Petroleum industry in Azerbaijan

• 1. Introduction

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  Azerbaijan's petroleum industry drew the attention of Marco Polo, who described a spring near the Georgian border gushing oil so abundantly that a hundred ships could load there at once. His account, from the travel memoir "il Milione," is widely believed to reference Baku. The oil was not good to eat, Polo wrote, but it burned well and served as a salve for men and camels with skin ailments.

  That passage is remarkable for what it implies. Long before drilling rigs or pipelines, caravans were traveling long distances solely to collect Azerbaijani oil. By 1901, the Apsheron peninsula was producing more than half of the entire world's petroleum. It all came from within six square miles of ground on the Caspian coast.

  How did a land of natural seeps become the world's dominant oil producer? How did European industrialists, Rothschild trading houses, and Armenian oil magnates all converge on a single city? And what happened when Nazi Germany concluded that seizing Baku was worth a major strategic offensive?

• 2. Ancient Accounts

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  A 1593 inscription in Balaxani marks a manually dug well, 35 meters deep, one of the earliest precisely dated records of oil extraction on the Apsheron peninsula. Evidence of petroleum being traded in the region stretches back even further, to the 3rd and 4th centuries, documented in the manuscripts of Arabic and Persian authors.

  Evliya Celebi, a Turkish scientist and traveller who lived from 1611 to 1683, reported that the Baku fortress was ringed by 500 wells. These produced both white and black varieties of refined oil. His account describes substantial extraction activity long before anything resembling a modern petroleum industry existed.

  In 1636, the German diplomat Adam Olearius described 30 Baku oil wells and noted that some were gushers, flowing without pumping. Engelbert Kaempfer, Secretary of the Swedish Embassy to Persia, made the first detailed written account of the Baku oil trade in 1683. His notes describe a "flaming steppe" where natural gas discharged through fissures in the earth. Some fissures blazed with large flames, others with small ones, and some emitted only smoke or a barely perceptible oily vapor. The territory Kaempfer measured stretched 88 steps in length and 26 in width.

  The Fire Temple at Suraxani raion, where a cavern of natural gas fed a flame that never went out, appeared in European accounts of the Caucasus throughout the 18th and 19th centuries.

• 3. Monopoly and the Drill

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  In 1803, Haji Kasimbey Mansurbekov began undersea oil extraction from two wells in Bibi-Heybat bay, at 18 and 30 meters from the coast. A powerful storm destroyed both wells in 1825. Oil extraction on land remained primitive: shallow hand-dug wells, horse carriages, and slow shipment by sea.

  In 1806, the Russian Empire occupied Baku Khanate and absorbed its oil production as a state enterprise. Around 120 wells were then yielding some 200,000 poods of oil each year. The imperial government replaced direct management with a lease system called the otkupchina, awarding exclusive 3-4 year contracts to individual operators.

  116 producing wells stood in 1813, a number that crept to 125 by 1825, fell to 120 in 1850, and reached 218 only by 1860. The otkupchina gave contractors no incentive to improve their methods. Oil was bailed from shallow hand-dug wells into horse carriages carrying two barrels apiece, then shipped north to Russian markets including 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. Vasily Semyonov backed the proposal in a government report, and in 1845 the Caucasus governor Grand Duke Mikhail Vorontsov authorized funds for the project. In 1846, engineer Nikolay Matveyevich Alekseev used a percussion drill to sink a well 21 meters deep at Bibiheybat, striking oil. Edwin Drake's celebrated American oil discovery came thirteen years later, in 1859.

  In 1871, Ivan Mirzoev, an ethnic Armenian and former otkupchina monopolist, built the first wooden oil derrick on the Apsheron peninsula. A second derrick followed in 1872. A new law in 1873 replaced the monopoly lease system with long-term competitive rights. Robert Nobel had arrived in Baku in March 1873 to purchase a refinery. By 1875, he had added a large portion of the Balakhani Oil Field to his holdings.

• 4. Nobel's Baku

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  Nobel Brothers Petroleum Production Company was founded in 1877, followed by Branobel in 1879. In 1877, the enterprise also completed Russia's first pipeline, linking the Surakhany oil field to the refinery in Baku. Their first oil tanker, the Zoroaster, was built in Sweden in 1877. It was the first successful oil tanker in the world.

  By 1890, 345 tankers were sailing the Caspian, including 133 steam vessels and 212 sailing vessels. The Nobels introduced continuous multi-still distillation in 1881. In 1885, they hired Hjalmar Sjogren as company geologist. For their workforce, they built Villa Petrolea, a company town with apartments, houses, schools, and libraries. Employees received profit-sharing and free education.

