Oil industry in Azerbaijan

Azerbaijan produces about 800,000 barrels of oil per day and 1 bcma of gas — a production that will grow to historical peak of 1.2 million bo/d by 2008 with an equally large amount of gas. Azerbaijan is one of the birthplaces of the oil industry, its history is linked to the fortunes of the petroleum. It is poised to become an important oil and gas producer once again.

Early history

There is evidence of petroleum used in trade as early as the third and fourth centuries. Information on production of oil in Apsheron peninsula have been reflected in the manuscripts of the most Arabic and Persian authors.

The following paragraph from the accounts of the famous traveler Marco Polo 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 neighbourhood no other oil is burnt but this.

Turkish scientist and traveler of the second part of the 17th century, Evliya Çelebi, reported that "Baku fortress was surrounded by 500 wells, from which white and black acid refined oil was produced".

The first detailed description of Baku oil industry was made by E. Kempfer, Secretary of Swedish Embassy to Persia (Iran) in 1683.

In his notes he confirms existence of discharge places of natural gas to the surface. Kempfer describes "flaming steppe" as follows: it "…constitutes peculiar and wonderful sight, for some of the fissure 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."

Many 18th and 19th century European accounts of the Caucasus refer to the Fire Temple of Baku at Surakhany, where the fire was fed by natural gas from a cavern beneath the site.

Pre-industrial period

In 1806 Russian empire occupied Baku Khanate and took a monopolistic control of oil production. Later exclusive rights to produce oil were given to individuals creating otkupchina lease system.

Oil extraction methods in those times were very primitive — mainly hand dug wells, drilled to very shallow depths. 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 3.76 thousand oil annually (about 64 bopd), and this oil was exported to Persia, where it was used in lighting as well as a source for 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 XIX 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 1846, under the supervision of state advisor V.N. Semyonov engineer Alekseev drilled a 21 m deep well using a primitive percussion drilling mechanism, in Bibi-Heybat to explore for oil, with positive results. More than a decade later, on August 27, 1859, "Colonel" Edwin L. Drake (1819-1880) struck oil on American soil for the first time, in Titusville, Pennsylvania.

A small petrochemical industry sprung around Baku, as demand for kerosene soared locally. Vasily Kokarev, 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.

First oil boom

In 1871 Mirzoyev, 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.

In the early 1870s the otkupschina system was abolished and oil lands were parcelled out under an 1872 auction to local and Russian-born investors. In Balakhani more than 149 parcels of land were sold with other parcels being in Surakhani, Bibi-Heybet and Binagady. This year marked the beginning of oil drilling on a massive scale. On 13th of June 1872 the largest oil gusher — "Vermishevsky" — blew on Balakhany field . Within three months, it had produced 90 million poods (averaging of oil per day). By 1878 Bibi-Heybat field had its first oil gusher.

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 mln rubles in Baku oil fields.

Oil production

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 was producing 35 percent of Baku's oil, and the Bibi-Heybat region produced 28 percent, followed by the Ramany and the Balakhany regions. Blowout oil gushers 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.

In oil industry of pre-revolutionary Russia foreign capital dominated the sector. On the eve of the World War One three companies ("Russian General Oil Company", "Royal Dutch Shell" and "Partnership of Nobel Brothers.") held 86% of all share capitals and controlled 60% of oil production. In 1903, 12 English companies with capital equaling to 60 mln. rubles were functioning in Baku region. In 1912, Anglo-Dutch firm "Shell" obtained 80% shares of Caspian-Black Sea Society "Mazut", which had belonged to Rothschild Banking-house. Other British firms purchased oil operations from Hajji Zeynalabdin Taghiyev.

In 1898, the Russian oil industry exceeded the U.S. oil production level. At that time, approximately 8 million tons were being produced (160 thousand barrels of oil per day). By 1901, Baku produced more than half of the world's oil (11 million tons or of oil per day), and 95 percent of all Russian oil. Approximately 1.2 million tons of Baku kerosene were also sold abroad.

Local oil barons and foreign oil companies

• Branobel Operating Company — largest single oil producer in Azerbaijan at 25,000 bop/d in 1914. Largest refiner and transporter of oil, as well as retailer of kerosene in Europe. Markets of France, Turkey, Greece and Germany were fully supplied by Nobel-produced kerosene and other products.
• De Rothschild Frères — trading and shipping in association with Shell. Possessed largest tanker fleet in the Caspian after Nobels.
• Royal Dutch Shell — Shell acted through following associated companies: the Caspian Black Sea Society, Caucasus, S.M. Shibayev, and Co. Shell-led consortium produced a fifth of Russian output up to 1914. Royal Dutch Shell's output from the Baku oil fields was 15,000 boppd in 1914.
• Hajji Zeynalabdin Taghiyev — oil, textiles and fishing. His firm was producing 1900 bopd in 1887 and occupied 4th place in refining business
• Aga Musa Nagiyev — oil and real estate. He was the second-largest oil producer and largest native producer
• Murtuza Mukhtarov — oil drilling services.
• Shamsi Asadullayev — oil shipping, largest native industrialist.
• James Vishau and Anglo-Russian Oil Company
• Trade House Benkendorf and Co — oil production.
• The Russian Oil General Corporation  — 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, Adamov and sonsMoscow-Caucasus Trade Company, Caspian Partnership, Russian Petroleum Society, Absheron Petroleum Society and others. This agglomeration produced more than 30% of Russian oil by 1916.

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, Kerboloy 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-Heybet.

Subsurface and drilling

By 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, Pirallahy 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 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.

