Introduction

Azerbaijan that produced half of the world’s oil by 1901 is still a significant global energy player. There were evidences from persian and arabic manuscripts about the availability of oil in the region about two thousand years ago. There are several places close to Baku, the country's capital, where natural gas would come out of rocks and burn, making these fires permanent, thus giving a name to the future country - Azerbaijan stands for the Land of Fire.

First oil wells

A 1593 inscription in Balakhani commemorates a manually dug well, 35 m deep [Smil, Vaclav (2017). Energy and Civilization: A History. Cambridge: The MIT Press. p. 246]. The Turkish scientist and traveller of the second half 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 1803 for the first time in the world, oil extraction in Bibiheybat bay started from two wells 18m and 30m away from the coast line. First offshore oil extraction was abandoned when a strong storm in 1825 destroyed the wells.

A hand-dug well

In 1846, first time in the world, Azerbaijan drilled a 21m exploration well using a primitive percussion drilling mechanism, in Bibiheybat (suburb of Baku), with positive results. It was only more than a decade later, in 1859, "Colonel" Edwin Drake drilled oil well using a rig in Pennsylvania for the first time.

Oil Boom, Revolution and WWII

The second half of the 19th century and the beginning of the 20th century was a very favourable time for the Azerbaijani energy industry. More than 2,000 wells drilled in the area helped Azerbaijan attract many local and global energy companies, investments of which developed the nation’s cultural, educational and health well-being. Baku attracted well known architects to rebuild the downtown. Many schools, hospitals, and cultural centers were built. These include and are not limited to the first girls’ school, opera, and ballet in the muslim world.

The region started attracting such global players as Royal Dutch Shell and Branobel. The latter was the largest oil producer in Azerbaijan and its co-owner Alfred Nobel later established the fund named after himself. 

In 1918, Azerbaijan separated from the Russian Empire and established the first democratic republic in the muslim world. Two years later, in 1920 bolsheviks (socialists) took over the region and nationalized the industry. All foreign companies had to leave.

By the start of WWII, Azerbaijan was the key energy supplier of the Soviet Union. During the war, the country supplied 90% of the aviation diesel and other fuels. Hitler’s plan to invade Azerbaijan was not successful leaving the country out of war and all bad things it brought to all nazi-envaded countries. 

In 1949, Azerbaijan built a town 55 kilometers off the shore called Neft Dashlari (Oil Rocks). A full town on the sea, it was the first oil platform in Azerbaijan, and the first operating offshore oil platform in the world, incorporating numerous drilling platforms ["Oldest offshore oil platform". Guinness World Records]. Probably the most distinctive feature of Neft Dashlari is that it is actually a functional city with a population of about 2,000 people and over 300 km (190 mi) of streets built on overpasses and piles of landfill and soil.

Neft Dashlari

Modern era

After its independence in 1991, Azerbaijan aimed to develop new promising offshore oil field Azeri-Chirag-Guneshli (ACG) with estimated reserves of 5-6 billion barrels, gas field Shah-Deniz with 1.5-3 billion barrel equivalent, and build new oil and gas pipelines to Europe. The next year, the state oil company - SOCAR - was established to lead all major energy initiatives. 

Azeri-Chirag-Guneshli

In order to develop the ACG basin, a consortium named Azerbaijan International Operating Company (AIOC) was established by multiple companies that included BP (35.78%), SOCAR (11.64%), and others. BP, as the major shareholder, became the operator of AIOC. The production sharing agreement (PSA) was signed by the shareholders on September 20, 1994 for the development of the fields for 30 years. The day the PSA was signed is celebrated as the Day of Oil Workers in Azerbaijan. In 2017, this agreement was extended into 2050 and SOCAR’s share was increased to 25%, BP’s and other shareholders’ shares were respectively reduced. BP remains the operator of the consortium [BP-led group extends Azeri oil 'contract of the century' by Reuters, 2017]. Production of oil peaked in 2010 and was around 850K barrels/day. 

Shah Deniz

In 1996, a similar consortium called Shah Deniz was established to operate the Shah Deniz gas field under PSA. Similar to AIOC, this consortium is also operated by BP (28.8%), and co-owned by TPAO (19%), SOCAR (16.7%), and others. In 2013, the shareholders made their positive FID to extend the project with phase 2. 

Pipelines

In order to responsibly ship both oil and gas, SOCAR together with its partners BP, TPAO and others, started consortiums to build both an oil and a gas pipelines. Baku-Tbilisi-Ceyhan (BTC) - a 1,768 km (1,099 mi) oil pipeline - connects Sangachal terminal (near Baku) with Turkish port of Ceyhan. This second longest pipeline in the former Soviet Union has a capacity of pumping up to 1 million barrels of oil a day. Parallel to BTC, another consortium laid a gas pipeline South Caucasus Pipeline (originally called Baku-Tbilisi-Erzurum) to connect Sangachal terminal with Turkish terminal in Erzurum. The initial capacity of the pipeline was 310 billion cu ft of gas per year. For the second stage of the Shah Deniz development, the capacity was planned to increase up to 880 billion cu ft. As the pipeline has the potential to be connected to Turkmen and Kazakh producers through the planned Trans-Caspian Gas Pipeline, Azerbaijan has proposed expanding its capacity up to 2.1 trillion cu ft by building a second line to the existing pipeline. 

There is an interesting story behind choosing the route for these pipelines. Looking at the region’s map, it seems like laying the pipeline via Armenia or Iran instead of Georgia would make more sense geographically. The western companies did not support the idea of going through Iran due to the strained relationship. Both Azerbaijan and the western companies did not want to pass Armenia either. Armenia, that occupied Azerbaijani lands of Karabakh (a conflict which is not settled even nowadays), was not a candidate for the route due to the conflict with Azerbaijan and related security concerns and threat to the operation of the pipeline.

International pipelines from Azerbaijan

State Oil Fund

In 1999-2000, Azerbaijan established the State Oil Fund of Azerbaijan (SOFAZ). The fund’s mission is “to transform depletable hydrocarbon reserves into financial assets generating perpetual income for current and future generations.” It collects all state revenues generated from oil and gas. Proceeds also include dividends and bonuses paid under the PSA, revenues generated from the transit of oil and gas through the territory of Azerbaijan, etc. The fund invests its holdings via investment management firms to increase revenues. The fund can use its holdings for strategic investment and infrastructure projects in Azerbaijan as well as transfer some to cover the budget deficit. Currently the fund holds around $40bln - triple of the state budget.