  In 1884, the Baku Petroleum Association formed to represent the interests of the local refining industry, primarily to prevent crude oil exports. The Oil Extractors Congress Council represented the producers, sponsoring the industry magazine Neftyanoe Delo. The Council also funded a library, school, hospital, and pharmacy. Ludvig Nobel directed the Council for six years. Construction of a large kerosene pipeline connecting Baku to Batum began in 1897 and was completed ten years later under Professor N. L. Szhukin.

  In 1898, Baku produced approximately 8 million tons of oil, around 160,000 barrels per day. By 1901, output had reached 11 million tons, or 212,000 barrels per day, accounting for 55% of all Russian oil production. The main producing areas were Sabunchy, at 35% of Baku's output, and Bibi-Heybat, at 28%.

  Between 1898 and 1903, British oil firms invested 60 million rubles in the Baku region. By the eve of World War I, three companies held 86% of equity capital and controlled 60% of all production. They were the Russian General Oil Company, Royal Dutch Shell, and Nobel Brothers. Ethnic Armenians ran almost a third of the region's oil industry by 1900. Alexander Mantashev owned the third-largest oil company in Baku by 1904. Calouste Gulbenkian, a British-Armenian oil tycoon nicknamed "Mr Five Per Cent," arranged the merger of Royal Dutch Petroleum Company with Shell Transport and Trading Company, becoming a major shareholder of the newly formed Royal Dutch Shell.

  Several oil crises around 1903, combined with constant strikes and ethnic strife during the Russian Revolution of 1905, began cutting into record production. No oil export was possible during the worst of the violence, and storage facilities were damaged across the region.

• 5. Soviet Transformation

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  65,000 barrels per day was all that Azerbaijan's oil industry could produce by 1918. World War I, civil unrest, and the collapse of the export system had together brought the sector close to standstill. By 1920, output had fallen even further.

  After the Bolshevik occupation of Azerbaijan, all oil assets were nationalized and the state company Azneft was formed. In 1920, Alexander P. Serebrovsky, soon to be known as the "Soviet Rockefeller," was named its head.

  In 1920, only 1,800 qualified specialists worked in Russia's entire oil industry. Of those, 1,232 were based in Azerbaijan. The Soviet leadership sent engineers from Baku to oil fields in Pennsylvania, Oklahoma, California, and Texas to study new methods of well deepening and exploitation. The Azerbaijan State Oil Academy was established in 1920 to train the next generation at home.

  By the late 1920s, production had stabilized. In 1928-29, the USSR produced 13.5 million tons of oil in total. Azerbaijan's share was 8.7 million tons. By 1940, Azerbaijan's total production reached 23.5 million tons, or 475,000 barrels per day. It was a historical record that would not be broken until 2005.

  Soviet engineers recorded genuine technical firsts. In 1925, Baku engineer M. M. Skvortsov built a device for the automatic movement of a drilling chisel, known as the "automatic driller." By 1930, Schlumberger was using electrical logging tools in the Surakhany oil field. The first deviated well was drilled in the Bibi-Heybat field in 1933. In 1936, the industrial application of the multi-stepped turbo drill, invented by Shumilov, Taghiyev, and others, began.

  Between 1939 and 1940, as the Soviet Union was supplying oil to Nazi Germany, British and French military planners had drawn up a strategic bombing offensive called Operation Pike, targeting Baku's oil production facilities.

• 6. The War for Oil

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  In June 1941, Hitler invaded the Soviet Union, with the Baku oil fields named as an eventual strategic target. During that first year of fighting, Azerbaijan produced 25.4 million tons of oil for the Soviet war effort. A decree from the Supreme Soviet in February 1942 honored more than 500 workers and employees of the Azerbaijan oil industry with orders and medals.

  As male workers left for the front, women filled the gap. By summer 1942, more than 25,000 women were working in the oil industries, making up 33% of all workers and putting in 18-hour shifts. At refineries and chemical plants, the proportion of women was estimated at 38%. By 1944, their share had grown to 60%.

  The 1942 German summer offensive, codenamed Case Blue, aimed to seize the Caucasian oil fields in a large-scale advance. On the 23rd of July 1942, Hitler signed Directive No. 45, ordering the Caucasus portion of the offensive under the name "Edelweiss." The plan named Baku, Maikop, and Grozny as primary targets and set the 25th of September 1942 as the date for Baku's capture. A surprise troop landing in Baku was planned so that Soviet authorities would have no time to destroy the oil fields. Technical experts from Technische Brigade Mineralol were designated to manage the captured facilities once German forces arrived.

  The Edelweiss offensive was weakened when forces were diverted against Soviet supply lines along the Volga River. Axis forces were surrounded and defeated at Stalingrad, forcing a retreat from the Caucasus. That September 25 deadline passed with German forces still far from Baku, already encircled at Stalingrad.

