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«AZERBAIJANI OIL:GLIMPSES OF A LONG HISTORY SABIT BAGIROV This article is intended to introduce to the reader some of the major events in Azerbaijan's ...»

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AZERBAIJANI OIL:GLIMPSES OF A LONG HISTORY

SABIT BAGIROV

This article is intended to introduce to the reader some of the major events in Azerbaijan's

oil industry and to what is going on in this small country rich in mineral resources. This

article does not claim full coverage and analysis of all the important and instructive events

that have happened in Azerbaijan, both since its independence five years ago and before.

This can not be done in a short article. Nevertheless, it is hoped that the information given here can help the reader learn about and understand this country, which has become a vital area of interest for the world's powers in their struggle for spheres of influence and energy resources.

I. EARLY EXTRACTION

Azerbaijan is one the world's few regions where oil has been extracted and used for a thousand years.

As far back as 1877 Charles Marvin wrote that there was irrefutable proof that 2500 years ago oil was exported from the Apsheron peninsula, where Baku is located, to Iran, Iraq, India and other countries. This was reported by such well known historians and travellers as Prisk of Pontus (fifth century), Abu-Istakhri (eighth century), Ahmed Balazuri (ninth century), Masudi (tenth century), Marco Polo (thirteenth-fourteenth centuries) and O'Learius (seventeenth century).

According to Marco Polo, the Apsheron peninsula was dotted with oil wells and the oil extracted was used for lighting and for healing purposes.

It was used for military purposes as well. Ancient Greeks and Alexander the Great knew about these qualities of oil.

The Apsheron was also well known as a holy land for followers of the ancient religion Zoroastrianism. Followers of Zoroaster worshipped the eternal fire and held their rites here. It was here that they erected the famous temple of fire-worshippers which still attracts crowds of tourists to Suraxani village near Baku.

In order to extract oil, the villagers dug wells, just as they did for water. According to historical data, in 1594 a person named Nur O¤lu, who lived in the Apsheron, dug a simple well to a depth of thirty-five metres. By 1806 there were fifty oil wells on the Apsheron peninsula, by 1821 there were one hundred and twenty. The average depth of the wells in the 1860s varied from two to three metres. In Suraxani village, near Baku, the depth of the oil well was twelve metres and it looked like an upturned multi-level pyramid. In the middle of the last century, the most productive oil well could provide little more oil than ten barrels per day (bpd). Once extracted the oil was stored in stone-lined holes and, after setting and refining, it was delivered to state-owned storehouses. In 1870 there were fourteen storehouses in Baku.

II. THE BEGINNING OF COMMERCIAL DEVELOPMENT

In the Apsheron this method of simple oil extraction was used until 1872. A well drilled in 1871 produced 50bpd, ending forever more primitive methods of oil extraction.

It took twenty-three years for the new technology of oil well drilling to take over. The world's first oil well was drilled in 1848 in Apsheron. This event took place eleven years prior to the drilling of the first oil well in Pennsylvania.

In the early 1870s the drilling of oil wells was widespread all over Azerbaijan. By that time engineering and technology had improved and was governed by new legislation. This signalled an era of industrial development which spread through all of Russia.

By 1913 there were 3500 wells in and around Baku.

1871 and 1872 were not only years of dramatic change in oil development technologies in Apsheron, but also a time when the old iltizam, tenant relations between the owner of the oil springs (at that time the Russian government) and the actual oil producers were abolished. Iltizam was a system of mutual obligations where the oil-bearing land could be rented under certain conditions from khans (the historic owners) granting the lessee temporary use of oil wells, salt lakes, dye works, storehouses, etc. After annexation of the Apsheron, the Russian government also used this system until the early 1870s.

The rental agreement, usually for a five-year term, was signed by an authorised representative of the owner and the lessee. The system for selecting lessees was similar to the modern day tender with the highest offer being successful. The basic minimum rent was announced by the government and those wishing to participate were obliged to give a pledge consisting of half of the annual rent.

