The Independent Azerbaijan's Oil Policy


by Dr. Nasib Nassibli (Nasibzade),

with the participation of Dr. Shahyar Daneshgar


Lecture at the University of California at Berkeley, April 15, 1998.

Article from the forthcoming "Oil and Geopolitics in the Caucasus and Central Asia" book.


During the Soviet era, the name "Azerbaijan" conjured up an exotica terra in the mind of the western readers. Towards the end of the Soviet Union, the term Azerbaijan was mentioned frequently in association with the problems in Karabagh. Recently, the Caspian oil headlines gained popularity for the term Azerbaijan. This demonstrates the very important events in the current history of Azerbaijan.

Oil as a factor, once again, constituted one of the significant leading components in the political and economical life of Azerbaijan. In the early years of Azerbaijan's independence it became apparent that the claim of the existenc e of large hydrocarbon reserves, what the Soviets considered to be anything but rumors, turned out to be real. Consequently, the talks and agreements began with the world's largest petroleum companies. Soon it was realized that to be able to utilize the n ew oil deposits on the Caspian offshore of Azerbaijan, one needed to have a large amount of capital and the most advanced technology.

A number of national problems such as strengthening its independence, preserving Azerbaijan's territorial integrity, and the creation of democracy and the well being of its population, began to be connected with the oil factor. How realistic is such approach? In terms of national security questions, oil as a factor has played a negative role in the past of Azerbaijan. What will be the outcome of the second oil boom?


Role of Oil in the History of Azerbaijan


The city of Baku and the Absheron Peninsula have been known to the world for their oil from early historic time to the present. Oil was used as fuel for living. It had medical application, and for its other extra-unusual characteris tics, it was also used for religious practices such as fire worshipping. In the ethimology "the protector of the fire" also was used widely as the version of the meaning of "Azerbaijan". The flame in the shrine in the Absheron known as "Ateshgah"(Fireplac e) is still active and attracts both pilgrims and tourists to it.

The first well was drilled in Absheron in 1848. Eleven years later, in America, the first oil well was drilled in Pennsylvania. The first oil refinery was also constructed in Baku. In the early 1870s the drilling of oil wells was wi despread all over Azerbaijan. That time engineering and technology had improved and was governed by new legislation. This signaled an era of industrial development, which spread through all of Russia. In 1878 an oil pipeline was built connecting the Balak hani oilfields with the oil refinery in Baku. It was 12 km of pipes 75 mm in diameter. By the end of 1898 there were 230 km of pipes with an annual throughput of one million tons of oil. During the 1896-1906, the Baku-Batum oil pipeline was laid out and t his was only 833 kilometers long. The 200-millimeter pipes in diameter made the transportation of 900,000 tons of petroleum possible.

Towards the end of the 19th century, Baku became the center of attention as far as the world's industrial capital/ investment was concerned. In 1870-1880's the famous Nobel brothers and Rothschilds financed Baku oil industry. In 189 0s, the Rothschilds received 42% at the export of Baku oil. The famous Shell Company and Nobel brothers played also an equal role as far as Baku oil industry was concerned. Russian and Armenian capital played a considerable role in Baku oil fortune too. D ue to the Russian discriminatory policy, native capital was put in a disadvantageous place from participating in advanced oil industry existing in Baku at that time. Nevertheless, the oil industry was shaping the economic basis of the native bourgeoisie a nd the national identity.

Baku oil was the main oil provider of Imperial Russia. Without it Russian industry would have not been able to function. Baku was providing 97.7% of Russian oil in 1890. At this time oil production in Baku was 426 million Russian po und whereas America's production was 400 million pound. In 1901 Baku shared approximately half of the world's production.

However, oil was the main calamity for a colonial Azerbaijan. Russia had no intention of letting Azerbaijan free. In the beginning of April 1920, the independent Azerbaijan Democratic Republic hardly had a chance to celebrate its se cond anniversary when Lenin, the leader of Russian Bolsheviks, predicting that "the Bolshevik revolution is certain" appointed Mr. Serebrovski as an emissary to organize the oil industry in Azerbaijan. He gave an order to the Red Army gathering in the Nor th Caucasus to occupy Baku. Later on, after the so-called "April revolution" in Baku Lenin wrote: "We all know that our industries stood idle because of the lack of fuel. However, now, the proletariat of Baku toppled the Azerbaijani government and is in c harge of the running the government. This means that now we own the basis of economy that is capable of supporting our industries."

