Oil of Russia

Overall, we should emphasize that the tragic events of August 1905 set Russia back nearly a decade in terms of production level. Russian petroleum products exports fell 57%, from 14.3 million barrels in 1904 to 6.2 million barrels in 1905.

A few years later, in 1908, Russian petroleum products exports were only 18.6% of American exports. The former head of the Caucasian Excise Tax Administration, Ludwig Perschke, cited the following figures, which speak volumes: “The loss of Far East markets was especially painful for the Baku industry, since the huge populations of India, China, and Japan offer a field for the widest development of kerosene trade.... There have been no deliveries to China since 1906.... Russia’s share of India’s total kerosene supply has fallen from 78% to 2%.”⁵⁵

As for the pride of the United States, the Standard Oil Company, it regained its dominant positions on the European and Eastern kerosene markets and opened up the enormous Chinese market for its petroleum products. Meanwhile, Great Britain, on the eve of the merger of Shell Transport and Trading Company with Royal Dutch, also gained a guaranteed sector for petroleum products sales in Asia and the Far East. But its principal gain was the opportunities it created by snapping up the ruined fields on the Absheron Peninsula literally for a song, paving the way for a massive expansion of British capital into the weakened Russian oil industry.

The First Labor Union of Russian Oil Workers

The creation of the first labor union in the Russian oil industry was preceded by a significant event. On March 4, 1906, the Russian government released “Temporary Rules on Professional Associations,” which gave workers the legal right to legitimize their labor unions.

On September 29, 1906, the first workers’ assembly was held in Balakhany, and special steps were worked out to establish a labor union. Intensive organization proceeded through the month of October, and on November 7, 1906 the authorities approved the charter of the Oil Industry Workers Union. At the end of the month, the union held a general meeting at which a 12-member governing board was elected. The board was located in Balakhany, and the union had divisions in Bibiheybet, Surakhany, and in the Black City outside Baku.

The Oil Industry Workers Union did not limit itself to production problems, but attended to the most varied issues. Library reading rooms at oil fields in Balakhany, Sabunchu, Ramana, Bibiheybet, and Keshle became a focus of the labor union’s activities. These libraries became true centers of economic, political, and cultural education for the working class. The union paid a great deal of attention to issues of oil worker health preservation as well, as the oil industry was among Russia’s leaders in the number of accidents involving workers. According to factory inspectorate data, from 1907 to 1909, over 5,600 accidents occurred in the oil industry in the Baku oil district alone, which amounted to 11.2 injuries per 100 workers. In the second half of 1908, under pressure from the Oil Industry Workers Union, the Council of the Congress of Baku Petroleum Industrialists organized a Physician’s Bureau for Certification of Maimed Workers. Under the terms of the agreement reached between the Council of the Congress and the Council of Oil Industry Workers, two of the four doctors making up the Bureau were to be elected by the workers themselves. The union’s representative, in the person of its secretary, was obligated to participate in all meetings of the Bureau.

In addition to work-related injuries, epidemics were also a constant threat to workers’ lives and health. When a cholera outbreak threatened the Absheron Peninsula in the summer of 1907, the union was very active in preventing imminent disaster. On August 26, 1907, the union’s board decided to convene a meeting of field and factory commissions to discuss ways of combating cholera, and adopted specific steps to fight the epidemic. In addition, important issues relating to the organization of physician care for certification of maimed workers and improvement of medical service to drilling crew and ancillary field workers were submitted for consideration.

The Oil Industry Workers Union’s energetic activity produced tangible results from the start, reflected primarily by the growth of its ranks. Even in its early days, in late 1907 and the first half of 1908, the union counted over 9,000 members.

The first months of the union’s operation saw an emerging need for it to create its own print publication. On August 12, 1907, it released the first issue of the Gudok [“Whistle”], the voice of the Oil Industry Workers Union. This publication regularly explored the most important practical issues of the labor union movement, reported in detail on the position of the multinational oil industry working class, and fought for its rights.

Then, beginning on September 6, 1908, the weekly newspaper Bakinsky rabochy [“Baku Worker”], became the new print voice of the Oil Industry Workers Union. Addressing its readers, the paper wrote: “Comrade readers! After a long interval, we have gained another opportunity to interact closely with you through the printed word. We were forced to keep silent at the key point of our struggle with the oil industrialists, when the printed word, discussion of pressing issues, and the exchange of opinions were especially needed.... We don’t need to disseminate much about our program, about the paths we will take and to which we will call the Baku working class. We are old acquaintances of the Baku workers and know each other well.... Comrade workers! The Bakinsky rabochy will be your newspaper, as was the Gudok before us, so the more interest you take in us and the more actively you participate in it, the more fully it will reflect your needs and desires.... Do not forget this, and try to help your newspaper do what good it can for you.”

