ARA SANJIAN, Phd Associate, Armenian Center for National and International Studies Professor, Haigazian University, Beirut

THE ARMENIAN CENTER FOR NATIONAL AND INTERNATIONAL STUDIES THE NEGOTIATION OF “THE CONTRACT OF THE CENTURY” AND THE POLITICAL BACKGROUND TO THE REVIVAL OF AZERBAIJAN’S OIL INDUSTRY ARA SANJIAN, PhD Associate, Armenian Center for National and International Studies Professor, Haigazian University, Beirut © 1997, Armenian Center for National and International Studies This publication may not be reproduced or published, in whole or in part, without the express written consent of the Center. The views of the authors do not necessarily coincide with those of the Center. pbeat assessments by renowned western politicians have recently become commonplace regarding the future of the rejuvenated oil industry in the newly independent former Soviet republic of Azerbaijan, a relatively small country on the western shores of the U Caspian Sea with a population of about 8 million. Most oil industry analysts now tend to agree with both the view expressed by former British Energy Minister Lord Fraser that Azerbaijan’s “oil-rich Caspian shelf and new oil fields will certainly become one of the main sources of world oil production in the 21st century,”1 and that of former United States Secretary of Defense Richard Cheney, for whom the Caspian region as a whole “may be the first world-class oil province to open since the North Sea.”2 Out of an estimated 1,000 billion barrels (approximately 170 billion tons) of proven oil reserves in the world, one recent estimate puts the total Caspian share at some 27.5 billion barrels (4.6 billion tons).3 Azerbaijan’s total oil reserves were estimated in another survey carried out in 1995 at around 4 billion barrels. In comparison, countries of the Organization of Petroleum Exporting Countries (OPEC) are believed to possess about 700 billion barrels of reserves, with Saudi Arabia alone having around 260 billion barrels of oil, and Iraq some 110 billion.4 Proven reserves are usually determined, however, relative to available technology and economic conditions, and their level is constantly revised upward as the world economy grows and new and more sophisticated production techniques are introduced. Additionally, since most of Azerbaijan’s oil is located in offshore fields which have yet to be explored, some industry experts suggest that the country’s own oil reserves may eventually run as high as Kuwait’s, those currently estimated at around 95 billion barrels of oil.5 If true, this estimate will put Azerbaijan’s reserves well ahead of those in many well-known oil producing countries such as Iran, Venezuela, the United Arab Emirates, Mexico, the United States of America, Libya, Nigeria, and Algeria. Azerbaijan’s reserves gain added international importance in light of the recent projections made about probable changes in the landscape of the world’s oil production distribution early next century. According to oil policy expert Hooshang Amirahmadi, “the trends in growth rates of possible oil substitutes indicate that by 2010, the share of oil in energy generation will decline, but the amount of decline will not be so significant as to bring a major change in oil demand,” with world consumption likely hovering around 85 million barrels per day (b/d), or 4.3 billion tons annually.6 While member states of OPEC–particularly those in the Persian/Arab Gulf–will collectively continue to remain the world’s largest suppliers ahead of Russia with her vast Siberian oil fields, production in the Gulf of Mexico is already experiencing a gradual yet certain decline despite many costly interventions. Norway’s North Sea fields will maintain production for the next few years, but they too will eventually experience decline.7 In light of the expected influx of western technology and investment in the next few years, however, Turkey’s state oil company Botas estimates that the Caspian can become by the year 2010 the world’s third largest oil-producing region, with an estimated annual production of 120 million tons.8 Azerbaijan’s own onshore and offshore output is currently projected by western experts to peak at around 1.15 million b/d (approximately 55 million tons annually) around 2012.9 This will certainly not represent a negligible amount, particularly in light of the expressed desire of the western industrial countries to diversify their oil sources and reduce their future energy dependence on Gulf states. U.S. national security adviser Sandy Berger described the Caspian Sea region in March, 1997, as “extraordinarily important to our future... I think we have a very strong geostrategic, as well as economic, interest in developing our relationships in that area of the world.”10 2 Historical Beginnings The history of Azerbaijan, and in particular that of its current capital, Baku, has always been intimately connected with oil, the country’s principal natural resource. Indeed, throughout Azerbaijan’s history oil deposits have lain