Summer 2004 (12.2)
Pages 82-85
Baku Baron Days
Foreign Investment in Azerbaijan's Oil
by Mir Yusif Mir-Babayev
The dramatic development of the oil business on the Absheron Peninsula during
the late 19th and early 20th centuries made Baku the main industrial center in the
Caucasus. This growth of oil production in Baku was based upon high quality
crude oil, cheap available manpower, and the unusually quick and effective
development and implementation of technical improvements.
In 1898, the Azerbaijani oil industry exceeded the U.S. oil production level. At
that time, approximately 8 million tons were being produced. In 1901, Baku
produced more than half of the world's oil (11 million tons), and 95 percent of all Russian oil.
Approximately 1.2 million tons of Baku kerosene were also sold abroad.
The main oil-producing regions were located near Baku at Sabunchi, Surakhani and Bibi-Heybat. Until
the beginning of the 20th century, the Sabunchi region was producing 35 percent of Baku's oil, and the
Bibi-Heybat region produced 28 percent, followed by the Ramani and the Balakhani regions.
Blowouts made up the main portion of all oil production in the early days although this was a very
uneconomical and environmentally harmful process. However, blowout production decreased as the
equipment was improved. In 1887 blowouts accounted for 42 percent of the recovered oil, but in 1890 it
had decreased to 10.5 percent.
Photos:
Currency notes and bond notes of the Oil Baron period and early Soviet period. Note, for
example the numerous languages and scripts in which they were printed, such as Russian, Azeri in
Cyrillic and sometimes Arabic script.
The foreign capital inflow to Baku increased toward the end of the 19th and the beginning of the 20th
centuries (Nobels, Rothschilds, Vishau and others). Naturally, the increased capital led to a significant
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increase in oil production, and the rapid growth of industries supplying services to the oilfield and
oil-refining sectors, such as the building of new ports and electric power stations.
At that time, Baku ranked third in the Russian Empire after St. Petersburg and Moscow in relation to
electric power plant output. Five percent of the electricity being produced was used for lighting and 95
percent was being used by industrial enterprises.
In order to provide services to the expanding
oil fields, the following joint stock
companies were established: the Caspian
Engineering and Boiler Plant, the
engineering shops of the Brothers Nobel,
S.M. Shibayev & Co., Caucasus & Mercury,
Caspian Engineering Plant & Ironworks,
Nadezhda Association, Orient Warehouses
Association, Dadashev's Dockyard and
various others. More than half of the
engineering plants that appeared were used
primarily for repairing ships as sea was the primary means of oil transportation.
During the last quarter of the 20th century, the Czarist government encouraged the foreign investment in
the oil industry as agreed upon in a government resolution adopted on May 1, 1880 at a Special Meeting
devoted to the admittance of foreigners to oil fields within the Baku region.
Prince M. Golitsyn, the Caucasus Governor-General, at the time wrote, "The situation in the Caucasus is
unique. Without participation of Russian capitalists, it is difficult to solve. The lack of free capital, the
limited industrial infrastructure, the low level of agriculture, the lack of technical knowledge and weak
business initiative of the resident population are long term obstacles to the economic growth of the
region. Under such circumstances, the participation of foreigners in the economy in the Caucasus should
not be rejected. In addition, the prohibition on purchasing real estate could lead to a stoppage of foreign
capital inflow, and to unavoidable damage to its economic interests." The Russian Ministers of Finance
Sergey Vitte and V. Kokovtsov also supported the involvement of foreign capital in the Caucasus.
Around 1901, foreign capital took a leading
position in the production and sale of
Russian oil products. British companies
were very active; they invested about 60
million golden rubles in Baku oil business
from 1898 to 1903 (though they had already
shown interest in Baku oil business much
earlier). This was a considerable sum for
that day.
The British
The director of an English-Russian trade company, I. Hunway, visited Baku with the aim of conducting
his own study to find out the condition of the Baku oil sources in 1741. In 1762, he published a book,
"Historical Studies of English Trade on the Caspian Sea", which included a detailed description
regarding the Baku oil business. Specifically, Hunway wrote that Baku's residence had been using gas
for boiling water, cooking and burning lime, for quite some time.