The oilfield and refinery workers answered the call. The paper established a firm relationship with the broad masses of workers, and became their favorite publication, in whose pages they found answers to the burning issues of their lives.

It should be noted that beginning in 1906, another labor union was operating on the Absheron Peninsula, alongside the Oil Industry Workers Union. This was the Mechanical Production Workers Union, for specialists involved in the servicing of oil fields and refineries. For some time, despite the fact that they addressed essentially the same issues, these two labor unions were often unable to coordinate their activities properly. Not until several years had passed were they able to overcome their differences and address the question of forming a single labor union—the Union of Oil Workers and Allied Trades. Formed in February 1912, the Union did much to help raise the level of activities to protect the vital interests of oil workers.

Oil on the Agenda of the State Duma

The history of Russian parliamentarianism provides the best argument against any idea that Russia has no democratic traditions. The Russian Federation, just like other nations, came to parliamentarianism by a long route, using the method of trial and error. Here we must mention the predecessors of domestic parliamentarianism: land, urban, and university self-government in the Russian Empire; class self-government in the centralized Muscovite state; and finally, the veche (public assembly) in many cities of Kievan Rus.

Russia’s first representative parliamentary institution (in the modern sense of the term) was founded by Emperor Nicholas II’s Manifesto establishing the State Duma and the Law Creating the State Duma, both promulgated August 6, 1905. Under pressure from the liberal wing of the government, represented mainly by his Prime Minister Sergey Witte, in an atmosphere of massive revolutionary demonstrations, Nicholas II decided to cool down the political situation in Russia by showing his subjects that he intended to consider the public need for a representative branch of government. This is explicitly stated in his Manifesto: “The time has now come, following their good beginnings, to call elected people from all Russian lands to permanent and active participation in the drafting of laws by including, to this end, a special legal-consultative establishment among high government institutions, which is authorized to carry out the preliminary development and discussion of draft legislation and to review the list of state revenues and outlays.” As the Manifesto makes clear, the new body was initially conceived with only a consultative role.

The following Manifesto of October 17, 1905, “On the Improvement of State Procedures,” substantially expanded the Duma’s authority. The Russian emperor’s sovereignty, i.e., the autocratic nature of his power, was retained. The procedure for elections to the first Duma was defined in an election law promulgated in December 1905, which instituted four curias, or citizen classifications, for the purposes of election: landowners, urban residents, peasants, and workers. We should note that the elections themselves were still not universal (they excluded women, people under 25 years of age, soldiers, and a variety of ethnic minorities), nor were they equal (one member of the landowners’ curia represented 2,000 voters; one member of the urban curia represented 4,000; one member of the peasant curia represented 30,000; and one member of the workers’ curia represented 90,000) or direct (election was a two-stage process, and for workers and peasants, it was a three- and four-stage process).

Having accorded legislative powers to the State Duma, the tsarist government did everything possible to limit them. In the Manifesto of February 20, 1906, it transformed the Russian Empire’s supreme legal-consultative establishment, the State Council (which had existed since 1810), into a second legislative chamber with veto power over decisions of the State Duma. On April 23, 1906, Nicholas II approved a code of Basic State Laws, which the Duma could amend only at the initiative of the tsar himself. In particular, these laws specified a whole series of severe restrictions on the activities of the future Russian parliament. The tsar retained full power to govern the country through a ministry answerable only to him, to manage foreign policy, and to control the army and navy; during recesses between sessions, he could promulgate laws that were then merely formally ratified by the State Duma (Art. 87 of the Basic Laws).

The first State Duma lasted from April to July 1906 and convened only one session. Of 499 deputies elected to the first Duma, the most numerous bloc was members of the Constitutional Democratic Party, numbering 179 deputies. The Octobrists were represented by 16 deputies, and the Social Democrats, by 18. The so-called ethnic minorities had 63 representatives, and another 105 representatives were unaffiliated. Representatives of Russia’s agrarian labor party, or, as they were called at the time, the “Trudoviks,” comprised an impressive bloc of 97 deputies, and retained this quota through practically all of the Dumas. Sergey Muromtsev (1850–1910), a professor at the College of Roman Law at St. Petersburg University, was elected chairman of the first Duma.

From the very outset, the first Duma demonstrated that it did not intend to accommodate caprice or authoritarianism on the part of the tsarist government. In response to the emperor’s throne speech of May 5, 1906, the State Duma adopted a message demanding amnesty for political prisoners; real exercise of political freedoms; universal suffrage; elimination of land set aside for the treasury, appanage, and monasterial property; and so forth.

