History of development of oil industry

Azerbaijan and the Baku oil attracted the attention of the world companies and businessmen
 in the second half of the 19th and early 20th centuries
 and a number of foreign companies successfully operated there and ensured the production of oil.
Heydar Aliyev

Azerbaijan – The Cradle of World Oil

Azerbaijan is the historical homeland of oil and the first country in the world where oil was extracted using industrial methods. In the late 19th and early 20th centuries, Baku, with its oil wealth, attracted global companies and entrepreneurs, and many foreign firms operated successfully here.

As early as the Middle Ages, Arab, European, and Turkish historians and travelers wrote about Azerbaijani oil, particularly mentioning the Absheron Peninsula and its export to different countries. Ahmad al-Baladhuri, Abu Ishaq al-Istakhri, and Ali al-Masudi wrote about Absheron’s “white” and “black” oil, while Marco Polo noted that Baku oil was transported to Eastern countries. In the 17th century, Adam Olearius and Evliya Çelebi described the Baku oil fields and its export to other lands. An inscription found in Balakhani states that in 1594, a skilled worker named Allahyar Mammad Nuroghlu drilled a 35-meter oil well. By the 16th century, there were nearly 500 oil wells around Baku. Engelbert Kaempfer wrote in 1683 that Absheron oil was being transported to Iran and the Caucasus. In 1803, Gasimbey Mansurbayov drilled the first offshore wells along the Bibiheybat coast.

The Beginning of Industrial Oil Production

In 1846, for the first time in the world, oil was extracted industrially from a 21-meter-deep well in the Bibiheybat field, laying the foundation for Azerbaijan’s oil industry. In 1859, the first oil refining facility was built in Baku, and in 1863, at the kerosene plant constructed by Javad Melikov, cooling systems were used for the first time in the world. From the second half of the 19th century onward, oil extraction increased due to the exploitation of fields in Binagadi, Pirallahi, and Surakhani. Hundreds of refining and trading companies were established, the national bourgeoisie emerged, and Baku became an industrial center. In 1871, industrial development of the Balakhani–Sabunchu–Ramana field on the Absheron Peninsula began. In 1872, two laws were adopted to regulate oil industry relations: “On Excise Tax for Oil Fields and Oil Products,” and “On the Sale of Oil Lands under Lease to Private Individuals through Auctions.” At the first auction on December 31, 1872, 15 fields in Balakhani and 2 in Bibiheybat were sold. By the end of the 19th century, 49 of the 167 oil entrepreneurs operating in the industry were Azerbaijani. Prominent figures such as Haji Zeynalabdin Taghiyev, Isa bey Hajinski, Murtuza Mukhtarov, Shamsi Asadullayev, and Seyid Mirbabayev played major roles in developing the oil sector. In 1874, the first joint-stock company — “Baku Oil Society” — was established, and in 1876, the Nobel Brothers Oil Company was founded. On their initiative, oil fields, refineries, the first oil tanker on the Caspian Sea, and railways were built. In 1878, the first oil pipeline between Balakhani and the Baku refinery was laid, and in 1883, the Baku–Batumi railway was put into operation. During this period, Rothschild’s “Caspian and Black Sea Oil Company” began operating and controlled over 40% of Baku’s oil production at the beginning of the 20th century. By 1901, Azerbaijan produced 11 million tons of oil, more than half of the world’s total at the time. Between 1897 and 1907, the 833-kilometer Baku–Batumi oil pipeline was constructed. On the eve of nationalization, Azerbaijan had 109 joint-stock companies and hundreds of production and refining enterprises.

Nationalization of the Oil Industry and the “Oil Rocks”

In 1921, oil production dropped to 2.4 million tons, but exploration and development of new fields like Qala and Buzovna–Mashtaga helped to restore output. By 1941, production reached 23.6 million tons, accounting for 76% of the total Soviet output. During World War II, due to the relocation of equipment and specialists to eastern regions of the USSR, production fell to 11.1 million tons. On November 7, 1949, the first offshore oil well in the world was drilled at Oil Rocks (Neft Daşları) at a depth of 942 meters, producing 100 tons of oil per day and marking the beginning of offshore oil extraction. The field’s first geologist was Agha Gurban Aliyev. The commissioning of the Oil Rocks field in 1950 launched the era of offshore oil development in Azerbaijan, lasting until 1969. During this period, large-scale geological surveys were conducted, and offshore fields such as Gum Deniz, Sangachal-Divanni, Bahar, and Bulla Deniz were put into operation. Innovative technologies were applied for marine drilling and hydrotechnical structures. Onshore fields like Kurovdag, Mishovdag, and Garadagh were also developed. At Oil Rocks, the world’s first pier-type open-sea platform was constructed, significantly reducing costs and increasing productivity.

