Autumn 1998 (6.3)
Back to the Future
Britain, Baku Oil and the Cycle of History
by Terry D. Adams
Baku has been at the crossroads of history for centuries; it was an important trading center on the "Silk Road" from China to Europe, a key player in the Russian Revolution, and a significant part of the story of the Soviet Union thereafter. Over the ages, Azerbaijan has suffered from being a country over which the influence of regional geopolitical powers has ebbed and flowed, but in the 20th century, it is the story of Baku Oil that has dictated its tempestuous past. There is a long record of British interest in Baku and by comparing our experiences today with the records of various British missions to Baku, we can see the cyclical nature of the history of the region.
In 1555, a new Moscow Company was formed in London and agents were sent to Central Asia throughout the remainder of the 16th century. Six English missions to Azerbaijan are recorded between 1568 and 1574, from which period Thomas Bannister and Jeffrey Duckett described Baku in their correspondence from the Caucasus as: "which town is a strange thing to behold, for there issueth out of the ground a marvelous quantity of oil, which serveth all the country to burn in their houses. This oil is black and is called "nefte." There is also by the said town of Baku, another kind of oil which is white and very precious, and it is called petroleum." [Text has been edited to reflect modern English usage.
Terry Adams, former President of AIOC, now with Monument.
This report was written more than 400 years before another trader from British shores beat a path to Baku in the shape of BP, leader of the AIOC oil consortium formed in 1994.
The First Oil Boom
Baku Oil is the father of the modern international oil industry. Large scale oil production began in Baku in 1872, even preceding the oil activities of Colonel Drake in Pittsburgh, Pennsylvania. By the turn of the last century, Baku was the global center for the international oil industry and much of the technology we use today was being invented in Baku. Moreover, led by the Nobel family, local Russian and European engineers combined to give Baku the sophisticated and cultural air which it enjoys today.
One of the first oil gushers of the Nobels in Baku (circa 1880s).
In 1905, a book describing these events was published in London. It was compiled by the well-known British oil journalist of the period, J.D. Henry, whose observations over 90 years ago carry a certain resonance today. He wrote: "Twelve months ago, the man who knew nothing of oil was ignorant of Baku; today Baku is known to millions."
When AIOC was formed in Baku four years ago, few people outside of Azerbaijan were aware of what was happening in that then turbulent city. Access was difficult and, other than from Turkey and Russia, international airlines did not fly to Baku. More recently, British Airways still boasted, "We fly everywhere - from Aberdeen to Azerbaijan." Now, however, there are many carriers. In addition, current affairs in Baku is a common item on British and U.S. television and in the international press.
Left: Construction of the oil Pipeline from Baku to Batum in 1928.
Right: One of the early oil wells at the turn of last century.
In 1905, J.D. Henry wrote: "The Caucasus is endowed by nature with practically an inexhaustible mineral wealth. We are near the time when this vast region will be thrown open to foreign financiers."
Photo: Early tank cars transmitting oil in Baku at the turn of the last century.
In 1994, the race for oil was repeated when the AIOC investors signed what Azerbaijanis like to call, the "Contract of the Century." Henry added: "The Government of Azerbaijan is most anxious to assist in oil development and have granted many important privileges."
We see further echoes in President Aliyev's oil strategy in the 1990s which has been central to the creation of international alliances so important to securing the independence of the Azerbaijan Republic the second time around.
Left: Refurbishment of the Aura, 1996. Right: Welding on the Chirag 1 modules at the SPS yard, 1997.
The British Oil Administration
Such comparisons with the present day are even more dramatically demonstrated by reviewing the tumultuous events that followed the end of the First World War, culminating in the all too short-lived First Republic, known as the Azerbaijan Democratic Republic [1918-1920]. Unfortunately, it was cut short in April 1920 by the arrival in Baku of the Red Army, determined to capture Baku Oil as the source of energy to fuel the Socialist revolution. The execution of the "26 Baku Commissars" followed shortly thereafter.