In turn, the emperor’s disparaging attitude toward the Duma became apparent when the first bill he sent to the deputies for consideration involved the question of allocating 40,000 rubles to build a palm conservatory and a laundry facility at Yuryev University (now Tartu University).

During its brief life, the first State Duma discussed a large number of issues: repeal of the death penalty and amnesty for political prisoners; freedoms of the press, of unions, and of assembly; civil equality; the Black Hundreds pogrom in Bialystok and others; labor unions; assistance to the unemployed and starving; and naturally, one of the main issues, the agrarian question. In all, it considered 391 requests from the Russian government and approved 261. The government rejected all parliamentary proposals expressed as wishes for partial political amnesty, creation of a “government answerable to the State Duma,” expansion of suffrage and other freedoms, increased peasant land ownership, etc. In turn, the Duma passed a resolution of complete lack of confidence in the government and demanded its resignation, whereupon the Duma was dissolved by Nicholas II, going down in history as the “Duma of Public Anger.”

The second Duma was convened in February 1907. As chairman, it elected the noted land movement figure and Deputy for Moscow Province, attorney Fëdor Golovin (1867–1937), one of the founders of the Constitutional Democratic Party. In all, this Duma operated for 102 days during only one session. Most of its meetings were devoted to problems of procedure. This became a unique way of fighting the government during the discussion of various bills, which the government believed the Duma had no right to raise or discuss. The government, answerable only to the tsar, did not wish to consider the deputies’ opinions, and the deputies, regarding themselves as the people’s elected representatives, did not wish to submit to this state of affairs, striving to achieve their goals by one means or another. Ultimately, this confrontation became one of the main causes of the second Duma’s dissolution on June 3, 1907.

As a result of the introduction of a new election law in Russia, a third State Duma was formed, the only one of the four that survived its full five-year term under law, from November 1907 to June 1912. It held five sessions. As chairman, the Duma elected Nikolay Khomyakov (1850–1925), a leader of the October 17 Alliance. In March 1910, he was replaced by Aleksandr Guchkov (1862–1936), a noted politician and leader of the October 17 Party, and a year later, the Duma elected Mikhail Rodzyanko (1859–1924), a major political figure and one of the leaders of the October 17 Party.

The fourth Duma, the last in the history of autocratic Russia, arose during a period of increasing crisis for the country and the whole world: the eve of the First World War. Five sessions were held between November 1912 and October 1917. The fourth Duma differed little in makeup from the third, except that a considerable number of clergy were added to the ranks of deputies. The chairman of the fourth Duma for its entire term was Mikhail Rodzyanko. It should be noted that the Fourth State Duma played a leading role in instituting the Provisional Govern-ment after the collapse of the autocracy. Beginning in March 1917, it operated through private meetings, but on October 6, 1917, the Provisional Government of the Russian Republic ordered the Duma dissolved in connection with preparations for elections to the Constitutional Convention.

In all four State Dumas, the ranks of the deputies were dominated (in various proportions, of course) by members of the landed gentry, trading and industrial bourgeoisie, urban intelligentsia, and peasantry. They brought to the institution their ideas of ways for Russia to develop and their skills in public debate. It was especially illustrative that the intelligentsia used skills acquired in university lecture halls and courtrooms, while the peasants brought many democratic traditions of community self-government. In their work, the deputies made wide use of a system of inquiries. In response to any emergency, after collecting a certain number of signatures, the deputies could submit an interpellation, that is, a demand that the government account for its actions, to which one or another minister had to respond. Thus, the birth of Russian parliamentarianism provided valuable experience combating authoritarian propensities in the activities of rulers. The practice of discussing various bills in the Duma is still of unequivocal interest for modern parliamentarians. For example, the third Duma had some 30 deputy committees. The more important committees, such as the budget committee, had several dozen members. The Duma’s own legislative initiative was limited by the requirement that each proposal have at least 30 sponsors. Based on one such initiative, the Duma developed and adopted one of the most progressive factory and plant laws in Europe.

In the opinion of a number of Russian historians, on the whole, the work of the State Duma was an important factor in the political development of early 20th-century Russia, substantially affecting many sectors of public life, including the development of the oil industry. This is where the first attempt was made to begin truly meaningful, systematic efforts to introduce civil law principles into the use of mineral resources, and to correct contradictions in the framework of the rigid administrative regime governing the exploitation of oil fields and the need to ensure freedom for private enterprise.

