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The petroleum industry in Azerbaijan produces about 873,260 barrels (138,837 m3) of oil per day and 29 billion cubic meters of gas per year as of 2013. Azerbaijan is one of the birthplaces of the oil industry. Its history is linked to the fortunes of petroleum. It is poised to become an important oil and gas producer once again.
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. Drilling was conducted primitively with a balance arm, whim and manual pump.
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 most 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."
The Turkish scientist and traveller of the second part of the 17th century, Evliya Çelebi, reported that "the Baku fortress was surrounded by 500 wells, from which white and black acid refined oil was produced".
In 1636 Adam Oleary Elshleger (1603-1671), a German diplomat and traveler, gave description of 30 Baku oil wells and remarked that some of them were gushers.
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."(improved translation needed)
Haji Kasimbey Mansurbekov, in 1803 for the first time in the world, begins sea oil extraction in Bibi-Heybat bay from two wells in 18m and 30m away from coast line. First offshore oil extraction was abandoned when strong storm in 1825 destroyed the wells.
In 1806, the Russian empire occupied Baku Khanate and took monopolistic control of oil production. Later exclusive rights to produce oil were given to individuals, thereby creating the Persian otkupchina lease system. This year all oil sources of Absheron, Guba and Salyan belonging to Baku khanate are requisitioned and declared state assets of Russia; and also, by the time of the joining of the Baku khanate to Russia about 120 wells were placed in the Baku area; the annual extraction from these wells made up about 200 thousand poods of oil.
Oil extraction methods in those times were very primitive —mainly hand-dug wells, drilled to very shallow depths. The production volume of those years can be judged from data provided in 1842 by the Caspian Chamber of the Department of State Property Ministry. It refers to 136 wells around Absheron, which produced 3,760 cubic metres (23,600 bbl) per year, and this oil was exported to Persia, where it was used for lighting as well as in ointments and other traditional remedies.
As a result of otkupschina monopoly and the absence of growing demand, annual oil production in the first half of 19th century remained unchanged at 250–300 poods (4–5 thousand tons). In 1813, the number of producing wells was 116, then 125 in 1825, 120 in 1850, and only 218 in 1860. Otkupschina system meant that oil production was monopolized by set of individuals who saw no incentive to increase production or improve drilling methods. In 1844 - a report detailing ideas developed by Nikolay Voskoboynikov (1801-1860) on drilling for oil rather than digging pits by hand is presented to the Russian government on the Caucasus (Baku region) by Vasily Semyonov (1801-1863). In 1845 Grand Duke Mikhail Vorontsov (1782-1856), Governor on the Caucasus authorizes funds for oil drilling considering the ideas of N.I. Voskoboynikov.
In 1846, under the supervision of state advisor V.N. Semyonov an engineer Alekseev drilled a 21 m deep well using a primitive percussion drilling mechanism, in Bibiheybət to explore for oil, with positive results. More than a decade later, on August 27, 1859, "Colonel" Edwin L. Drake struck oil on American soil for the first time.
A small petrochemical industry sprung 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 was used to produce kerosene out of "kir", an asphalt-like substance. In 1859, N.I. Vitte, a Tiflis pharmacist, built the second paraffin-producing factory on Pirallahi Island.
As a result, there was flurry of financial activity and various bank societies and organization were created. In 1884, the oil barons in Baku established their own organization, the Oil Extractors Congress Council for the discussion of oil business. They created their own magazine, Neftyanoe Delo (Oil Business), a library, school, hospital, and pharmacy. For six years, the Council of Oil Extractors Congress was directed by Ludvig Nobel.
The oil industry greatly influenced the architectural appearance of Baku as a modern city. Administrative, social and municipal institutions were established which, in turn, made decisions about the city's illumination, roads, streets, buildings, telephone stations, and horse-drawn trolleys. Gardens and parks were laid out and hotels, casinos and beautiful stores were built.
First, exclusive rights to develop Baku oil fields were in the hands of Russian-registered businesses, and only in 1898 foreign companies were granted rights to explore and develop oil fields as well as to participate in annual bidding process. Between 1898 and 1903 British oil firms invested 60 million rubles in Baku oil fields. Ethnic Armenians also contributed to the oil production and drilling around Baku. They reportedly ran almost one-third of the region's oil industry by 1900.