The lessee had the right to export the oil and could fix his own price paying an agreed amount originally to the khans and thereafter to the treasury of the Russian state.

According to available records, the net profit of the lessee was about 14-15 per cent.

In 1872, iltizam was replaced by a new system of property relations in the oil industry

introduced by two very important legislative acts adopted then. These were:

• The Law on Oilfields and Liability for Excise Tax on Oil Products

• The Law on the Auction Sale of Oilfields Belonging to Leaseholders to Private Persons.

After these laws were adopted, the new Caucasus Directorate of Mining Industry was formed and was authorized to solve all issues related to oil in the Caucasus. In 1872, the oilfields were grouped and sold to private individuals. A number of the oilfields were not purchased, however, and another auction was held for those in 1880.





Oil fever infected Baku

In accordance with these laws, exploration on both private and public land could only be carried out with the permission of the landowner. Oil exploration on lands owned but unused by the state were governed by the following regulations: anyone who wished to begin such work chose his piece of land by hammering in a stake to which he attached a board with his name and the date; within a week an application was to be submitted to the local authorities; the application had to specify the location of the site, its dimensions and its distance from the nearest populated area. If approval was granted, the land was rented for a period of twenty-four years at a rent of ten gold roubles for one tenth of a hectare. If the search for oil was not successful, the leaseholder could return it on agreed terms.

III. OIL BOOM AT THE END OF THE NINETEENTH CENTURY

New economic conditions, technology and engineering broadened the scale of oil exploration and extraction, refining and transportation, leading to the development of the infrastructure of Azerbaijan's industrial, cultural and educational systems.

1873 saw the launch of the exploration and development of the world’s largest deposits with a volume of 500m tons of oil capable of being extracted from the Ramani, Sabunchi, Balakhani and Bibi-Heibat oilfields. In twelve years they produced 6.2m tons.

This was followed by an expansion in oil refining with the first oil refinery being built as early as 1859 in Baku and by 1867 there were fifteen crude oil refineries. After the abolition of the excise tax on oil products, many new factories were built in Azerbaijan with new technologies allowing the production of new types of refined products. In 1879 and 1881, two refineries were built to produce lubricants.

In 1878 an oil pipeline was built connecting the Balakhani oilfields with the oil refinery in Baku. It was 12km long with pipes 75mm in diameter. By the end of 1898 there were 230km of pipes with an annual throughput of one million tons of oil.

Between 1896-1906, the Baku-Batumi pipeline was built with a length of 833km and a diameter of 200mm to transport 900,000 tons of kerosene a year.

A decision on drainage works in Bibi-Heibat bay, near Baku, to enable oil wells to be drilled was taken in 1901. Since ancient times people had known about the rich oil deposits here.

At the beginning of the nineteenth century there were two oil wells located only nineteen metres from each other. According to Kerim Cafarov, these oil wells were originally dug in the sixteenth century and were located on the shore. But later, as the water table in the Caspian rose they were submerged by the encroaching waters. The owners resorted to erecting wooden barriers, but by 1824 they were totally submerged.

The decision to fill the bay was the first such exercise in the world and in 1906 a competition was announced to prepare appropriate drainage projects. In 1909 the project commenced and in 1910 the Russian Sormovo factory began the production of 23 special vessels to transport and distribute filling materials. By 1916 their assembly was completed and by 1918, 193 hectares were filled in. The work continued in the 1920s and by 1927 some 300 hectares had been reclaimed. It is worth noting that this project ranks as the second largest in the world after the Panama Canal project and during those years the region achieved considerable success in developing oil extraction technology. Azerbaijan was a base for the development and implementation of new techniques and pioneering inventions.

The well pumps designed by Ivanitsky were tested in the oilfields of Azerbaijan some 15 years before similar technology began to be used in America.

By the end of the 1870s Azerbaijan had become one of the world's leading financial centres.

In the 1880s the Rothschilds began to make large-scale capital investments and by the end of 1890 they controlled some 42 per cent of oil exports from Baku.