As an example, we can cite the inquiry of October 19, 1909 submitted by a group of 42 members of the October 17 Alliance bloc in the State Duma, “On the Illegal Cession of Oil-Bearing Parcels in Baku Province,” which spoke of a flagrant violation of law on the part of the Russian Ministry of Trade and Industry in allocating oil-bearing lands on the Absheron Peninsula to two highly placed tsarist dignitaries, hunt director [Jägermeister] Vasily I. Mamantov and hunt director Pavel P. Golenishchev-Kutuzov-Tolstoy. Discussion of this inquiry in the State Duma erupted in a loud scandal, and exposed a shocking forgery with the assignment of oil-bearing lands to “dead souls”⁵⁶—the Caucasian Partnership, which had ceased to exist in 1900, and two long-dead entrepreneurs, Bastamov and Shkhiyants. This parliamentary session was widely covered in the Russian and foreign press, and evoked a strong public response, which ultimately caused the minister of industry and trade, privy councilor Vladimir Timiryazev, to resign in disgrace.

In early 1913, Russia saw a substantial rise in petroleum products prices, and began to experience a shortage of kerosene, lubricants, and residual oil, which created serious problems for the normal operation of the national economy. In March 1913, the State Duma sent the government an inquiry, “On the Activities of Syndicates in the Oil Industry,” where it raised the following question fairly clearly: “Is the Minister of Trade and Industry aware that the activities of major oil companies are giving obvious and clear indications of the existence of an illegal oil-industry syndicate? If so, what steps has he taken to investigate these illegal activities and to curtail further existence of the syndicate?” The discussion of this parliamentary inquiry within the government led to the development and implementation of a series of concrete steps to develop the national oil industry and correct the situation in the country’s oil market, and led to a certain mitigation of the petroleum fuel shortage. But the First World War, which began in August 1914, prevented the full implementation of these plans.

We should note that the history of parliamentary activity in tsarist Russia is extraordinarily relevant and necessary today. It teaches the public representatives of our time to be combative, to be able to defend the public interest under strong pressure from the executive branch, to engage in sharp parliamentary debate, to find creative ways for the body of deputies to work together, to maintain a high degree of professionalism, and to be proactive lawmakers.

Regaining Lost Ground

After the events of August 1905, the Russian government and oil industrialists undertook emergency measures to restore the damaged oil fields on the Absheron Peninsula and exerted great efforts to rehabilitate oilfield and processing equipment, but the level of damage done prevented a quick recovery of what had been lost. Russia produced 53.8 million barrels (8.09 million tons) in 1906, 62.3 million barrels (9.36 million tons) in 1907, and 63.4 million barrels (9.53 million tons) in 1908.

During 1906 alone, three conferences were held, in February, June, and December, by the main representative organization of the industry’s entrepreneurs, the Baku Congress of Oil Industrialists. The resolutions of the Congress contained specific proposals to the government for leading the Russian oil industry out of its severe crisis and restoring Russia’s position as a stable, competitive supplier to the European and world petroleum product markets.

It seemed that joint government and industry efforts would soon show positive results. The government adopted a decision to grant loans worth 20 million rubles to the oil industrialists, although in fact only 13 million rubles in loans was actually disbursed. In 1906, the government held regular auctions for new oil-bearing areas on the Absheron Peninsula. Under the provisional rules in place at the time, auctions favored higher percentage payments to the treasury of produced oil; that is, whoever offered a greater share would win the desired oil-bearing parcel. At auction, the major companies that won the bids offered the treasury 57–70% of the oil produced as rent.

However, to the surprise of the oil industrialists, the Senate rejected the auction results. As justification for their decision, the senators stated that “the existing terms do not guarantee market prices for crude oil.” The Senate resolution also contained this language: “The major firms do not fear large percentage payments, so long as they can secure for themselves the treasury’s remaining reserves of oil lands, in order to make themselves masters of the oil market.”

After voiding the results of the 1906 auction, the Russian State Duma managed, after fierce debate, to establish only “the urgent need to promulgate a new oil law.” And consequently, one Russian newspaper wrote: “Beginning in 1906, the ministers of industry and trade, accepting the portfolio, zealously emphasized in their declarations that the oil law was first and foremost; what remained was only to discuss it.” Understanding the urgent need to restore the industry, the Russian government proposed an auction in 1909 under new rules, but the State Duma rejected that proposal as well.

Thus, new oil-bearing lands were not leased, and for nearly the entire first decade of the 20th century, oil production on the Absheron Peninsula proceeded only in the four areas previously developed. Not until 1907 did very limited development of fields begin in new areas, particularly Surakhany.