The main oil-producing regions were located near Baku at 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. Most oil production came from oil gushers in the early days, although this was a very uneconomical and environmentally-harmful process. However, the share of blowout production in the total decreased as the equipment improved. In 1887 blowouts had accounted for 42% of recovered oil, but by 1890 their prevalence decreased to 10.5%.
Foreign capital dominated the oil industry of pre-revolutionary Russia. On the eve of the World War I three companies ("Russian General Oil Company", "Royal Dutch Shell" and "Partnership of Nobel Brothers.") held 86% of all share capital and controlled 60% of oil production. In 1903, 12 English companies with capital of 60 million rubles were functioning in 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.
In 1898, the Russian oil industry produced more than the U.S. oil production level. At that time, approximately 8 million tons were being produced (160,000 barrels (25,000 m3) of oil per day). By 1901, Baku produced more than half of the world's oil (11 million tons or 212,000 barrels (33,700 m3) of oil per day), and 55% of all Russian oil. Approximately 1.2 million tons of Baku kerosene were also sold abroad.
There were other entrepreneurs with lower rank who also made contributions to industrial development of Azerbaijan, such as Haji Baba Alekperov, Agasibek Ashurbeyov, Ali Bala Zarbaliyev, Kerbalay Zarbaliyev, Huseyin Melikov, G. Bagirov, G. Aliyev, S. Zminov, Amir-Aslanov brothers and others were owners of oil-field areas in Sabunchi, Balakhani, Romani, Shubani, Bibi-Heybat.
By the late 1890s, large companies started to employ geologists to describe and map prospective structures. Geologist and oil specialist Dmitry Golubyatnikov began a systematic investigation of Absheron and predicted the availability of oil deposits in Surakhany field. In 1901, the Pirallahi oil field was discovered and put on production. Scientists like Ivan Gubkin, Golubyatnikov and Uskin described the productive series deposits of Azerbaijan and the process generation for the first time in 1916.
By the early 20th century, innovation started to improve hitherto backward well drilling practices. Most of the wells up to that time were drilled by cable-tool drilling method, which limited the exploitation to shallow depth.
Qualified engineers (of which Fatulla Rustambeyov is the first Azeri national) contributed to the improvement of well designs. By early 1913 the following changes occurred in some of largest producers such as Branobel.
In 1858, one of the major shipping companies on the Caspian Sea — joint-stock company "Kavkaz and Merkuriy" was established and served as the first oil shipping outlet.
Great changes were introduced in the area of oil storage by Nobels. To counteract the waste of the ground pits, vessels and lakes where great quantities of oil evaporated or simply penetrated back into the ground, the company started to use iron reservoirs for oil storage.
The first successful oil tanker in the world — a refurbished metal ship called Zoroastr — was built in 1877 in Sweden by Nobels. By 1890 345 tankers, including 133 steam vessels and 212 sailing vessels were sailing on the Caspian Sea. For instance, Mazut Trading Co, created by Rothschild Frères in 1898, possessed 13 tankers in Caspian Sea alone. During these years, native Azerbaijani shipowners appeared, of which the largest fleet belonged to Shamsi Asadullayev.
In 1877, construction of the first-ever oil pipeline linking Surakhany oil field and refinery in Baku was completed. By 1890, there were more than 25 pipelines totaling 286 km.
The Nobel Brothers were the first to introduce railway tanks (cisterns) for oil transportation, when the railway link between Baku and Tiflis was built in 1883. The situation with limited exporting options was solved by the construction of the Baku–Batum pipeline. After 1936 Batum renamed to Batumi. Construction began in 1897 and was completed 10 years later under supervision of Professor N. L. Szhukin.
Several oil crises jolted Russia around 1903, when constant strikes, violence and ethnic strife during Russian Revolution of 1905 led to fall in the oil production from the peak of 212,000 bbl/d (33,700 m3/d). The relative calm of the early 1910s was disrupted by World War I, when production of oil steadily decreased to reach the lowest level of just 65,000 bbl/d (10,300 m3/d) by 1918 and then dropped even more catastrophically by 1920. As a result of civil unrest no oil export was possible, oil storage facilities were damaged and wells were idle. The government of Democratic Republic of Azerbaijan was unable to restore the damage done to the oil industry during its time in office between 1918 and 1920.
