Petroleum industry in Azerbaijan
The petroleum industry in Azerbaijan produced about 33 million tonnes of oil and 35 billion cubic meters of gas in 2022. Azerbaijan is one of the birthplaces of the oil industry.
The State Oil Company of the Republic of Azerbaijan, a fully state-owned national oil and gas company headquartered in Baku, is a major source of income for the Azerbaijani government. The company is run opaquely through complex webs of contracts and middlemen, which non-government watchdog organizations say have channeled revenues to the country's ruling elites.
Early history
There is evidence of petroleum being used in trade as early as the 3rd and 4th centuries. Information on the production of oil on the Apsheron peninsula can be found in the manuscripts of many Arabic and Persian authors.The following paragraph from the accounts of the famous traveler Marco Polo "il Milione" is believed to be a reference to Baku oil:
"Near the Georgian border there is a spring from which gushes a stream of oil,
in such abundance that a hundred ships may load there at once. This oil is not good to eat; but
it is good for burning and as a salve for men and camels affected with itch or scab. Men
come from a long distance to fetch this oil, and in all the neighborhood no other oil is burnt but this."
A 1593 inscription in Balaxani commemorates a manually dug well, 35 m deep.
The Turkish scientist and traveller Evliya Çelebi reported that "the Baku fortress was surrounded by 500 wells, from which white and black acid refined oil was produced".
In 1636 German diplomat and traveller Adam Olearius gave a description of 30 Baku oil wells and remarked that some of them were gushers.
The first detailed description of the Baku oil industry was made by Engelbert Kaempfer, Secretary of the Swedish Embassy to Persia in 1683.
In his notes he confirms the existence of places where natural gas discharges to the surface. Kaempfer describes "flaming steppe" as follows: it "...constitutes a peculiar and wonderful sight, for some of the fissures were blazing with big, others with quite flame and was allowing everybody to come up; thirds emitted smoke or at any case minimum perceptible evaporation that was sending off heavy and stinking taste of oil. It was occupying the territory of 88 steps in length and 26 in width."
Many 18th and 19th century European accounts of the Caucasus refer to the Fire Temple of Baku at Suraxanı raion, where the fire was fed by natural gas from a cavern beneath the site.
Pre-revolution period
In 1803 Haji Kasimbey Mansurbekov, began the world's first undersea oil extraction from two wells in Bibi-Heybat bay, 18m and 30m from the coast, later destroyed by a strong storm in 1825. Oil extraction methods were primitive, mainly shallow hand-dug wells.In 1806, the Russian Empire occupied Baku Khanate and appropriated its oil production as a state enterprise, about 120 wells producing some 200,000 poods of oil annually. Later, exclusive 3-4 year contracts to produce oil were awarded to individuals, creating the Persian otkupchina lease system.
In the first half of the 19th century, the cumbersome otkupschina monopoly and stagnant demand left annual oil production unchanged at 250–300 poods. In 1813, the number of producing wells was 116; then 125 in 1825; 120 in 1850; and 218 in 1860. In 1842 the Caspian Chamber of the Russian Ministry of State Property reported 136 wells around Absheron producing per year, exported to Persia for lighting as well as ointments and traditional remedies. Otkupschina contractors had little incentive to increase oil production or improve drilling methods. Oil seepage was bailed from shallow hand-dug wells, transported by arbos to the shore of Baku bay, where kerosene was distilled in open stills, and finally transported via ship over the Caspian Sea and Volga River to Russian markets, especially St. Petersburg.
In 1837, the Russian engineer Nikolay Voskoboynikov built an oil-distilling factory in Balaxani. In 1844, he proposed drilling for oil rather than digging by hand, supported by Vasily Semyonov in a government report on the Baku region. In 1845, the Caucasus governor Grand Duke Mikhail Vorontsov authorized funds for the drilling project. In 1846, the engineer Nikolay Matveyevich Alekseev used a percussion drill to dig a 21 m deep well, striking oil in Bibiheybət. It was not until 1859 that "Colonel" Edwin L. Drake struck oil on American soil for the first time. In the early days of drilling, most production came from oil gushers, a very uneconomical and environmentally harmful process, but as equipment improved the share of blowout production decreased. In 1887, blowouts accounted for 42% of recovered oil, but by 1890 this decreased to 10.5%.
A small petrochemical industry sprang up around Baku as demand for kerosene soared locally. Vasily Kokorev, Peter Gubonin and German baron N.E. Tornow built the first kerosene factory in Surakhany. The factory produced kerosene from "kir", an asphalt-like substance. In 1859, N.I. Vitte, a Tiflis pharmacist, built the second paraffin-producing factory, on Pirallahi Island. In 1871, Ivan Mirzoev, an ethnic Armenian who was then an otkupchina monopolist, built the first wooden oil derrick followed by another the next year. The drilling mechanism used a balance arm, whim and manual pump.