The industry felt a pressing need to develop new oil-bearing areas, and at this point the Kuban, the home of Russia’s first oil gusher, unexpectedly emerged to the forefront. After many years in oblivion, the clock struck once again for the oil-bearing foothill strip in Maykop District in the eastern Kuban Region. On August 30, 1909, near the village of Shirvanskaya, a well on a parcel belonging to the Baku and Black Sea Partnership produced a powerful gusher with a daily flow of 36,025 barrels from a depth of 253 feet. Within a week, the gusher produced as much as 240,175 barrels of crude.

For many entrepreneurs, this was a bolt from the blue. Mining engineer Yevgeny Yushkin, an eyewitness to the events, wrote: “August 30, 1909 will be remembered in the Kuban Region as the day a major oil industry was developed.... The honor of establishing the reputation of the field belongs to the Baku and Black Sea Partnership, which was organized by three people (Russian engineers) and appeared after all others, in December 1908. The company looked at the business correctly, ran its enterprise in an efficient industrial manner, and didn’t begin drilling little holes, but wells. And it made the best of its goods, advertising the riches of the Kuban Region’s oil-bearing ground.”

The news of the unprecedented Kuban gusher near Shirvanskaya appeared in every Russian newspaper. The report was immediately picked up by foreign print media as well, which set the stage for the so-called “Maykop Oil Boom.”

In October 1909, two British entrepreneurs visited the Kuban on an inspection mission, and upon returning to London established a series of companies with British capital. By 1910, some 50 joint-stock companies aimed at developing the Kuban oil fields had been formed in Great Britain, including the Australia-Maykop Company (with authorized capital of £275,000), the Austria-Maykop Company (£275,000), the Maykop Valley (£400,000), the Maykop Spies Company (£200,000), the Maykop-Absheron Petroleum Company (£450,000), the Maykop Parcels Company (£600,000), and others.

However, in addition to serious entrepreneurs, all types of swindlers also decided to play “oil roulette.” Newly formed companies such as the Taman–Black Sea Oil Company (1911), the Anglo-Taman Oil Financing Syndicate (1912), the Central Caucasus Oil Industry Company (1913), the East Caucasus Oil Industry Company (1913), the Caucasus (Black Sea) Oil Company (1913), and the Caucasus Oil Syndicate (1914, with a capital of only £100), were created merely for speculative purposes.

Impatient Russian seekers of “black gold” didn’t lag far behind the foreign entrepreneurs, either. That same year, the office of mining engineer Yevgeny Yushkin received 38,000 letters, resulting in the issuance of 2,865 permission certificates for oil exploration, nearly three times as many as in the two previous years.

In his article “The Maykop Oil Fever,” engineer Korzukhin noted that the period from 1909 to 1910 was a time of exceptional interest in Kuban crude, which evoked such enthusiasm that prospecting for it covered the entire region with a dense forest of claim markers.

Striving to reduce the high temperature of the “oil fever” in early 1910, a group of entrepreneurs and engineers started a special publication in Yekaterinodar, the Kuban Oil Industry Annual [Yezhegodnik Kubanskoy neftyanoy promyshlennosti], in which they published articles by geologists, mining engineers, and other specialists on issues relating to oil development in the region.

In July 1910, the Russian war department convened an extensive conference on matters related to oil prospects in the Kuban Region. As a result, a new list of known oil-bearing lands in the Kuban Region that were to be leased at auction was published in September 1910.

From 1910 to 1916, the accomplished Russian oil scientist, mining engineer Ivan Gubkin (1871–1939), worked productively in the Kuban Region. During this time, he published numerous works of relevance to prospecting in the region, including: “Report on Exploratory Work in the Neftyano-Shirvanskaya Oil-Bearing Area” (1910), “The Maykop Oil-Bearing District” (1912), “On the Question of the Geologic Structure of the Central Part of the Neftyano-Shirvanskaya Oil Field” (1913), “Report on Geologic Studies of the Anapa-Temryuk District” (1912), “Report on Geologic Studies on the Taman Peninsula” (1913), “Survey of Geologic Formations on the Taman Peninsula” (1913), “On the Need to Plug Drillholes in Kudako, Kuban Region” (1914), and “Geologic Study of the Kuban Oil-Bearing District” (1915). Additionally, his discovery of a unique oil pool, shaped like a sleeve, doubtless occupies a place of honor in the history of world geologic science.

In January 1910, work began to create a representative entrepreneurial organization in the region and soon after the Committee of the Union of Kuban Oil Industrialists was formed. Then, in October 1911, the First Congress of Kuban Oil Industrialists convened in Yekaterinodar, where it elected a board and approved a program for its subsequent activities.