Since 1918, more 5 mln ton of oil accumulated in Azerbaijan. After the occupation of Azerbaijan by Bolsheviks, all oil supplies were directed to Russia. All oil assets in the country were nationalized and Azneft State company was formed. In 1920, Alexander P. Serebrovsky, soon to be known as the "Soviet Rockefeller", was named head of Azneft.
In 1920, only 1800 qualified specialists worked in the Russian oil industry of which 1232 worked in Azerbaijan. The industry urgently needed technology, education and specialists. The scientific exchange started with the US, where visitors from Baku were seconded to oil-fields in Pennsylvania, Oklahoma, California, Texas, learned new methods of well deepening and exploitation. The Azerbaijan State Oil Academy was established in 1920 to train oil specialists.
By the late 1920s, production stabilized. In 1928–29, oil production in the USSR equaled to 13.5 mln t including Azerbaijan's 8.7 mln t. By 1940, the total production of Azerbaijan — 23.5 mln. t (475,000 bbl/d (75,500 m3/d)) — was a historical record not broken until 2005.
For the first time in Russia in 1925, Baku engineer M.M. Skvortsov constructed a device for the automatic movement of a chisel, which became known as the "automatic driller". By 1930, electrical logging tools were used in the wellbore by Schlumberger in the Surakhany oil field.
A new technology in drilling was introduced in Baku: electrical aggregates with exact control of the number of rotations came into widespread use. By the early 1930s, about third of well stock was operated with pumps using gas lift. In 1933, the first deviated well was drilled in the Bibi-Heybat field.
Other firsts were:
Between 1939 and 1940, when the Soviet Union was supplying oil to Nazi Germany, Britain and France planned a major strategic bombing offensive called Operation Pike to destroy the oil production facilities in Baku.
During that first year of the war, Azerbaijan produced 25.4 million tons of oil — a record. By the Decree of the Supreme Soviet of the USSR in February 1942, the commitment of more than 500 workers and employees of the oil industry of Azerbaijan was recognised by the giving of orders and medals of the USSR.
By the end of the year, so many engineers and oil workers had left for the war front that positions had to be filled by women. By the summer of 1942, more than 25,000 women or 33% of all the workers were working 18-hour shifts in the oil industries. At refineries and chemical plants, the percentage of women was even higher, estimated at 38%. By 1944, women's participation had grown to 60%. Veterans and retirees also returned to the oil fields to help. It was not uncommon for the workforce of small towns (i.e. Kıncıvo) to completely and rapidly convert toward dependence on the oil industry during this period.
Hitler was determined to capture the oil fields of the Caucasus, in particular Baku, as it would provide much needed oil-supplies for the German military which was suffering from blockades. The 1942 German offensive codenamed Case Blue saw a determined attempt to seize the oil fields in a large scale advance into the area. The plan was to attack Baku on September 25, 1942. Anticipating the upcoming victory, Hitler's generals presented him with a cake of the region, where the piece showing Baku was given to Hitler. But the Axis forces were surrounded and eventually defeated at Stalingrad forcing a retreat from the region. During World War II (1939-1945) - control of oil supply from Baku and the Middle East played a large role in the events of the war and the ultimate victory of the allies. Cutting off the oil supply considerably weakened Japan in the latter part of the Pacific war.
Oil production from the existing fields started to decline after World War II, as a result of catastrophic over-production and under-investment. However real potential for new discoveries was felt to be present offshore.
In the early 1930s, engineers proposed construction of offshore wells from timber piles, connected by a causeway. The first such well was laid in the open sea on the depth of 6 m to the east from filled Bibi-Heybet bay.
In 1945, oil engineers S.A. Orujev and Y. Safarov proposed a method of tubular collapsible constructions for offshore bases. This construction enabled quick installation under oil-rig at any season. In 1947, a group of oilmen developed the trestle method of linking development rigs and processing facilities. Average height of trestle above sea level is 5–7 m, and width of causeway was about 3.5 m. In 1948, construction of trestles and other causeways started on Pirallahi and Oil Rocks.