During the Soviet era, Baku oil revenues were taking away from the budget of Azerbaijan and included to the central Soviet budget. Dr. Narimanov, the leader of the Azerbaijan Soviet Republic, requested from Lenin that 4% of the Baku oil revenues be allowed to use in Azerbaijan. Later on he complained in one of his letters (to Lenin) that the price of kerosene is much more expensive in Ganja than Tbilisi.

In the following years with the discovery of so called "Second Baku", "Third Baku" and various oil fields in other parts of the Soviet Union, Azerbaijan Republic's oil production fell after being exploited for a long time. In 1940 A zerbaijan was providing 71.55% of the entire Soviet oil demands whereas this figure fell to 39.15%, 12.0%, 5,7%, 2.4% in 1950, 1960, 1970, and 1980 respectively. Since the main portion of the oil remained far underground, attention was given to excavate o il in the Azerbaijan section of the Caspian Sea. The oil production was 21 million tons between the years of 1964- 1968. In the following years, the annual yield was almost 13 million tons and even it went down. On the eve of independence, oil production was 9 million tons annually.

In 1971, it was proudly announced that Baku oil production in the Soviet period exceeded one billion tons and these sad statistics were celebrated. Despite this huge amount of oil, Azerbaijan's share was nothing but lack of progress , poverty, and ecological catastrophe. To find out about how serious a degree of catastrophe, it suffices to take an aerial glimpse at the Absheron Peninsula with its puddles before reaching Baku.


New Oil Boom


The relaxation of foreign economic relations that took place as a result of the Gorbachov's Perostroyka policy created a favorable condition for foreign companies, which were interested in Azerbaijan oil. In the late 1980s, the newl y untapped rich Chiraq and Azeri oil deposits, located in the Caspian Sea beds, was the one that initially received the foreign oil companies' attention. In January of 1991, by one decree, the Azerbaijan government announced a tender for the joint explora tion of these rich fields. British Petroleum (together with Statoil), Amoco, and Unocal participated at this tender. Amoco came out as the winner of the tender.

According the decision of the Azerbaijan government, under the leadership of Amoco a consortium was formed to exploit the "Azeri" oil field's deposits. Unocal, BP/Statoil. McDermott, Ramco were participants in this consortium. In Oc tober of 1992 the research concerning the formulation of the technico-economical feasibilities were indeed completed. The Azerbaijan government began to exploit the oil factor in resolving the Karabagh dilemma.

At this time, the country witnessed a change in its government. Abulfez Elchibey, the leader of the largest political organization of Azerbaijan, Popular Front, was elected as the President of the Republic of Azerbaijan. Elchibey's government began actively getting foreign firms interested in working together in Azerbaijan oil industries. Moreover, in May 1993, six agreements were signed regarding joint venture in the area of excavating oil deposits. In June a declaration was signed in regard to the "unitarization" of the oil deposits. In June of the very same year i.e. 1993, talks about the oil contracts and the possibility of having them signed were planned in London. The President of the Republic of Azerbaijan was also to attend these meetings.

The expansionist circles of Russia who could not tolerate losing their influence on Azerbaijan engineered revolt in June of 1993 inside the young republic. Elchibey's national and democratic government had to evacuate its post.

Haydar Aliyev, the new leader of Azerbaijan halted all of the oil negotiations. Consequently, the State Oil Company of Azerbaijan (Socar) was kept away from the renewed negotiations. This time, the negotiations were pursued by exper t compatriots living outside the country.

In the fall of 1993 Haydar Aliyev granted a few concessions to Russia. For instance, he granted a 10% ownership right to the Russian oil company Lukoil in the forthcoming contract.

Once again negotiations with foreign oil companies began in the beginning of 1994. After the appointment of the President's son, Ilham Aliyev, as the first deputy of the chairman of the Socar, the responsibility for negotiations was restituted to the State Oil Company of Azerbaijan.