The Maykop oil boom soon brought solid results. Whereas 4,368 feet of hole were drilled and 68,737 barrels of oil were produced in the Kuban in 1909, 28,077 feet were drilled and 156,691 barrels were produced in 1910, and these figures grew rapidly: in 1912, 84,910 feet were drilled and 941,158 barrels were produced.

All this required new refining enterprises. In 1909, entrepreneur Selitrennikova funded the construction of a refinery near the Cossack village of Shirvanskaya, with a capacity of 5.1 tons of crude per day. Three strands of pipeline (2, 2¹/₂, and 3 inches in diameter) were subsequently laid from the refinery to carry petroleum products to a loading station on the Maykop-Yekaterinodar highway. In 1911, a refinery with the mellifluous name, “First Kuban Refinery of the Black Sea Oil Fields” was built near the Shirvan fields. On August 31, 1911, the P. O. Ter-Gukasov & Co. refinery was put into operation in Yekaterinodar, near a railroad bridge on the Novorossiysk line. Crude oil was refined on a six-still bank, and its capacity was 2,950 barrels/day. Its main product consisted of several grades of clarified kerosene. In addition, the refinery also made gasoline on a rectification unit consisting of a 1,413-cubic-foot still and a “cap” column. Finished petroleum products were loaded via a loading gantry on the refinery grounds into tank cars supplied by the Vladikavkaz Railroad.

In addition to refineries, the Shirvanskaya-Yekaterinodar oil pipeline (69 miles) and the Khadyzhenskaya–Tuapse oil pipeline (79 miles) were built in the Kuban Region in 1911.

The year 1912 was a time of maximum production in the Kuban: 74,417 feet of hole were drilled and 1.1 million barrels of oil were produced. In January 1913, the Second Congress of Kuban Oil Industrialists convened in Yekaterinodar to discuss the prior year’s results and announce its optimistic forecasts for the future.

As for the Russian oil industry as a whole, 70.7 million barrels (10.16 million tons) of crude oil were produced in 1912. However, Russia continued to lag very far behind the US in this indicator.

Table 6. Russian and US Oil Production, 1906–1912 (in millions of tons)

Source: Dyakonova, I. A. Oil and Coal in the Power Industry of Tsarist Russia in International Comparisons [Neft i ugol v energetike tsarskoy Rossii v mezhdunarodnykh sopostavleniyakh]. Moscow, 1999, p. 166.

A major turning point for the Russian oil industry was the unexpected departure of the Paris banking house of the Rothschild family from the Russian market in 1912. Looking at the performance of the Rothschild oil companies during the first decade of the new century, no one would have predicted that they would lose their hard-won market share to anyone. The fixed assets of the Caspian and Black Sea Oil Industrial and Trading Company at the time totaled 10 million rubles, and it held oil fields on the Absheron Peninsula at Balakhany, Sabunchu, Ramana and Bibiheybet, and also in Grozny and on Cheleken Island. Its well count reached 285, and it operated 45 steam engines and 19 electric motors. The company produced more than 3.9 million barrels of crude per year, and employed 1,269 workers. Meanwhile, the Mazut Company’s fixed assets were 6 million rubles. It comprised numerous wholesale offices throughout the country, its own tanker and tug fleet, a huge number of railroad tank cars, a repair yard at Dyadkovo, Yaroslavl Province, and other service enterprises. The company’s net profit in 1903 was 531,300 rubles, and it paid a dividend of 6% per share.

To a certain extent, the Rothschilds’ decision to leave Russia was influenced by the bloody events of August 1905 on the Absheron Peninsula, and also by the passing of one of the company’s key figures, Alphonse Rothschild. Thus, the Paris banking house of the Rothschild family entered into complex years-long negotiations with Royal Dutch Shell, culminating in February 1912 with the signing of an agreement in which the Paris banking house of the Rothschild family ceded all of its Russian enterprises to the English-Dutch concern headed by the noted entrepreneur Henri Deterding (1866–1939).

In 1912, recognizing the power of this transnational corporation, the Russian government supported the formation of a new corporation of Russian industrialists in order to hold down prices on crude oil and petroleum products. This organization was a mighty holding company whose portfolio included large blocks of stock in merged Russian enterprises. Its partners included major joint-stock companies—A. I. Mantashev & Co. Oil Industrial and Trading Company, the G. M. Lianozov Sons Oil Industrial Company, the Caspian Partnership, the Neft Petroleum Products Production, Transportation, Storage and Trading Partnership, and the Moscow-Caucasus Oil Industrial and Trading Company—but the vast majority of participants were medium-sized and even small businesses. The new oil conglomerate, formed under the aegis of Russian banks, was registered in London as a British company, the Russian General Oil Corporation. The company’s board included a member of the parliament of the United Kingdom and a British representative of the London division of the Russian-Asian Bank. The Russian entrepreneurs needed this “English shell” to simplify the attraction of new capital to Russia, but multiple attempts to place the corporation’s stock on leading European exchanges were not successful.