One of the striking examples for offshore oil deposit development is "Oily Rocks" — "Neft Dashlari". It is located to the south-east of Absheron Archipelago. In "Oily Rocks" sea depth ranges from 10 to 25 m, though part of the oil pool reaches 60 metres depth. Oil prospecting with geological survey, structure drilling, seismic prospecting and preliminary drilling started in 1945.
On August 24, 1949, the first offshore exploration well at Neft Dashlari (Oil Rocks) was spudded after the causeway was built. In November, at a depth of 1,000 metres, the well N1 tested oil with a rate of 700 bbl/d (110 m3/d). Neft Dashlari is referred to as "The Island of Seven Ships" because during construction of the bridge-head, disused ships were sunk to provide a solid base for causeways.
Intensive development began in 1950. Development from multiple drilling sites connected by trestle bridges also employed deviated holes. In 1953, to maintain the reservoir pressure, a water flood was applied. The field is still delivering about 15,000 bbl/d (2,400 m3/d) after 50 years of exploitation.
As a result of intensive geological and geophysical mapping during 1950–1960, Caspian oil-and-gas bearing structures were determined. The discoveries included such fields as Darwin Bank, Gum Deniz "Canub", "Gurgani-esea", "Chilov Island", "Hazi Aslanov", "Sangachalli-sea", "Duvanni-sea", "Bulla Island" and Peschany.
One of the largest offshore fields, "Sangachal-deniz", has been drilled several times since 1959, but success came only in 1965. "Duvanni-deniz field" discovery well was tested in May 1963 with an output of 700 bbl/d (110 m3/d). This field has about 700 million barrels (110,000,000 m3) of oil reserves.
Several large oil and gas fields were discovered and put into production between 1968 and 1975: Bahar (1968), Sangachali-Duvanni (1969), Bulla Deniz (1975).
Production reached its peak in 1967 with 414,000 bbl/d (65,800 m3/d) being produced and henceforth started to decline as Oily Rocks development was complete. Gas production increased steadily through until the 1990s until the decline of Bahar and Bulla gas fields ensued.
As a result of modern methods of exploration being employed, four new multireservoir fields were opened in the Caspian at a depth of 200 meters: Gunashli (1979), Chirag (1985), Azeri (1988) and Kapaz (1989). The Caspian was covered by extensive 2D seismic grid and 3D seismic was attempted, however unsuccessfully. The discovery of Azeri-Chirag-Guneshli field complex was the last but significant achievement by Azeri Soviet explorationists. The shallow portion of Guneshli, where water depth allowed oil development was put in production by 1989 and now delivers 120,000 bbl/d (19,000 m3/d).
In Chirag, drilling took place via semi-submersible drilling equipment at a depth of 200 meters — an offshore record for USSR. The Azeri-Chirag-Guneshli complex contains more than 16 billion barrels (2.5×109 m3) of oil in place.
After gaining independence Azerbaijan started to attract badly-needed foreign investment into the country.
The implementation of the 20 PSA contracts (requiring $60 billion investment) that have been concluded so far is an integral part of Azerbaijan's oil strategy. Azeri, Chirag and deep-water Gunashli (ACG)-International Contract No. 1 was signed by President Heydar Aliyev and the participating international companies on September 20, 1994, ratified by Parliament on December 2, and went into effect on December 12. Because of its potential reserves estimated at 6 billion barrels (950,000,000 m3) of oil, this project is often referred to as the "Contract of the Century". The projected investment for this project is $13 billion.
A few months later in 1995, a consortium was organized, known as the Azerbaijan International Operating Company (AIOC). Originally AIOC was composed of eleven major international companies: BP (UK), Amoco (U.S.), Lukoil (Russia), Pennzoil, (now Devon of U.S.), UNOCAL (U.S.), Statoil (Norway), McDermott (U.S.), Ramco (Scotland), TPAO (Turkey), Delta Nimir (now Amerada Hess of U.S.), and SOCAR (Azerbaijan).
