FROM THE HISTORY OF AZERBAIJAN OIL INDUSTRY DEVELOPMENT

U.A. Seyidova

Azerbaijan oil industry development includes 5 stages:

I STAGE - mud oil production till 1871.

II STAGE - commercial oil production with mechanical way of drilling since 1871 till nationalization of oil industry in 1920.

III STAGE - after nationalization of oil industry in the Soviet period till the discovery and commissioning of the Neftyaniye kamni (currently Neft Dashlari) huge sea field in 1950.

IV STAGE - with input of the Neftyaniye kamni field in 1950 (significant expansion of exploration works, discovery and development of new oil and gas fields in the Caspian Sea, intense development of sea oil and gas production infrastructure) till signing of the "Contract of the Century" in 1994 with involvement of foreign investments.

V STAGE - begins with signing of the first big "Contract of the Century" in September 20, 1994 on Azeri-Chirag-Guneshli (deep-water part) fields with involvement of large-scale foreign investments in oil branch of the sovereign Azerbaijan.

Azerbaijan oil industry has a 130-year history of development. Mud oil production was known in Azerbaijan even in distant past.

By the data of Prisk Pontiqskiy (V century), Abu-Iskhag Istakhri (VIII century), Masudi (X century), Oleariy (XII century), Marco Polo (XIII-XIV c) and others exported petroleum from the Apshern peninsula to Iran, Iraq, India and other countries as far back as B.C.

According to testimony of Marco Polo already at the XIII century many oil wells were active in the Apsheron peninsula and oil produced from them was used for light and treatment. At the early XIV century French monarch-missioner Jurden Catalini de Severak having visited Azerbaijan reminded oil production in the Baku surroundings in his records.

Travelers' information of XVI-XVII centuries contains valuable information about mud oil production in Azerbaijan.

The English trade agent Jeffry Dyuket, who visited Azerbaijan in the XVI century writes that black oil called "naphtha" produced in the Baku surroundings is delivered on mules and donkeys by caravans 400-500 at a time. This information also reminds of "white oil" production in Surakhani.

D.Dyuket's information on delivery of oil by caravans from Baku testify of a significant mud oil production at the XVI century from the Apsheron peninsula fields.

Amin Ahmed Razi (Iran, 1601) informs that at the early XVI century about 500 oil wells were in the Baku surroundings, from which black and white oil was produced.

German traveler Engelbert Kempfer, physician and scientist as a secretary of the Swedish embassy visited oil fields of the Apsheron peninsula in Balakhani, Ramani, Binagadi and Surakhani during his visit to Azerbaijan in 1683. E.Kempfer informs that oil from the Apsheron p. fields was taken out on pack animals, bullock-carts and camels to Baku and further to the Caspian countries - Iran, Middle Asia, Dagestan and "Circassia" (Northern Caucasus) by sea.

Mud oil production in Azerbaijan continued till 1871.

Since 1871 commercial oil production started in Azerbaijan in the Balakhani and Bibi-Heybat fields with the mechanical well drilling method. The first well that was drilled in 1871 in Balakhani was producing 70 barrels (10 tons) of oil per day.

With the development of technique and technology of mechanical well drilling in the Apsheron p. new oil fields (Binagadi, Artyom, Surakhani and others) discover one after another, oil production increases, oil branch infrastructure starts to develop, oil processing develops intensively, national bourgeoisie forms in Azerbaijan. At early 70s of the XIX century the Government of Russia liquidated oil production monopoly in the recently annexed Azerbaijan.

In 1872 two legislative acts regulating relations in the oil branch were adopted: These are the "Law on oil fields and levy of excise tax on oil products" and the "Law on auction sale of leaseholders' oil fields to private persons".