The Years of the “Great Battle of Nations”

In June 1912, the State Duma finally approved the long-awaited “Law on Leasing of Treasury Lands.” The first auctions under the new law were scheduled for mid-1913. In practical terms, the Law proved extremely unsuccessful: the auctions were supposed to determine who would agree to supply the treasury a mandatory minimum of crude oil at the lowest price. The auction results were unexpected: a price of “minus 47 kopecks per pood [36 pounds]” was offered—that is, the oil industrialist was prepared to pay the treasury 47 kopecks for delivery of each 36 pounds of crude oil. The Russian papers wrote: “So here’s what these syndicate owners are doing: not only will they not take a thing from the treasury for oil delivered, but what’s more, they will pay for it.... They must be hiding something here.” Naturally, what was being hidden was the simple business calculation of covering all costs of sales on the free market of the oil that would be produced over and above the mandatory minimum. However, the Senate rejected the auction results, repeating the paradoxical situation of seven years earlier.

So it is not surprising that, in part due to the unhelpful position of Russian legislatures, the domestic oil industry continued to lag behind the US in the world market competition. Whereas Russian companies produced 67.6 million barrels (10.17 million tons) of crude in 1913, their American counterparts produced 3.7 times as much—37.96 million tons.

The steady decline in Russian oil production that began in 1909 owing to the depletion of Absheron Peninsula old fields was partially compensated by the placement of new Grozny fields into industrial production. Grozny’s share of the crude, which had been 4.4% in 1902, rose to 13.5% by 1913.

In 1913, the Russian industry leader, the Nobel Brothers Petroleum Production Partnership, produced 7.9 million barrels of crude, and refined 6.9 million barrels at its refineries to make 2.4 million barrels of kerosene alone. Oil production was carried on at 479 wells, and 177 steam engines and 131 electric motors operated in the oil fields. The total number of employees was 2,541. To transport the crude oil and petroleum products, the company had at its disposal 43 inland ships, 14 schooners, 209 barges, and 1,400 railroad tank cars.

Unfortunately, the year 1913 brought a major disappointment to the Kuban oil industry. Despite 79,765 feet of hole having been drilled in the Maykop District, only 576,782 barrels of crude were produced. This 47.5% drop in oil production was a very unpleasant surprise for the Board of the Union of Kuban Oil Industrialists, the entrepreneurs in the region, as well as the British stockholders of the numerous Maykop oil companies. In the following year, 1914, the Maykop fields produced only 475,169 barrels of crude from 242 wells.

In his 1915 article, “Status of the Maykop Oil Industry and Outlook for the Future,” mining engineer Yevgeny Yushkin thoroughly analyzed the state of affairs in the Kuban. Despite the pessimistic assessments that prevailed among entrepreneurs, the author concluded that they should “not sit idly,” but continue “research in further directions from known to unknown” and fully “use the experience of prior years.” Symbolically, as if in confirmation of these words, a powerful oil gusher some 98 feet high was struck on March 10, 1915 at the village of Absheron. The gusher produced about 360,265 barrels of crude in 50 days, and total production for the year was 886,489 barrels.

Meanwhile, Royal Dutch Shell was especially active in Russia, striving to expand its participation in the development of the Grozny, Maykop, and Emba fields and attract additional investment in these regions. During its first two years, it ran its Russian branch entirely from London, but beginning in 1914, most of the functions of regional management were gradually shifted to one of the concern’s major enterprises, the Mazut Company. It was this company, at the direction of top management at Royal Dutch Shell, that carried out the essential reorganization of the English-Dutch giant’s entire group of Russian enterprises during the next several years.

However, any gains made by Royal Dutch Shell and other Russian oil industrialists were put on hold by the outbreak of war. On August 1, 1914, at 7 p.m. in St. Petersburg, the German ambassador to Russia, Count Friedrich von Purtales, handed Russian Foreign Minister Sergey D. Sazonov a declaration of war. The two countries entered the First World War, the “battle of nations,” from which no nation was destined to emerge victorious.

Russia was not ready for war, and this became obvious within months of the opening of hostilities. The Russian military industry, which required serious modernization, could not cope with the volumes of military equipment, materiel, munitions and supplies required of it.