Since then Exxon, now ExxonMobil (U.S.); ITOCHU (Japan); and INPEX (Japan) have joined the consortium and McDermott, Ramco and LUKoil have sold their shares. AIOC's first president was Terry Adams (UK) of British Petroleum (BP), the company that operates the offshore oil platforms and the onshore Sangachal Terminal.
However, the problem of how to deliver the oil to European markets existed. This problem was solved by the agreement for the construction of the Baku–Tbilisi–Ceyhan pipeline between Azerbaijan, Georgia and Turkey in 1998.
The Baku–Tbilisi–Ceyhan pipeline officially opened on July 13, 2006 and now transports crude oil 1,760 km (1,090 mi) from the Azeri–Chirag–Gunashli oil field on the Caspian Sea to the Mediterranean. The oil is pumped from the Sangachal Terminal near Baku, via Tbilisi the capital of Georgia, to Ceyhan, a port on the south-eastern Mediterranean coast of Turkey. It is the second-longest oil pipeline in the world. (The longest is the Druzhba pipeline from Russia to central Europe).
More than 1.9 million tons of Azerbaijani oil from the port of Ceyhan were exported to world markets in September 2017 (1 million 204 thousand 943 tons of this volume was made by the State Oil Fund of Azerbaijan). The volume of oil exported from the Ceyhan port amounted to 19 million 140 thousand 954 tons during January–September 2016.
2 million 268 thousand 672 tons of Azerbaijani oil were transported through the BTC main export pipeline in October 2017.
Entirely, 344 133 525 tons of Azerbaijani oil were transported via BTC pipeline from June 2006 till November 1, 2017.
The BTC pipeline is expected to make a major contribution to world energy supply with its more than 1 million barrels (160,000 m3) per day capacity. Thanks to this project, Turkey is also expected to earn about $300 million annually. Around 15,000 people were employed during pipeline construction, which cost $3 billion.
Shah Deniz gas field, discovered in 1999, is one of BP's largest gas field finds in recent decades. The Shah Deniz gas plant at Sangachal Terminal started up in 2007 and transformed Azerbaijan into a major gas producer. Stage 1 of Shah Deniz project is now complete and supplies Georgia and Turkey with 8 bcma of natural gas via the South Caucasus Pipeline. In December 2013, Stage 2 of the Shah Deniz Project has been approved and is being designed. The Shah Deniz Stage 2 hydrocarbons are planned to be transferred to Turkey and Europe through the TANAP and TAP export pipelines.
On September 9, 2011, French energy giant Total S.A. which has been operating in Azerbaijan since 1996, announced a major gas discovery in Absheron gas field offshore 100 km southeast of capital Baku. The field is estimated to have around 300 billion m³ of gas subsequently boosting Azerbaijan's gas reserves from 2.2 to 2.5 trillion m³.
Azerbaijani Government extended “Contract of Century” until 2050 with BP-led consortium (Azerbaijan International Operating Company) based on the amended contract for extension of Production Sharing Agreement (PSA) on development of Azeri–Chirag–Gunashli block of oil and gas fields by 2050. The new contract was signed on 14 September 2017 after a letter of intent for future development of the field was signed on 23 December 2016.
The group chief executive of BP, Bob Dudley stated: “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. Today’s contract is perhaps an even more important milestone in the history of Azerbaijan as it ensures that over the next 32 years we will continue to work together to unlock the long-term development potential of ACG through new investments, new technologies and new joint efforts to maximize recovery. In light of that, I think it is fair to call this the Contract of the New Century.”
The State Oil Fund of Azerbaijan was founded at the decree of former president Heydar Aliyev on 29 December 1999 and started to operate in 2001. It is a sovereign wealth fund where surplus revenues of oil industry is saved. The main purposes of the Fund are to maintain macroeconomic stability and through decreasing dependence on oil and gas revenues and to foster the development of non-oil sector, to save revenues for future generations and to finance principal projects. Approximate amount of the Fund's financial reserves is 34.7 billion dollars. Fund's assets may be used for strategically important infrastructure projects but not for government borrowing. The strict target asset allocation of the Fund decreases investment risks. Funds flow mainly from the State Oil Company of Azerbaijan.
Main projects financed by the Fund
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