One part of this great historic scene was the appointment on November 17, 1918, of British Army officer General V. Thompson to run in Baku what was known as the British Oil Administration. This was not a universally welcomed arrangement either in Baku or beyond, but the challenges faced by General Thompson were, in large part, duplicated nearly 80 years later when AIOC embarked on its high profile Early Oil project.
The British Oil Administration was only a small element of the dramatic events that were the last vestiges of the "Great Game" that was being so ruthlessly enacted in Baku. The practical lessons from this early British oil initiative, however, hold clear messages for the present. General Thompson's reports from 1918 can be seen in the archives of the Foreign Office, and they make revealing reading today. He expressed with great clarity what he believed was required, in order to stabilize the potential and economic situation in Baku which was increasingly chaotic.
Much has been written on this period, dominated by stories of heroes and spies. General Thompson's observations were rather more practical: "Trade in Baku has almost entirely ceased and as a result of this stagnation, ships and railways have fallen into total disrepair. General reconstruction is, therefore, necessary and the task must be dealt with under the following main heads: banking, labor, transportation (railways) and oil."
These same words could have been written in December 1994 when AIOC set up its first oil operations in Baku. In the early 1990s, the Second Republic faced very similar challenges as had the First Republic. Baku was suffering from a collapsed economy resulting from the demise of the contemporary Russian empire, the Soviet Union, and it was (and still is) in a state of war over territorial threats to Karabakh.
In 1918, General Thompson was faced with an enormous challenge to recreate confidence in the economy. His fundamental requirement was to recreate a sound and reliable banking system. He wrote, however: "the political situation in Baku does not permit the opening of a British Bank because this would have increased suspicion and jealousy as to British intentions."
The Chief Executive of the British Bank of the Middle East in Baku might have voiced similar thoughts when the creation of a sound international banking sector became a key priority for the Second Republic, too!
Regarding labor, General Thompson reported very concisely on the local situation: "No wages have been paid to any of the workmen in the oil fields and railways or in the factories. The sailors of the Caspian Mercantile Fleet and the dockers are in a similar position. This demands immediate attention. In addition, arrangements must be made to supply the workers with food at cheap rates."
SOCAR (State Oil Company of Azerbaijan Republic) and the Cabinet of Ministers faced the same problem in 1994. An unpaid and hungry workforce was an unfortunate but frequent feature arising from the collapse of the Soviet Union as a whole. In 1918, however, General Thompson was able to add: "On the whole the Azerbaijan workers can be compared most favorably with labor in England which is very patient. They respond to just treatment. Generally speaking, the Azerbaijani is industrious and in Baku few Muselman idlers are to be seen."
In Baku, some 80 years later, the same sentiments apply. The patience and tolerance of oil workers in Baku and elsewhere in Azerbaijan is heroic and demands respect. Without their diligence, commitment and expertise, the AIOC Early Oil Project would never have been achieved on time (in 1994).
Returning to 1918, General Thompson then addressed the issue of rail transportation, particularly between Baku and the Black Sea. He described the condition of the Caucasus in terms that would be appropriate today: "There has been much rivalry between Azerbaijan and Georgia. The former owned the oil upon which the railway system depended; the latter possessed the workshops through which all railway repairs were effected."
There was an urgent need for regional co-operation. Regrettably for the First Republic, this was not forthcoming. Fortunately, in the 1990s, Azerbaijan and Georgia have a true commonality of purpose in their political and commercial endeavors, aided by the coincidence of respective political leaders, President Aliyev in Baku and President Shevardnadze in Tbilisi, of unusually significant stature.
On the specific issue of oil, General Thompson focused on the critical importance of keeping oil pipelines to the Black Sea in working order. "Pipeline operations have ceased because of a tariff war between Azerbaijan and Georgia and the pipeline was damaged. However, the pipeline has been repaired and is now in working order; but owing to Georgia refusing to pay for oil, pumping has ceased. Consequently, producers in Baku have shut in wells and storage is full."
At various times, this stored oil was seen by all of Britain, Germany and Russia as a potential prize; but that is another story.