The Era of High Development in the Oil and Gas Industry (1969–1980)

From 1969, Azerbaijan’s oil and gas industry entered a stage of rapid development, coinciding with Heydar Aliyev’s first leadership period. In 1970, the Khazardenizneft Production Association was established, entrusting Azerbaijani oilmen with exploration, drilling, and production throughout the Caspian sector. At Heydar Aliyev’s initiative, self-elevating Khazar-type and semi-submersible Shelf-type drilling rigs were introduced, along with heavy-lift and pipe-laying vessels. The giant crane ship “Azerbaijan” was also commissioned. As a result, new oil and gas fields were discovered at depths of up to 200 meters, and reserves multiplied. By 1975, oil production reached 27.1 million tons, and during the 1980s, large fields such as Gunashli, Chirag, and Azeri were discovered. With Heydar Aliyev’s efforts, 450 million USD was allocated for the construction of the Baku Deepwater Jackets Factory, establishing a strategic industrial base.

Implementation of Azerbaijan’s Oil Strategy

In 1994, under the leadership of Heydar Aliyev, Azerbaijan’s national oil strategy was developed. Its main goal was to extract the country’s rich oil and gas reserves using modern technologies, export them to international markets, and channel revenues into national development. Due to limited financial and technical resources, Azerbaijan needed foreign investment, experience, and advanced technologies to operate its Caspian fields. On September 20, 1994, the “Contract of the Century” — a Production Sharing Agreement (PSA) — was signed between SOCAR and a consortium of international oil companies known as the Azerbaijan International Operating Company (AIOC). This marked the official beginning of Azerbaijan’s oil strategy. To transport oil to Western markets, the Baku–Tbilisi–Supsa and later the Baku–Tbilisi–Ceyhan (BTC) pipelines were initiated. Heydar Aliyev proved at the international level that BTC was the only viable project from economic, political, and independence perspectives, laying a solid foundation for Azerbaijan’s long-term growth.

Under President Ilham Aliyev’s leadership, the BTC project was completed: The Azerbaijan section was filled with oil in May 2005, The Georgia section in October 2005, and On May 28, 2006, Azerbaijani oil reached the Ceyhan terminal in Turkey. The BTC pipeline was officially commissioned on July 13, 2006, at a ceremony attended by the presidents of all three countries. Ilham Aliyev stated: “We all remember that this great transnational project began in 1994 with the signing of the ‘Contract of the Century’ in Baku. Despite the challenges and pressures of that difficult time, the determination and foresight of Azerbaijan’s leadership made it possible, after which all the issues were resolved. New pipelines were built, new infrastructure was created, and our country’s rich oil and gas resources now reach global markets.” The forces that did not want the establishment of Baku-Tbilisi-Ceyhan oil pipeline put pressure. However, despite all this, the determination and courage of the Azerbaijan`s leadership, and of our great leader Heydar Aliyev and the support of the Azerbaijani people allowed us to put rich oil and gas fields into operation and today our natural resources are being exported to the world markets."

The modern stage of development of the oil industry

On September 14, 2017, an amended and restated agreement was signed for the joint development and production sharing of the Azeri, Chirag, and Gunashli Deepwater Fields in the Azerbaijani sector of the Caspian Sea. The document was signed by representatives of the Government of Azerbaijan, SOCAR, and companies including BP, Chevron, INPEX, Statoil, ExxonMobil, TP, ITOCHU, and ONGC Videsh. The new agreement extended the ACG field development until 2049, increased SOCAR’s stake to 25%, granted Azerbaijan a 3.6 billion USD bonus, and ensured that the country would receive 75% of future profit oil. Within this framework, the Azeri Central East (ACE) project was approved in 2019 with an investment of 6 billion USD — marking the next phase of ACG field development. Over its operational life, the project is expected to produce up to 300 million barrels of oil. In April 2024, oil production officially began at the ACE platform, marking another milestone in Azerbaijan’s modern oil history.