The endorsement of the contract brought the months of long negotiations to an end on 20th of September. The press entitled this contract as "the Contract of the Century". 7.4 billion US dollars were earmarked for investment. 511 mil lion tons of oil is expecting to be produced. The contract is based on the "production sharing" principals. In this contract the share of Socar is 10%, BP-17%, Amoco-17%, Lukoil-10%, Pennzoil- 9.8%, Unocal- 9.5%, Statoil-8.6%, Itochu-2.4%, Ramco- 6.7%, De lta- 1.7% .

Following this contract, in 1995 LukAgip, Pennziol, Lukoil, Socar, Agip, signed the second contract, known as the "Karabagh" oil field, worth 2 billion dollars.

In 1996 BP/Statoil, Socar, Lukoil, Elf, Niok, Tpao, concluded a third contract valued at 3-4 billion dollars pertaining to the "Shah Deniz" oil field. 1996 witnessed the conclusion of the fourth contract known as "Dan Ulduzu" and "Ashrafi" in which Amoco, Unocal, Socar, Itochu, Delta were partners and it was worth 2 billion dollars.

The fifth contract, known as "Lenkeran Deniz" and "Talish Deniz", worth 2 billion dollars, was signed by Elf, Socar, and Total. This policy continued in the following years. Again a few new contracts were signed. President Aliy ev's official visit to the USA in the summer of 1997 brought three more contracts that envisage 10 billion dollars investments. According to the official information, the total fundraising capital, which was sought for the development of the Azerbaijan oi l industry, has exceeded 30 billion US dollars.

Today the actual figure concerning the quantity of the Azerbaijan oil deposits vary. Kemp and Harvey's report speak of 8.8 billion barrels. Others, such as Shoumikin estimate 150.42 billion tons of crude oil. According to the Americ an Department of Energy, out of the 200 billion barrels estimated oil in the Caspian basin, one fourth is Azerbaijan's share. According to other sources, the Caspian basin is capable to produce 178 billion barrels valued at 4 trillion US dollars (AP, Feb 25, 1998).

Based on the expert calculations, if everything goes ahead as planned in these contracts, Azerbaijan will be able to produce 40 million tons of oil each year until 2015. To give you an example for comparison, Azerbaijan produces ap proximately 9 million tons of oil at the present time.

Azerbaijan will gain huge income from the exports of oil after 2001. This year US$ 1 billion is expected to be included in the Azerbaijan budget, in 2005 US$ 5 billion. According to the statement of the Prime Minister of Azerbaijan, given in Washington in May 1997, Azerbaijan income from oil during the 25 years will be US$210 billion. Only the first contract will grant to the Azerbaijan budget 80 billion US dollars.

In November 1997, the first and second wells of the first contract began to give products. Consequently, both the local and world media announced the launching of the second oil boom in Azerbaijan.


Pipeline Issue and Geopolitical Obstacles


Despite the preliminary exciting news concerning the oil boom in Azerbaijan, there are a number of obstacles that need to be overcome before the oil can be delivered to the world market. These obstacles are related to its compli cated geopolitical location. Azerbaijan is surrounded by the not-so-friendly countries, such as Russia, Iran, and Armenia. In the pipeline issue Azerbaijan has to foresee different factors in the same time. Because the pipeline issue is more than just eco nomic problem; rather this has a geopolitical nature.

In October of 1995, according to the proportion of the geopolitical powers, the Azerbaijan government and the leaders of the first contract reached an agreement to transport the first so-called "early" oil production via two routes. After overhauling the Baku-Novorossiysk pipeline, which cost some 50 million dollars, its capability, has to rise 5 million tons each year. This route began to function at the end of the 1997. The Russian government insisted on its proposal to widen this route. The proposal would have expanded its transportation capacity to 17 million tons annually and such a plan would have cost $2.2 billion. Russia's insistence of the acceptance of this proposal, in addition to its economic interest, is safeguarding it s geopolitical interests. By guaranteeing a supervisory role in the transportation of the Azerbaijan and Central Asian oil, the Russian government aims to keep these countries under its orbit of influence.

The other portion of the early oil production (7 million tons) is supposed to be exported via Baku-Supsa line. Its preliminary construction cost is estimated to be around 250 million dollars. The independence and well being of Georg ia and the entire region's success of getting away from the Russian influence depends on this line. By the end of the 1998 it should be ready for work.