The need for mutual co-operation on pipelines between Azerbaijan and Georgia is a recurring theme for the history of Baku Oil in the 20th Century. It is certainly as true today as in 1905 when J.D. Henry wrote: "Although the Caucasus mountains separate them, Baku, the Caspian oil port, and Batumi, the sister oil port on the Black Sea, are linked together by 600 miles of pipeline just completed, and through which the oil for foreign markets will be pumped before the end of the year. But at the present moment, it is only too clear that one if not both ports could suffer damage as the result of racial and political risings in the Caucasus, and interminable labor troubles at these trading centers."
This passage reflects concerns that impact equally on AIOC today. They are refurbishing the same pipeline route through Azerbaijan and Georgia to a new Black Sea terminal at Supsa and the same unresolved conflict of Karabakh is a continuing threat to stability and security in the Caucasus. Also, the ordinary workers of Baku still await their just rewards.
The issue of Karabakh has been the critical conflict for Azerbaijan in the 20th Century. It played a significant part in the collapse of the First Republic in 1920 and is still a threat to the stability of the Second Republic. The outbreak of ethnic conflict in Karabakh in March 1920 was of considerable concern to British diplomats in London. Foreign Office records testify to the serious thought that was given to initiatives that might effect a settlement: "A strong foreign protectorate is desirable for Karabakh. We can begin by ruling out the participation of Russia, England and Italy; whose presence could not be trusted. There remains France and the United States, and perhaps some other minor European powers. A mandate for the United States would suit best, but there is little hope that they will come forward. Therefore, the best hope for a practical solution seems to be with the French." This diplomatic note is dated May 13, 1920.
A comparison to the Minsk Group initiatives of the OSCE (Organization of Security and Cooperation in Europe) for the resolution of the Karabakh conflict are currently stalled. A comparison to the past is too self-evident for comfort.
As the perceptive Henry observed in 1905: "Practically the chief thing wanted to ensure the return of prosperity to Baku is lasting peace, not a patched-up arrangement between the fanatical races of the Caucasus, but a real and permanent peace guaranteed by military force with the assistance of foreign capital to develop the oil resources of the region."
Flags Follow Trade
The story of oil in Baku this century shows remarkable repetition with the past. The reader may question, therefore, whether there are any fundamental differences between the situation which the Second Republic faces today as compared to that of the First Republic after the First World War. The answer must be "yes."
The role of President Heydar Aliyev and the political significance of the Azerbaijan oil policy have already been mentioned. Unlike General Thompson and his contemporaries, President Aliyev and his administration have directly addressed the fundamental need to create confidence in the Azerbaijan offshore oil industry, thereby ensuring that "flags would follow trade". This policy has been dramatically successful.
The oil contracts strategy has resulted in the establishment of alliances with key capitals around the world; in the United States, Russia, Britain and France. Regional interests are well served through the direct participation of Turkey and Iran and East Asian interests are represented by Japan. There are now 13 national interests present in the 14 Production Sharing Agree-ments (PSAs) approved to date. The Caucasus still has to live with its historical inheritance which includes territorial and ethnic tensions, but the geopolitical importance placed on the region by the United States, the European Union, Turkey, Russia and Iran is reassuring to the investor.
It seems that the economic and political realities of the region have fundamentally changed and, in contrast to the Russian Federation, Azerbaijan has experienced an explosion of international activity in pursuit of another Oil Boom.
It seems appropriate to allow General Thompson the last word:
"The general situation in Azerbaijan depends almost entirely on the town of Baku. Owing to its oil wealth, the town of Baku has an influence far out of proportion to its size."
Terry Adams is the Executive Director of Monument Oil and Gas plc, London. He was the Founding President of AIOC (Azerbaijan International Operating Company), the giant consortium which was dubbed as the "Contract of the Century" by Azeris in 1994 for the development of the gigantic offshore fields of Azeri, Chirag and Gunashli.
From Azerbaijan International (6.3) Autumn 1998.
© Azerbaijan International 1998. All rights reserved.
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