Having visited Baku in 1784, another
English traveler G. Foster wrote that the
people in Baku used thick black oil to cover
the roofs of their houses to protect against
leaks.
In 1884, Secretary of the London Oil
Association Boverton, is quoted at a meeting
of the Chemical Industry Society, as saying,
"Baku's oil sources are so extensive that the
Russians could supply the whole world with
kerosene and oil." [Mining Journal, 1885,
v.1, p. 349].
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In 1885, the British magazine, Engineering, published a major article summarizing the growth of the
Baku oil industry from 1864. It stated: "Within two or three years Russia will be able to gain control
over the markets in Northern Europe. In the near future, Baku will be a strong competitor of the U.S. in
countries bordering the Black and Mediterranean seas, not to mention, the Far East and India" [Trade
Sheet, 1886, 22nd February].
Charles Marvin a British traveler and writer reached a similar conclusion about the competitive activity
between the two countries. Marvin wrote "Baku is the Oil of Europe" and "Region of Eternal Fire: The
Petroleum Region of the Caspian", a book which was published three times, the latest being in 1891.
Left:
One million rubles. Early Soviet
period (1922). Russian and Azeri in
Arabic script.
Having studied the extent of the oil pools of
the Caucasus, Marvin wrote in his leaflet
"The Future Flow of Russian Oil" that
sooner or later America would yield its
leadership to Russia. Marvin also mentioned
that the Russian oil business was too
attractive for England to allow it to slip out
of its hands.
In order to make deeper inroads into the Baku oil business, he advised implementation of the
construction of the Baku-Batumi (Georgia) Oil Pipeline. Construction began in 1897 and was completed
exactly 10 years later.
Many engineers, scientists and businessmen were staunch supporters of the rapid construction of the
Baku-Batumi Oil Pipeline, including Dmitry Mendeleyev, Haji Zeynalabdin Taghiyev, Alfonse
Rothschild, the Nobel Brothers, I.P. Ilimov, S.I. Baghirov and others.
As a patriot of his country, Marvin believed that the Russian oil pipeline, together with all necessary
equipment, machinery, pumps, reservoirs and other facilities, would fall into German or Belgian hands
[Mining Magazine, 1887, V1].
The British company John Russell & Co. sent representatives to the Caucasus twice in 1886. Stuart, a
representative of the London Chamber of Commerce, and Peekock, the English Vice Consul in Batumi,
were present at the Third Session of the Baku oil-producers held in March-April 1886. In his report,
Stuart came out against the purchase of kerosene plants by the English. He believed that Great Britain
should focus their main attention on trading in oil products.
Nevertheless, the oil fields of S.M. Shibayev, located in Ramani (a district outside of Baku), which were
purchased by James Vishau in 1890, yielded 1 million rubles of net profit a year.
Taghiyev
English businessmen bought Taghiyev's fields for 5 million rubles in 1897. In two and a half years, they
had earned more than 7.5 million rubles in net profit.
In 1904, Baku kerosene supplied 47 percent of the needs of Britain, and 71 percent of the needs of
France. It should be mentioned that Taghiyev sold his oil companies in order to diversify into other
industries of the Azerbaijani economy. Meanwhile, he amassed shares in the Oleum Company
established on the basis of these enterprises to the amount of 16 million rubles. This allowed him to
continue accumulating capital created in the oil sector. During this period, Taghiyev invested significant
sums into the textile, food, construction and shipbuilding industries, as well as in fishery. Later, in 1890,
Taghiyev bought the Caspian Steamship Company, renovating it, and then creating a fleet of 10
steamboats.
Taghiyev's company (1872-1897) was a diversified business. His largest oil companies were fourth in
terms of oil output, preceded by the Brothers Nobel and the Caspian Partnership. In 1885, his company
produced some 7 million poods of oil and 2 million poods of kerosene. [Note: pood is a Russian unit of
weight equivalent to about 36.11 pounds.]
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Naghiyev and Asadullayev
The companies owned by Musa Naghiyev and Shamsi Asadullayev were the largest Baku oil producers.
Established in Baku respectively in 1887 and 1893, they produced between 7-12 million poods of oil
annually. These companies owned oil fields, oil distilleries and oil tankers.