After these laws were adopted, oil wells started to sell to private persons since 1872. The first auction took place in December 31, 1872 when 15 fields in Balakhani, 2 in Bibi-Heybat were displayed on sale with total cost of 2975 rubles. According to the adopted laws non-used state lands were submitted to rent for 24 years for oil prospecting and operation of discovered fields on condition of annual rental payment at the sum of 10 rubles per one tenth of land equaling to 1.092 ha. Under the concluded agreement, the right of oil export monopoly belonged to the renter. The renter had the right to establish the price of the produced oil at his discretion. Under the archive data, the renter's pure profit was 14-15% of the sold petroleum. If oil exploration works appeared unsuccessful, the renter had the right to redeem the rented site into his own property or give it back to the state preliminarily clearing it out.

Those years share of Azerbaijan capital in the oil branch was not so big. At the first auction in 1872 only one mixed Azerbaijan firm (H.Z.Tagiyev and others) represented local capital with only 0.1% share of participation at the auction. By late 70s of the XIX century the volume of local capital in oil production increased a bit and equaled to over 4%. Mixed Azerbaijan-Armenian and Russian-Azerbaijan capitals in oil production totaled together about 10%. 17 possessors of oil industry enterprises out of 135 were Azerbaijani in 1883. By the end of XIX century Azerbaijan representatives possessed 49 enterprises out of 167, i.e. 29.3%. At the period of Azerbaijan oil industry formation three basic sources of local capital investment: trade, industrial and State machinery officials. The capital was concentrated also by means of formation of shareholder companies. The first shareholder company "Baku petroleum association" was established in 1874.

The first oil refining (kerosene) plant was built in Baku in 1859. In 1867 already 15 such plants were operating here. After the excise tax on oil products was liquidated in 1876 new plants started building and new technology began to be introduced. It allowed to get new kinds of processing products. So, in 1876 and 1881 two new plants on manufacture of liquid oils were constructed.

At the early 70s Azerbaijan capital reps possessed 25 out of 46 small enterprises of kerosene manufacture. In 1883 21 out of 100 kerosene manufacturers in Baku were Azeris. Since this year Baku kerosene started to export abroad. Pic. 1 shows oil production changes within 1871-1920.

In 1878 the first oil field pipeline of 12 km length was built, which linked the Balakhani field with the OR in Baku. By the end of 1898 general length of the field oil lines connecting the fields with OR in Baku was 230 km with total productivity of 1,000,000 tons of oil.

Since 70s XIX century an unprecedented for that time economic rise took place in Baku.

A powerful industrial potential was created in the city, hundreds of big and small firms on production, processing and trade of oil were opened. Baku turns into one of the financial centers of the world. In 1873 Robert Nobel, a Swede by origin paid a visit to the Caucasus (searching for wood for arms factory of the Nobel brothers in the city of Izhevsk, Siberia) found "petroleum fever" in Baku and invested 25000 rubles to purchase a small kerosene plant.

In some years, in 1876 the Nobel brothers organize an oil company in Baku on production and processing of petroleum, which subsequently becomes the biggest oil company in Russia that completely forces the Rockefeller company "Standard Oil" out from the Russian market. The Nobel brothers possessed oil-producing fields, tens of oil refining plants, bulk-oil tankers, barges, railroads, hotels etc.

By the 80s XIX century 200 small oil refining plants (installations) were built in Baku, significant part of them belonging to the Nobel brothers.

Samples of oil products of the Baku plants were demonstrated at world exhibitions in Paris (1878), Brussels (1880), London (1881) and received high assessments of experts.

Those years the Nobel brothers constructed the first bulk-oil tanker in the world in the Caspian Sea.

The Baku "Petroleum boom" drew attention of also the French "Home of Rotshilds".

Since 1883 Rotshilds were engaged in the basic credit-loan operations and oil trade in Baku. The initial capital of Rotshilds increased from 1.5 mln rubles in 1883 to 6 mln rubles in 1895 and to 10 mln rubles in 1913.

Rotshilds also had oil fields in Balakhani, Sabunchu, Ramani, kerosene and oil plants in Kishle.

By 1883 due to the capital of Rotshilds Baku-Batumi railway playing an important role in the export of oil and oil products (particularly kerosene) from Baku to the European countries was completed. With construction of this railway Batumi became one of the important world seaports.

In 1886 Rotshilds based the "Caspian-Black Sea" oil company. By 1890 the capital of Rotshilds' bank was supervising 42% of the Baku petroleum export.