By 1910 more than 60 per cent of the oilfields were under the control of three large organisations: Shell, the Oil Production Society of the Nobel Brothers, and the Russian General Oil Society, which was supported by French and English capital with headquarters in London.

Between 1874 and 1899, twenty-nine joint stock societies (some of them with the participation of foreign capital) were established in Azerbaijan. All these events reflected the growing demand for petrol in world industrial centres and led to a major increase in oil extraction in Azerbaijan. At the beginning of the twentieth century more than 10m tons of oil were extracted annually which accounted for half of the world's production at that time.

IV. NATIONALIZATION OF THE OIL INDUSTRY AND THE SOVIET PERIOD

After the Russian revolution of 1917, Soviet power was established in Baku. In 1918, following a decision taken by the Bolshevik government in Moscow, 165 independent oil companies were nationalized in Azerbaijan. In the same year, after the declaration of the independent Azerbaijani Republic (1918-1920), the Azeri government issued a decree denationalizing the oil industry and returning the enterprises to their owners. In 1920 the Russian Red Army invaded Azerbaijan and the oil industry was nationalized once again.

The Soviet period saw ups and downs in the oil industry of Azerbaijan. A rapid drop in oil production took place, falling to 3245m tons in 1918, less than half the total extracted in the previous year. Nationalization of the oil industry and the political changes were responsible for this downturn.

1919 saw some growth in oil extraction largely due to the stabilisation of the political situation and denationalization of its oil industry. The two subsequent years saw a further decrease in oil extraction caused by political instability and the re-nationalization of the oil industry. In 1921 the oil output amounted to 70 per cent of the 1919 level.

The Soviet government, which realized the importance of Azerbaijan's oil riches all too well, started to take active steps in order to revitalize oil extraction. The young Bolshevik Russia did not have strong financial resources. However, Russia did invest in Baku because it was sure that the costs would be reimbursed and that the development and sale of the 'black gold' would bring enormous revenues. The lack of financial resources was compensated for by the slavish labour of the workers, some of whom were intimidated while others believed the Bolshevik propaganda about the communist paradise that was close at hand. Soon the results became evident.

After 1922 the oil output steadily grew to reach a record level of 23,482,000 tons in 1941.

In 1940 Azerbaijan provided 71.5 per cent of the total oil output of the USSR.

From the beginning of the 1920s until the beginning of World War II, Azerbaijan remained a world centre for oil science and technology. Over this period, hydrocarbon deposits were discovered here, the immense project of filling up Bibi-Heibat bay was finished (1927), construction of the 834km-long Baku-Batumi pipeline was finished (1925, the pipes were 250mm in diameter and had 13 pumping stations), and the world's first offshore oil well was drilled from a small artificial islet on wooden piles. One should also note a dramatic growth of the factories which produced oil equipment.

During the period between 1941 and 1945 Azerbaijan provided 63.2 per cent of the output of the USSR, and this oil played the decisive role in the USSR's victory over Germany.

Along with this, Moscow was afraid lest the oil-producing Baku region should be seized by Germans and carried out an unprecedented transfer of Azerbaijan's industrial petroleum capacities to the oilfields of Talariya, Basl›kiriya and other eastern areas of Russia including almost the entire personnel (approximately 11,000 oil workers, engineers and geologists, etc.), oil equipment, manufacturing facilities and even the disassembled Baku-Batumi pipeline. Parts of this pipeline were later used to build the Astrakhan-Saratov pipeline.

Thus, while the industry of the USSR's western regions was destroyed by the war, Azerbaijan's industry suffered the same fate –but here this was done by Moscow.

As a result of such policies, by the end of the war oil production started to decrease. Once again tremendous efforts were made to stabilize it. Although the pre-war level of oil production was never reached, the period between 1947 and 1963 was a period of steady increase in oil production.

From 1964 to 1968 output was running at 21m tons of oil per year.

From 1969 to 1985 the gradual decrease in Azeri oil production was followed by a period of stabilisation when oil extraction levelled out at 13m tons per year. The following factors

were responsible for the decrease during the period:



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