The question of the main oil pipelines and their route are one of the hottest issues of the time. The issue of the direction of the pipeline is supposed to be settled by October 1998. Various power centers are trying to settle the q uestion of the oil pipelines according to their own geopolitical interests.

Azerbaijan, Turkey, USA, Kazakstan, partly Turkmenistan and Georgia are in favor of the Baku-Ceyhan pipeline. The Baku-Ceyhan line stretches almost 1900 kilometers and its construction amounts to US$ 2.5 billion. The fact that the c onstruction of this line has high costs, some of the American and European oil companies are reluctant, they oppose this pipeline. They lean towards the Iranian pipeline scenario that is estimated to cost between 50 million to 1 billion dollars. In this r egard it is worth mentioning that oil companies have been exercising pressure on Clinton Administration concerning the US-Iran relationship.

Other proposals, such as a Turkmen-Afghan-Pakistani pipeline route, have been submitted for study too.

Similar to the early oil pipelines a multi-direction pipeline is suggested by some oil companies.


Is Caspian a Sea or a Lake?


At the dawn of the approval of the "Contract of the Century" the Russian Foreign Ministry began to demonstrate its deep disapproval. The irony is that during the ceremony of signing-up the contract, a member of the Russian governmen t, Minister of Fuel and Energy witnessed to the event. In addition, the Lukoil firm which is controlled by the Russian government participated as a full consortium member with a 10% membership right. The Russian government took two positions in this regar d. Intending to pressure Azerbaijan, the Russian political and armed forces circles rejected the idea of Caspian being either lake or sea. Instead they argued that Caspian is a special case, i.e. it is a "unique water reservoir". While Russia was dragging her feet on the issue of the

Caspian, she exercised a severe pressure on Azerbaijan. In February of 1998 during official talks with Kazakistan, Russia finally agreed to accept the idea of dividing Caspian to different sections.

Today only Iran insists that the Caspian belong to everyone. However, Iran's position will not have major influence on the future negotiations. It seems that the cart used for a pressure to Azerbaijan, Kazakstan, Georgia, and partly to Turkmenistan is beaten.


Role of Oil in the Future of Azerbaijan


For some years the ways of using the oil revenues is debating in Azerbaijan. Compative statements such as Azerbaijan being a "second Kuwait" are still heard in lectures and conferences. The West press particularly is responsible for spreading such kind of populist news.

Serious articles on the issue of how the Azerbaijan oil revenues should be spent are in frequent. The truth is that if Azerbaijan asks itself how the oil revenues should be spent, like Nigeria or Norway, this is not a rhetoric quest ion.

The history of the oil exporting countries demonstrates that it is true that the sale of their oil brings in large revenues but the money does not guarantee prosperity and happiness. Contrary, oil as a factor can slow down the progr ess of a country's socio-political development and in some cases even it can slow down its economic growth. For instance Iran is a good case for study. Had it not been for the oil revenues, neither the Shah nor the present theocratic regimes could have st ayed in power. Neighboring Turkey provides us with a good comparison scenario. The country has no oil resources. Nevertheless, Turkey's current political and economical system stipulates a growth of 7-8%, and sometimes even more.

Oil, in addition to the role that it plays in internal economic conditions, at times can become a real socio-political dilemma in a country.




The Azerbaijan and Central Asian oil are changing the geopolitics of the region at an unexpected rate of speed and they will continue doing so in the future. Today these fundamental changes are taking place in front of our eyes.

The South Caucasus and the Central Asian regions are leaving the political orbits which used be controlled by Russia and are coming under the influence of the West.

Oil as a factor is bringing peace and stability to the region. Oil, as a factor is becoming a strong catalyst in solving the ethnic strife in the region.

The restoration of the ancient "Silk Road" between East and West enables the global changes in the Eurasia; the emergence of the Central Asian Union and first steps of GUAM are the indices of a new geopolitical situation in this regio n.

As far as the future of Azerbaijan is concerned, great opportunities will be available. But the realization of these opportunities will be depend mostly on the maturity of Azerbaijan's political forces.



Copyright © 1998 by Nasib Nassibli (Nasibzade). All rights reserved.

Published in VAR with permission from the author.

Virtual Azerbaijan Republic (VAR) Website

Counter added 06/12/98