At early XX century Rotshilds assign their oil interests in Azerbaijan to the Anglo-Dutch corporation "Royal Dutch Shell" and from now on English capital takes an outstanding place in Azerbaijan oil industry.

These years more than 60% of oil fields in the Apsheron p. concentrated in the activity sphere of three big companies: "Royal Dutch Shell", "Nobel brothers oil manufacture partnership" and "Russian general petroleum association". The joint-stock capital in Azerbaijan oil industry reached 165,000,000 rubles.

From 1874 till 1899 29 JSC, also with participation of foreign capital were founded in Azerbaijan industry. As the positions of foreign capital strengthened, Azerbaijan oil industry passed into hands of foreign investors ever more. So, for example, if in 1902 16% of the means invested in oil industry belonged to foreign investors, in 1912 participation share of foreign capital in Azerbaijan oil branch equaled to already 42%. The growing demand of world industrial centres for oil and oil products promoted significant growth of oil production in Azerbaijan. At the early XX century (in 1901) 11.0 mln tons of oil was produced here, which was more than half of world oil production.

The intensively growing oil production in the Apsheron p. was not provided with export of oil (kerosene) via railway to the port of Batumi, Black sea and further to European countries.

As far back as in 1880 the famous scientist - chemist D.I. Mendeleyev put forward the idea of constructing Baku-Batumi oil line for access to world oil market through the Black and Mediterranean seas. It was proved that pipeline transportation of oil and oil products is much cheaper and more effective than by rail. Despite of it, construction of the Baku-Batumi oil line (833 km length and 200 mm diameter) for pumping about 1 mln tons of oil and oil products began only in 1897 and finished in 1907. Before nationalization 109 JSC companies functioned in the Azerbaijan oil industry. Of them 72 belonged to the Russian capital of 240 mln rubles total sum and 37 - to the English capital of 100 mln pounds total sum.

The biggest capital in Azerbaijan oil branch belonged to the company of the Nobel Brothers (30 mln rubles with the highest cost of shares at 5000 rubles). The capital of A.I.Mantashov's company was 20 mln rubles.

The Caspian-Black Sea oil industrial and trade society possessed 10 mln rubles of the Russian capital.

"Haji-Chelekn oil company", a big Azerbaijan oil industrialist of that time - Maecenas Isa Bey Hajinskiy possessed 1.25 mln pounds of the English capital.

On the eve of oil industry nationalization 270 oil-producing enterprises, 49 large and small firms engaged in contract drilling, 25 oil processing firms, more than 100 mechanical plants (workshops) and repair shops etc. worked in Azerbaijan.

After establishment of the Soviet authority in Azerbaijan in 1920 the oil industry was nationalized and oil production fell to 2.4 mln tons in 1921. The subsequent years with expansion of exploration works new fields were discovered and put into development, oil production increased from year to year reaching 23.6 mln tons in 1941, which equaled to almost 76% of all-union oil production at that time.

In 1941-1945 during the war oil production in Azerbaijan fell to 11.1 mln tons in connection with transfer of Azerbaijan's oil-production capacities into new oil areas of Turkmenistan, Tatarstan, Bashkiria and other eastern regions of Russia.

In the post-war years with discovery of Gurgani-sea field, sea oil production starts in Azerbaijan in 1947, though oil was produced in the Pirallahi Island (Artyom i.) as far back as from 1902. In 1950 the big oil field Petroleum stones (Neft dashlari) was discovered and put into development in the open sea. A new stage of oil industry development begins from now on, sea prospecting works extend considerably, new oil and gas fields (Peschaniy-sea, Bahar, Sangachal-Duvanniy sea, Bulla i.Bulla-sea etc.) are discovered one after another and put into development, sea drilling engineering and technology, sea oil production infrastructure develop. In 1965 the level of oil production in Azerbaijan reaches 21.6 mln tons.

At the early 80s XX century a big field named after April 28 (nowadays Guneshli) is discovered in deepwater water areas of the Azerbaijan sector of the Caspian sea, which currently provides about 65% of sea oil production in Azerbaijan (without account of oil production of the Azerbaijan International Operational Company - AIOC under the "Contract of the Century").