In 1873, a new law replaced the otkupchina contract-monopoly with a long-term lease system, and removed the kerosene excise tax in 1877.
Robert Nobel arrived in Baku in March 1873, where he purchased an oil refinery, and in 1875, purchased a large portion of the Balakhani Oil Field, where he built a new refinery. Nobel Brothers Petroleum Production Company was founded in 1877, followed by Branobel in 1879. They added infrastructure, including Russia's first pipeline system in 1877, pumping stations, storage depots, railway tank cars, and the first oil tanker, the Zoroaster. In 1881, they introduced continuous multi-still distillation, and hired Hjalmar Sjögren as the company geologist in 1885. The Nobels built Villa Petrolea as a company town with apartments, houses, schools, and libraries, while employees were given profit-sharing and free education.
The Baku Petroleum Association was formed in 1884 for the interests of the local refining industry, aiming to prevent the exportation of crude oil. A large kerosene pipeline was constructed between 1897 and 1907 connecting Baku to Batum. The Baku oil production barons established their own organization, the Oil Extractors Congress Council, sponsoring the magazine Neftyanoe Delo, as well as a library, school, hospital, and pharmacy. For six years, the Council was directed by Ludvig Nobel.
The oil industry built Baku into a modern city. Administrative, social and municipal institutions were established to plan and erect the city's illumination, roads, streets, buildings, telephone stations, and horse-drawn trolleys. Gardens and parks were laid out, and hotels, casinos and luxury stores opened.
After the reform, rights to develop the oil fields were limited to Russian-registered businesses, but in 1898 foreign companies were admitted to the annual bidding on rights to explore and develop oil fields. Between 1898 and 1903, British oil firms invested 60 million rubles. Ethnic Armenians also entered, reportedly running almost a third of the region's oil industry by 1900.
Oil production
Between 1898 and 1901, Baku produced more oil than the United States. By 1901, half of the world's oil was produced from its 1900 wells located within 6 square miles,In 1898, approximately 8 million tons of oil were produced, per day. By 1901, Baku produced more than half of the world's oil, 11 million tons or per day, making up 55% of all Russian oil, with 1.2 million tons of Baku kerosene also sold abroad.
The main oil-producing localities were Sabunchy, Surakhany and Bibi-Heybat. Until the beginning of the 20th century, the Sabunchi region produced 35% of Baku's oil, and the Bibi-Heybat region produced 28%, followed by the Romany and the Balakhany regions.
Foreign capital dominated the oil industry of pre-revolutionary Russia. On the eve of the World War I three companies held 86% of equity capital and controlled 60% of oil production. In 1903, twelve English companies with capital of 60 million rubles were functioning in the Baku region. In 1912, Anglo-Dutch Shell obtained 80% of the shares of the Caspian-Black Sea Society "Mazut", which had belonged to De Rothschild Frères. Other British firms purchased oil operations from Hajji Zeynalabdin Taghiyev.
Local oil barons and foreign oil companies
- Branobel Operating Company – largest single oil producer in Azerbaijan at 25,000 bop/d in 1914. Largest refiner and transporter of oil, as well as retailer of kerosene in Europe. Markets of France, Turkey, Greece and Germany were fully supplied by Nobel-produced kerosene and other products.
- De Rothschild Frères – trading and shipping in association with Shell. Possessed second largest tanker fleet in the Caspian, after Nobels.
- Alexander Mantashev – a Russian-Armenian oil tycoon, the owner of the third-largest oil company in Baku, A.I. Mantashev & Co., by 1904.
- Calouste Gulbenkian – a British-Armenian oil tycoon, nicknamed "Mr Five Per Cent". He arranged the merger of Royal Dutch Petroleum Company with "Shell" Transport and Trading Company Ltd. and emerged as a major shareholder of the newly formed company, Royal Dutch Shell.
- Royal Dutch Shell – Acted through associated companies: Caspian Black Sea Society Caucasus, S.M. Shibayev and Co. The Shell-led consortium produced a fifth of Russian output up to 1914, 15,000 boppd in 1914.
- Zeynalabdin Taghiyev – oil, textiles and fishing. His firm produced in 1887 and occupied 4th place in the refining business.
- Aga Musa Nagiyev – oil and real estate. The second-largest Azerbaijani oil producer and largest native producer.
- Murtuza Mukhtarov – oil drilling services.
- Shamsi Asadullayev – oil shipping, largest native industrialist.
- James Vishau and Anglo-Russian Oil Company
- Trade House Benkendorf and Co – oil production.
- The Russian Oil General Corporation – established in London in 1912 by the most important Russian and foreign banks, united 20 companies. These included A.I. Mantashev & Co., G.M. Lianozov Sons, Adamov and sons, Moscow-Caucasus Trade Company, Caspian Partnership, Russian Petroleum Society, Absheron Petroleum Society, and others. This agglomeration produced more than 30% of Russian oil by 1916.