviet-French venture to construct and operate the Baku-Batumi oil pipeline.

Second, the French group was to shoulder the funding of that project to the tune of 75% of the amount of capital required for the construction of the Baku-Batumi oil pipeline.

Third, France was to grant the USSR the right to redeem 25% of the project shares at a short notice (within 2-3 years) or any time at Moscow's discretion.

Fourth, the joint venture was to be managed on a parity basis. However, therein lurked the Achilles' heel of the likely agreement. Paris insisted that before the Soviet party redeemed 25% of the stock, the venture should be managed by a nominee of the Companie Francaise de Petrol. Moscow objected to that provision.

Fifth, the USSR was granted the right to redeem all the oil pipeline shares within a decade of the Baku-Batumi pipeline going into commercial operation.

Sixth, the French and Soviet parties reached agreement on placing orders for pipes and process equipment for the Baku-Batumi pipeline with German, U.S. and other companies.

Seventh, the rates of payment for pumping oil through the Baku-Batumi pipeline were to be set by a mutual agreement of the parties. This payment was to include the covering of all the operation and depreciation costs, interest on investment capital and dividends. By way of payment for pipeline operation, oil or petroleum products were to be made available to the joint Soviet-French venture on the basis of world prices.

The Soviet-French pipeline construction project never materialized, however.

Attempts at forming a partnership with the United States in constructing the pipeline failed, too. And that despite the fact that Soviet specialists had visited the United States, studied the American record of pipeline construction and even arrived at the conclusion that cooperation with overseas partners could be economically expedient because in America pipeline construction costs amounted to $12,000 per km. Therefore, had the USSR contracted a U.S. company to lay the pipeline, the project would have cost Moscow no more than 25 million rubles to carry out.

Falling back on our own resources

Mikhail Barinov, the Head of Azneft, sent the following report to Moscow on March 27, 1927: "Let us face it, the delay in the pipeline business is not our fault. The central authorities in Moscow are procrastinating things. We must break that dead-end and decide, once and for all, whether we - i.e. Azneft - are going to construct it on our own, ordering whatever materials and equipment are required from foreigners. We must give a firm and unambiguous answer to that question."

And that exactly how the matter was settled. The contract for the construction of the 10-inch 822-km-long Baku-Batumi pipeline was awarded to Azneft, with the engineer A.V. Bulgakov appointed project designer and construction manager.

Over 60,000 pipes weighing a total of over 54,000 tons went into putting the pipeline together. The German-manufactured pipes were brought to Georgia from Germany by way of the Black Sea and then proceeded to the construction site by rail. Diesels for the Baku-Batumi pipeline were purchased from the Mann company; pumps, from Crossley; and generators, from Bergman.

Construction work was done on three sections simultaneously. The highest point was at the 823-m-above-sea-level mark. On February 13, 1930, engineer A.V. Bulgakov contributed an article to the newspaper Bakinsky rabochy saying that the going was extremely hard. Transport vehicles were short, supply problems arose now and again, there was one engineer per 100 km of the construction site. Nevertheless, the first section (Khashuri-Batumi, 21-km long) was completed as early as February 13, 1929; the second section (Mingechaur-Khashuri, 363 km long), on December 15, 1929; and finally the third and the last section (Baku-Mingechaur, 248 km long), on February 13, 1930. In other words, the first leg of the Baku-Batumi pipeline took 20 months to construct.

On the Baku-Batumi pipeline there were 13 head pressure plants - termed transfer pumping stations in those remote times - each equipped with three diesel pumps of 360-hp each. Ten of the stations contained one oil cylinder each; two stations, two cylinders; the Baku transfer pumping station, 10 cylinders holding 41,000 tons of oil.

Each transfer pumping station was manned by a crew of 14. Altogether, the pipeline was serviced by 250 workers, technicians and engineers.

As regards route safety, Ivan Koshelev, Azneft mobilization department manager, dispatched the following report to his superiors on January 21, 1929: "Security of all the installations throughout the Baku-Batumi pipeline route calls for setting up 22 three-shift round-the-clock sentry posts; 2 two-shift and 5 three-shift night-time sentry posts with a total numerical strength of up to 400. This is enough to take care of all the installations, warehouses and depots along the pipeline route all the way to Baku."

As we see, it took the USSR less than two years to construct in the Southern Caucasus the Baku-Batumi export pipeline for a cost-saving delivery of Caspian oil to the Black Sea destinations. On February 13, 1930, the day the oil pipeline went into 50-percent capacity operation, engineer A. Bulgakov wrote in the Bakinsky rabochy: "Piping one ton of oil along the Baku-Batumi route saves 9.75 rubles a day or 16 million rubles a year compared to rail transportation cost." That, of course, was true of 100-percent capacity operation the Baku-Batumi pipeline attained on April 30, 1930. "The project is an earnest of the further growth of our oil export which is winning ever more markets for the USSR," the Bakinsky rabochy wrote. And here is another feature of the Baku-Batumi oil pipeline project. The pipeline which cost 49 million rubles to construct paid its way in just three years.

In his next letter to the USSR Supreme Economic Council, Mikhail Barinov insisted on realizing Azneft's plans for boosting the capacities of the Batumi refineries: "I am hereby requesting your permission to order from the Groover Co., the USA, four tubular refining units like the ones we have already ordered from that firm for Baku earlier this year. Each unit costs 460,000 rubles complete with all the necessary spares, a 10-percent overhead included, which adds up to 1,840 rubles. Besides, we propose to install two cracking plants in Batumi - a Jenkins and a Dobbs." This goes to show that the Azneft management regarded the Baku-Batumi oil pipeline not as a means of delivering Caspian crude oil to world markets but as a transport route minimizing the company's expenses on keeping its refineries, found in the immediate vicinity of the Black Sea export terminals, supplied with feedstock.

The history of the construction of the Baku-Batumi oil pipeline, our first large-scale pipeline project, is most instructive for modern oilmen because it shows what wonders grassroots enthusiasm can work.




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Oil of Russia, No. 3, 2005
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