Musa Naghiyev's company had fixed capital at 10 million rubles in 1907. Between 1904 and 1910, it
ranked as the 6th or 7th largest oil company in Russia. Both companies owned by Naghiyev and
Asadullayev held 10 votes in the Council of the Baku Oil Producers, which provides evidence in itself as
to the importance of these companies. The largest oil company in Russia, The Nobel Brothers, held 18
votes in this Council in 1914.
Council of Oil Producers
The first session of the Baku Oil Producers was called in 1884 and it continued for 34 sessions. The
Council provided the basis for these sessions. The representatives of the largest joint stock companies
were elected as the Council's members. The main goals of the Council included (1) protection of the
oil-producers' interests in government bodies, (2) provision of high profits to the oil magnates, and (3)
the establishment of opposition to the labor movement. The Council was headed by Ludwig Nobel who
was the older brother of Alfred Nobel who went on to establish the Nobel Prize. He held this position
until 1888.
The Council issued the Oil Business Magazine (published in Baku from 1898-1920). It was one of the
first periodicals in Russian about the Russian oil business. Since May 1920 when the Bolsheviks took
power in Baku until the present day, the Azerbaijan Oil Business magazine has been published.
John D. Rockerfeller
The increasing interest of John D. Rockefeller's syndicate to export Baku oil products resulted in intense
competition on the Absheron oil market. This incited foreign entrepreneurs, who had earlier put down
roots in the local market, to struggle actively for the leadership.
The Standard Oil syndicate sent petroleum geologists to the Shamakhi region of Azerbaijan in 1898.
Having surveyed the region, they came to the conclusion about the viability of the commercial oil
reserves. In 1902, John D. Rockefeller, was so eager to get involved with oil fields in the Caucasus that
he was prepared to turn down a profitable deal that the Japanese were offering in preference to the
Caucasus.
The idea to purchase Baku's oil fields in association with banks in St. Petersburg with a production
output of nearly a third of all Russian's oil production was included in Standard Oil's project for
participation in the Russian oil business (1903). This project was never realized, but Rockefeller
continued to suggest other projects [See Oil Business, November 5, 1903].
As of January 1, 1916, the four main companies, which led the Baku oil industry included the Nobel
Brothers; Russian General Corporation Oil; Transnational Trust Royal Dutch Shell, and the financial oil
corporation Neft [See the Review of the Baku Oil Industry for 1915, Baku, v. 2, 1916, pp. 235-331].
Nobel Brothers
The Nobel Brothers Petroleum Company was an oil-producing company established in St. Petersburg in
1879. The primary owners were Ludwig, Robert and Alfred Nobel. On April 10, 1902, the company
signed a contract for the purchase of oil fields in Romany, which were owned by the oil producer Isabey
Hajinsky. On October 17, 1905, in accordance with the Committee of Ministers, the company purchased
the oil fields owned by oil producer A. Adamov. The company's fixed capital in 1914-1917 was 30
million rubles. By 1916, it was the largest oil company in Russia, producing 76 million poods of oil. The
Russian General Corporation Oil, established in London in 1912 by the most important Russian and
foreign banks, united 20 companies.
These included A.I. Mantashev & Co., G.M. Lianosov & Sons, Moscow-Caucasus Trade Company,
Caspian Partnership, Russian Petroleum Society, Absheron Petroleum Society and others. The fixed
capital in oil in 1914 was 23 million rubles. By 1917 it had increased to 125 million rubles under the
management of the Russian-Asian Bank. Russian oil production in 1914 was distributed among Oil
(28%), Shell (20%), and the Nobel Brothers (14%). These monopolies produced 62 percent of the
world's oil, and two thirds of its kerosene and black oil.
Shell
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Shell was established on October 18, 1897 by Marcus Samuel Jr. Ranked one of the largest British oil
companies in Baku, it owned 30 ocean-going ships, and more than 340 oil terminals located between
Baku to Shanghai. Altogether, up to the beginning of the 20th century, British oil producers took on the
management of more than 11 percent of the Baku oil fields. Unlike in the Russian oil industry, where the
Nobel Brothers were the main competitor to Shell, on the world scene this part was played by the U.S.
syndicate Standard Oil. Shell always competed with the latter for a monopoly on the world market. Baku
oil products were dominant among the goods sold by the company.