so close to the surface in Baku and the nearby Absheron Peninsula that crude has regularly leaked out of the ground on its own, resulting in significant oil production from hand-dug pits which date back to ancient times and long precede the introduction of drilled wells. The first reliable information about oil extraction on the Absheron Peninsula appears in the seventh and eighth centuries A.D. Oil was initially extracted by very primitive ways. Until the ninth century it was simply collected on the surface with the help of cloth and transported by caravan or by sea in seal skins obtained from the Caspian. Later wells were sunk and the oil was scooped out in leather bags. A device somewhat like a multi-dipper crane was invented to facilitate the process. Shelters, sometimes made of stone, were constructed over the wells to make work possible in any weather. The extracted oil–medieval Arab sources mention that it was yellow, black, green, or even white in color–was used for lighting, heating, lubrication, burning lime, making varnish and lacquer, cleaning clothes and removing stains. It also served as paint thinner and even as medicine. Some oil was utilized in thickened form for roof insulation, and until the invention of fire-arms in the sixteenth century oil was widely used in warfare. Refining and relatively advanced drilling techniques became known after the thirteenth century, and in the fifteenth century 200 mule loads of oil were reportedly daily exported from the pits near Baku. In the ensuing centuries a modest yet profitable trade in oil made Baku an important link between Persia and Russia.11 The Oil Boom under the Tsars The systematic exploitation of the natural riches of the Caspian shore began only after the Russian occupation of the area in 1806. The first paraffin plant in the world was built in Baku in 1823, followed by the drilling of the world’s first deep bore-hole in 1847, the erection of an oil refinery in 1859, and the construction of a kerosene plant in 1863. The Russian Imperial government, which possessed monopolies in oil extraction, refining, and trade, initially leased the Baku oil fields for four-year spans to selected entrepreneurs, giving special treatment to Armenian capitalists. This system was abolished in 1872, however, because it gave incentive to oil trade rather than to extraction. The government then introduced lease by tender, hoping that with the security of their holdings assured oilmen would invest more money and care in their operations, thereby generating long-term benefits. Although local Armenian businessmen were challenged by this new system, their dominance in the oil industry was only slightly affected. Together with Russians they then became some of the major buyers of oil land. Few local Muslims succeeded in doing the same. Initially the latter owned none of the companies that produced over 165,000 tons of oil annually; Muslims were more numerous in small-scale extraction activity and in refining.12 The arrival in 1873 of Robert and later that of Ludwig Nobel, the brothers of Alfred Nobel–the inventor of dynamite and founder of the Nobel prizes–also contributed to the expansion of Baku’s oil industry. They established the Nobel Brothers Oil Extracting Partnership, which soon became one of the world’s major oil companies. The Nobel brothers introduced new technology and 3 business methods in Baku. They pioneered the use of railway tanks, launched oil tankers in the Caspian, and constructed a pipeline to reduce drastically the expenses connected with transport. They also invented several kinds of black mineral oil for heating ship engines, and used iron reservoirs for oil storage. The Nobels were followed to Baku by the French branch of the famous Rothschild family and the British company, Shell. By the end of the 1880s these three companies together extracted more than half of the oil then harvested in Baku, and marketed two-thirds of the total amount of extracted oil as well.13 Despite the dominance of these giants, the rapid growth of the oil industry after 1870 ensured that many others could likewise turn a profit. Local oilmen copied Nobels’ methods, and after 1883 the latters’ share of the market shrank. By 1900, Baku had more than 3,000 oil wells, of which 2,000 were producing oil at industrial levels. The city’s oil assumed international significance and played a leading role in Russia’s industrial expansion. Output rose from approximately 715,000 tons in 1872, to around 10.8 million tons in 1891, and peaked out at approximately 12 million tons in 1901. That year Russia was the world’s leading producer of oil, responsible for 47% of the world’s total output, most of this extracted from the Baku region.14 According to historian Ronald G. Suny, within a few short decades the development of the oil industry transformed Baku into both a capitalist city located in a feudal land, and a proletarian oasis surrounded by a peasant population.

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