• 7. Into the Caspian

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  On the 24th of August 1949, the first offshore exploration well at Neft Dashlari was spudded after a causeway was built to reach the site. In November, at a depth of 1,000 meters, well N1 tested oil at 700 barrels per day. Neft Dashlari, known in English as Oil Rocks, sits to the southeast of the Absheron Archipelago. Sea depth at the site ranges from 10 to 25 meters, with parts of the oil pool reaching 60 meters.

  The site carries the popular name "The Island of Seven Ships," after the disused vessels sunk during construction to provide a solid base for the causeways. Intensive development began in 1950, using deviated holes drilled from multiple sites connected by trestle bridges. In 1953, a water flood was applied to maintain reservoir pressure. After more than 50 years of exploitation, the field was still delivering about 15,000 barrels per day.

  In 1864, the German geologist Otto von Abich had already surveyed and reported structures present on the Caspian seabed. Engineers in the early 1930s proposed offshore wells built from timber piles linked by causeways. By 1947, oilmen had refined the trestle method of linking development rigs and processing facilities, and construction on Pirallahi and Oil Rocks started in 1948.

  New offshore fields continued to appear through the 1960s and 1970s. Sangachal-deniz, drilled several times since 1959, yielded success only in 1965. The Duvanni-deniz discovery well, tested in May 1963, produced 700 barrels per day. That field holds about 700 million barrels of oil reserves. Bahar came online in 1968, Sangachali-Duvanni in 1969, and Bulla Deniz in 1975. Offshore production reached its peak in 1967 at 414,000 barrels per day.

  Gunashli was discovered in 1979, Chirag in 1985, Azeri in 1988, and Kapaz in 1989. At Chirag, semi-submersible drilling equipment operated at 200 meters depth, an offshore record for the USSR. The Azeri-Chirag-Gunashli complex contains more than 16 billion barrels of oil in place. With reserves estimated at 6 billion barrels, the complex was substantial enough to attract international attention the moment Azerbaijan gained independence.

• 8. Contract of the Century

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  On the 20th of September 1994, President Heydar Aliyev signed International Contract No. 1 with eleven major international companies for the Azeri, Chirag, and deep-water Gunashli fields. Parliament ratified the deal on December 2, and it went into effect on December 12. A projected investment of $13 billion gave the agreement the name it carries to this day: the Contract of the Century.

  In 1995, the Azerbaijan International Operating Company was formed to manage the project. Its eleven original members included BP of the United Kingdom, Amoco and Pennzoil from the United States, Lukoil from Russia, Statoil of Norway, TPAO of Turkey, and SOCAR of Azerbaijan. Terry Adams of BP served as the consortium's first president.

  In 1998, Azerbaijan, Georgia, and Turkey agreed on a new export route. The Baku-Tbilisi-Ceyhan pipeline officially opened on the 13th of July 2006. It stretches 1,760 kilometers from the Azeri-Chirag-Gunashli field on the Caspian to the Mediterranean port of Ceyhan in southeastern Turkey. At that length, it was the second-longest oil pipeline in the world, behind only the Druzhba pipeline. Construction cost $3 billion and employed around 15,000 workers. Turkey earns approximately $300 million annually from pipeline transit.

  The Shah Deniz gas field, discovered in 1999, was described as one of BP's largest gas field finds in recent decades. The plant at Sangachal Terminal came online in 2007, transforming Azerbaijan into a significant gas exporter. Stage 1 of the project supplies Georgia and Turkey with 8 billion cubic meters of gas per year via the South Caucasus Pipeline.

  In September 2017, the Contract of the Century was extended until 2050. The new agreement's letter of intent had been signed on the 23rd of December 2016. At the signing, BP group chief executive Bob Dudley said: "Over the past 23 years, the Contract of the Century has truly transformed Azerbaijan, energy supplies to Europe and all of us who have worked so hard to make it a success." In April 2019, SOCAR president Rovnag Abdullayev and BP regional president Gary Jones signed a separate $6 billion contract covering the Azeri Central East platform.

  The State Oil Fund of Azerbaijan, SOFAZ, was established by President Heydar Aliyev's decree on the 29th of December 1999, and began operating in 2001. Its financial reserves stand at approximately $34.7 billion. Non-government watchdog organizations have raised transparency concerns, describing SOFAZ's contracting as opaque and noting that contracts have been awarded to companies owned by the ruling Aliyev family. SOCAR, the state oil company and SOFAZ's primary revenue source, has been similarly described as running through complex webs of contracts and middlemen that critics say have channeled revenues to the country's ruling elites.

  In 2022, Azerbaijan's petroleum industry produced about 33 million tons of oil and 35 billion cubic meters of gas. The country's 20 Production Sharing Agreements, requiring a combined $60 billion in investment, continue to shape how those resources are developed and distributed.