In 1907, with the aim of uniting efforts in competition with the U.S. syndicate, two large companies,
Shell and Royal Dutch, merged into the transnational trust Royal Dutch Shell, headed by Henry
Deterding. At that time 60 percent of the company's shares were owned by Royal, while 40 percent were
owned by Shell.
The trust united the following companies: the Caspian Black Sea Society, Caucasus, S.M. Shibayev, and
Souchastniki. Oil companies in the trust produced a fifth of Russian output up to 1914. Royal Dutch
Shell's output from the Baku oil fields was 57 million poods in 1914.
The Royal Dutch trust had its own pipelines, a large number of refineries, oil tankers with a total
capacity of 1.6 million tons and a diversified trade network. The capital stock of the trust amounted to
more than 2.5 billion rubles. Deterding was called "The Napoleon of Oil" by his contemporaries. Oil
production by the trust was 15.5 million tons in 1926.
A member of the trust, the Caspian Black Sea Society, established in 1883 by A. Rothschild, was the
main exporter of oil products. This company sold 36 percent of total exports, compared with the Nobel
Brothers, which sold 18 percent. The remaining exports were distributed among other exporters.
The Review of Factories and Plants of the Transcaucasian Region contains a list of foreign kerosene and
lubricating oils supplied by Rothschild's Caspian-Black Sea Society. It includes Great Britain, France,
Austria, Belgium, Turkey, Greece, Germany, Italy, Holland, Portugal, Malta, Danube principalities,
Japan, China, Algeria, Indochina and the Philippines. Altogether, the Rothschilds exported 27,600 poods
of kerosene from
Baku through Batumi.
The financial oil corporation Neft (established in St. Petersburg in 1883) was a Russian company
involved in the production, transportation, storage and trading of oil products. Its fixed capital in 1916
was 33 million rubles, and it was managed by the Russian-Asian and the Petrograd Discount and Loan
Bank. The corporation owned oil fields, kerosene and chemical plants in Baku, and united the companies
Baku Petroleum Society, Neft, Balakhani-Zabrat Society and others.
Foreign Investment
The total amount of foreign currency invested in the Baku oil industry up to 1917 averaged 111 million
rubles; 60 percent of oil production in Russia was managed by foreign companies, while 75 percent of
the trade in oil products was under the management of foreign companies.
According to several documents, until 1920 foreigners, including businessmen from Great Britain,
France, the USA, Sweden and Germany, made about 70 percent of the investment in the Baku oil
industry.
During World War I, the capitalist system was characterized by the predominance of monopoly cartels
formed of the largest entrepreneurs. Furthermore, the more raw material sources and markets united into
one monopoly union, the more stable such a union would be. After World War I, the relationships that
had been established between the Russian monopolies, especially Baku's and the oil monopolies in
Europe and the U.S. were first complicated and then broken. Tendencies towards strengthening of the
labor movement were noted, resulting in a revolt.
In the long term, the historical events of 1917 in Russia stopped any further expansion of foreign capital
into the Baku oil industry. In March 1918, the power of the workers and peasants was established, and
on June 2, 1918, a decree was published which declared the Russian oil industry to be the property of the
people.
On 24th May 1924, the Azerbaijan Revolutionary Committee adopted a decree on the nationalization of
the Azerbaijan oil industry. In accordance with the decree, all oil producing, refining, oil trade, and
auxiliary enterprises were declared to be the property of the state. The Oil Committee, created to manage
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the oil business in Azerbaijan, liquidated 272 private petroleum companies located in the Baku region.
Mir-Yusif Mir-Babayev, Doctor of Chemical Sciences is a Professor at Azerbaijan Technical University.
His articles, "Azerbaijan's Oil History: A Chronology Leading up to the Soviet Era" (Part 1) and "A
Brief Oil Chronology since 1920" (Part 2) published in AI 10.2 and 11.2 (2002 and 2003). Search at
AZER.com.
These articles have now been expanded into a small book entitled "Brief Chronology of the History of
Azerbaijan's Oil Business" by M.F. Mir-Babayev, Baku: 2004, 200 pp. The book is a summary of the
chronology of the oil business in Azerbaijan from the 9th century through February 2004. Contact author
for copies: mirbabam@bp.com.
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Index AI 12.2
(Summer 2004)
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