In succeeding years, new big fields Chirag (1985), Azeri (1987), Kapaz (1988) and others were discovered in the Azerbaijan sector of the Caspian.

Thus, real preconditions were created for intensive development of oil and gas production in the Azerbaijan sector of the Caspian, which was of great importance for economic and political life of the Azerbaijan Republic that had just received independence. There is no doubt that Azerbaijan will turn into one of the richest oil and gas producing countries of the world in the near future.

From the beginning of development of hydrocarbon resources in Azerbaijan (on land and in the sea) more than 70 oil and gas fields were discovered, of them 54 are being developed currently. From the beginning of commercial development of Azerbaijan fields 1.4 bn tons of oil with condensate and 463 bn c.m. of gas has been produced [Kh.B. Yusifzadeh, AOGE, 11-12, 2000]

On land Azerbaijan 43 oil and gas fields have been discovered (37 of them are being developed) for the whole 130 years of the oil industry development history, 935 mln tons of oil and 130 bn c.m. of gas have been produced. As follows from the Pic. 1 and 2 repeated falls and rises took place in dynamics of oil production on land Azerbaijan, which was connected with political concussions of the XX century (war with Armenians in 1905, First World War in 1914-1917, October Revolution in Russia, establishment of the Soviet authority in Baku and genocide of Azerbaijanis by Armenian dashnaks in 1918, occupation of Azerbaijan having received sovereignty in October 1918 by intervention of the XI Red Army in 1920 and nationalization of oil industry, Second World War in 1941-1945, Armenian occupation of 20% Azerbaijan that got independence for the second time etc.).

Fall of oil production on land Azerbaijan since 1965 is linked with exhaustion of long developed fields and low productivity of exploration works.

Currently oil production on land Azerbaijan is 1.5 mln tons per year.

Further oil and gas production development in Azerbaijan are linked basically with sea fields. 28 oil and gas fields (18 of them are being developed) were discovered in the Azerbaijan sector, Caspian sea, more than 130 perspective structures were revealed. For the whole history of Azerbaijan sea fields development more than 460 mln tons of oil with condensate and about 345 bn c.m. of gas has been produced. Max level of oil production from sea fields at the volume of 12.9 mln tons was achieved in 1970, and gas at the volume of 14 bn - in 1982. Currently the State Oil Company of the Azerbaijan Republic (SOCAR) produces 7.5 mln tons of oil and 5 bn c.m. of gas per year from sea fields.

After the collapse of the Soviet Union at the early 90s XX century economy of the Azerbaijan Republic disorganized due to the break of the economic relations in the former Soviet Union established for a long time and also due to the heavy financial position. The old economic relations were destroyed, the new were not created. Significant part of operational fund of the wells stood idle in the oil branch, volume of operational and prospecting drilling was reduced, oil and gas production in the republic fell considerably. Oil mechanical engineering plants were not working at full capacity, which provided 70% of the Soviet Union's demand for oil equipment before.

Thus, restoration of Azerbaijan oil industry and development of big oil and gas fields discovered in the deep-water parts of the Azerbaijan sector, Caspian and prospecting of perspective structures required big capital investments and realization of oil and gas production in general and sea oil and gas production in particular, modern engineering and technology, which could be real at involving of large-scale foreign investments in the oil branch.

The thoroughly thought-out investment policy of the President of Azerbaijan Republic Heydar Aliyev was the only way of taking Azerbaijan Republic, also oil industry out from the economic crisis, let alone its great political importance.

In September 1994 a big (for produced stocks and volume of investments) "Contract of the Century" as "Production Sharing" or "PSA" (Production Share Agreement) was signed with participation of 12 famous world oil companies from 8 countries for development of Azeri, Chirag and deep-water part of the Guneshli fields discovered as far back as in 80s.

With signing of the first large-scale contract as PSA on the Azeri-Chirag-Guneshli (deep-water part) fields in the Azerbaijan sector of the Caspian sea Azerbaijan oil industry entered a new stage of development.