• Transition from percussion cable-tool drilling to rotary drilling using electrical drive.
• Use of thread line casing pipe instead of valve strings during drilling.
• Replacement of wooden derricks with metal ones.
• The process of gaslift was tested for the first time in 1915 in Ramani field.
• The compression during transportation of oil and gas was introduced in 1911.

Storage and transportation

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 oil tanker in the world — a refurbished metal ship called "Zoroastr" — was built in 1878 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 the Rothschild Frères in 1898, possessed 13 tankers in Caspian Sea alone. During these years, native Azerbaijani ship-owners 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 totalling 286 km.

The Nobel Brothers were the first to introduce railway tanks (cisterns) for oil transportation, when the railway link between Baku and Tbilisi was built in 1883. The situation with limited exporting options was solved by the construction of the Baku-Batumi Oil Pipeline. Construction began in 1897 and was completed 10 years later under supervision of Professor N. L. Szhukin.

Revolution and Soviet Republic

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 bopd. 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 bopd 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, 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 bopd) — was a historical record not broken until 2005.

Advancement in drilling and logging practices

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 gaslift. In 1933, the first deviated well was drilled in the Bibi-Heybat field.

Other firsts were:

• 1936 saw the beginning of the industrial application of the multi-stepped turbo drill without a reducer which had been invented by Shumilov, Taghiyev and others.
• For the first time in the world, an oil well was drilled by the electro-drilling construction which was introduced by engineers Ostrovsky, Aleksandrov and others in Kala oil field

World War II

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.

Hitler was determined to capture the oil fields of the Caucasus including Baku as it was most important for survival of the German war machine.

Post-war period

Beginning of offshore exploration

The 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.

As far back as 1864, academician G.V. Abikh surveyed and reported structures present on the seabed of the Caspian. In the early 1930s, engineers proposed construction of offshore wells timber piles, connected by a causeway, and 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, 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.

Oily Rocks Saga

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. On November , at a depth of 1,000 metres, the well N1 tested oil with a rate of 700 bopd. 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 bopd after 50 years of exploitation.

Offshore exploration in the 1960s and 1970s

As a result of intensive geological and geophysical mapping during 1950-1960 main Caspian oil-and-gas bearing structures were determined. The discoveries included such fields as "Darwin Bank", "Canub", "Gurgani-sea", "island Jiloy", "Hazi Aslanov", "Sangachalli-sea", "Duvanni-sea", "Island Bullah", "Peschany", .

One of the largest offshore fields "Sangachal-deniz" was drilled several times since 1959, but success came only in 1965. "Duvanni-deniz field" discovery well was tested in May of 1963 with an output of 700 b/day. This field has about of oil reserves.

Several large 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 b/day being produced and henceforth started to decline as Oily Rocks development was complete. Gas production increased steadily through until 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 100,000 bopd.

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 of oil in place.

"Contract of the Century"

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. The first contract to be signed was Azeri-Chirag-Guneshli

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 in Parliament on December 2, and went into effect on December 12. Because of its potential reserves estimated at 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 comprised of 11 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 (U.S.), 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. McDermott, Ramco and LUKoil have since sold their shares. AIOC's first president was Terry Adams (UK) of British Petroleum (BP), the company which 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 among Azerbaijan, Georgia and Turkey in 1998.

The Baku-Tbilisi-Ceyhan pipeline was officially opened in July 13, 2006 and now transports crude oil 1,760 km (1,094 miles) from the Azeri-Chirag-Guneshli oil field in the Caspian Sea to the Mediterranean Sea. The oil is pumped from the Sangachal Terminal close to 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 being the Druzhba pipeline from Russia to central Europe).

The BTC pipeline is expected to make a major contribution to the development of world energy supply with its more than 1 million barrels per day capacity. Thanks to this project Turkey is also expected to earn about $300 million annually. Around 15,000 people were employed during the construction of the pipeline which cost $3 billion

Shah Deniz field is the largest gas field discovered by BP for many years in 1999. The Shah Deniz gas plant at Sangachal Termanal started up in 2007 and made Azerbaijan into a major gas producer. Stage 1 of Shah Deniz project is now complete and supplies Europe with 8 bcma of natural gas via the South Caucasus Pipeline. Stage 2 of the Shah Deniz Project has been approved and is being designed.

References

• Free Political Journal
• Azerbaijan International Sherman Oaks, CA (U.S.), 1993-2003. Search at AZER.com.
• Azerbaijan Oil Industry (magazine). Baku, 1995-2002.
• Oil Industry (magazine). Moscow, 1995-2002.
• Territory of Neftegas (magazine). Moscow, 2001-2002.

Books

1. Balayev, S. G., Oil of the Country of Eternal Fire. Baku: Azernashir Publishing House, 1969.
2. Lisichkin, S.M., Outstanding People of Native Oil Science and Technique. Moscow: Nedra Publishing House, 1967.
3. Academy of Sciences of Azerbaijan SSR. Edited by H.B. Abdullayev. Baku: Elm Publishing House,1976.
4. Mir-Babayev, M.F., “Brief chronology of the history of Azerbaijan’s oil business”. Baku, “Sabah”, 2004, 200 s. ISBN 5-86106-083-5
5. Mir-Babayev, M.F., "Absheron Oil: The Development of Oil Business in Azerbaijan" in Chemistry and Technology of Fuels and Oils, Moscow, No. 3 (1993), pp. 36-37.
6. Mir-Babayev, M.F., "Azerbaijan's Oil History: A Chronology Leading Up to the Soviet Era-Azerbaijan International Magazine, Sherman Oaks, CA (US) AI 10.2 (Summer 2002), pp. 34–41. Search at AZER.com

Notes