The acuteness of the problem of supplying and transporting petroleum products became apparent fairly quickly, partly due to the changing structure of the demand. Despite the cessation of petroleum products exports, fuel shortages and price increases began to be felt to a much greater degree. In addition, the Russian Empire’s entry into the war closed off access to the Turkish straits; that is, the export of oil through the essential port of Batumi was completely halted. This meant a total loss of traditional Russian petroleum products markets in Western Europe and the Middle East, which still accounted for a fairly large share of Russia’s total oil exports.

The elimination of petroleum products exports produced, in turn, another structural crisis in the industry. Since the oil industry’s foreign trade was oriented toward petroleum products, a cessation of their exports inevitably led to a considerable increase in the residual oil component at domestic refineries. Whereas kerosene accounted for 25.1% of the total volume of Russian petroleum products in 1913, that figure was only 17.6% in 1915; comparatively, residual oil increased from 61.8% in 1913 to 77.0% in 1915, a rise of 15%.

The events of the First World War inevitably had a negative effect on the status of the Maykop oil district in the Kuban, which up until that point had shown signs of revival. The impossibility of selling oil through the Black Sea ports irreversibly undermined future prospects for increasing petroleum products volumes in the region.

Table 7. Russian and US Oil Production, 1913–1917 (in millions of tons)

Source: Dyakonova, I. A. Oil and Coal in the Power Industry of Tsarist Russia in International Comparisons [Neft i ugol v energetike tsarskoy Rossii v mezhdunarodnykh sopostavleniyakh]. Moscow, 1999, p. 166.

Meanwhile, the forced structural changes in the oil industry and the general state of emergency during the war required the government to establish control over the regularity of petroleum products shipments. In late 1914, the first government fuel agency was formed, the Special Central Committee for Oil Supply, a unit of the Ministry of Trade and Industry. In March 1915, in support of this modest agency, an Interdepartmental Committee for Fuel Distribution was formed under the Ministry of Railroads.

Ultimately, the Law of August 17, 1915 undertook a new attempt at government regulation of the petroleum products market: a Special Council on Fuel [OSOTOP] was created under the Ministry of Trade and Industry. Council members were representatives of the State Council and State Duma, leading ministries (inland waters, finances, etc.), and social organizations (all-Russian unions, elective district councils [zemstvos], and cities). The council was headed by a representative of the Ministry of Trade and Industry, and everyday matters were supervised by the Provisional Office, headed by a colleague of the minister of trade and industry, the fuel commissioner-in-chief. His petroleum section was the Main Crude Oil and Petroleum Products Supply and Sales Administration [Glavneft]. Locally, issues of fuel supply were the responsibility of authorized representatives of the chairman of the council, and a special position, the Caucasus Fuel Commissioner, was created. OSOTOP even published its own newspaper, Izvestiya Osobogo Soveshchaniya po toplivu [“News of the Special Council on Fuel”].

OSOTOP’s main objective was to assist in providing fuel to railroads and enterprises working for the army. In practice, this assistance amounted to organizing shipments and ensuring the export of fuel via rail and ship. It is notable that OSOTOP did not limit companies’ trading operations: as before, companies set prices and were free to choose buyers. However, this did not last long, as petroleum fuel demand increased considerably as a result of the cessation of deliveries of English coal to Russia and difficulties with the export of Donetsk coal, together with the development of military procurement. This created a trend toward higher prices and toward the selection of customers from the standpoint of their ability to pay, placing railroads, the least reliable payers, in an especially difficult position.

For this reason, in January 1916 the Russian government took a major step on the path to state regulation of the oil trade by establishing mandatory price controls on shipments of petroleum products to all customers. The imposition of fixed prices was soon followed by a law on compulsory shipments, which further restricted the freedom of oil trade.

The government made feverish attempts to find an adequate administrative structure. On May 4, 1916, the minister of trade and industry approved “Rules for the Distribution of Crude and Residual Oil among Consumers,” which established five categories of customers. To implement the rules, a central agency, the Central Oil Industry Administration [Tsentroneft], was created under the railroad administration in the fall of 1916.

On September 3, 1916, a system of permitted petroleum products shipments was established. Under this system, OSOTOP set priorities for providing tank cars to various categories of customers. The practice of requisitioning petroleum products had come about even earlier: i.e., in the absence of contracts for the delivery of petroleum products to important customers, OSOTOP could issue mandatory work orders. Late that same year, it approved a project proposed by the Mining Department to create three treasury oil fields on the Absheron Peninsula, with an expected annual production of up to 6 million barrels. Alas, there was insufficient time to implement the project. Military setbacks and economic difficulties stirred up the unstable domestic political situation in Russia. Numerous political parties of the most diverse types demanded immediate implementation of a series of major reforms, but the Russian government, headed by Nicholas II, could not retreat from its chosen suicidal path, and the serious political and socioeconomic crisis grew and deepened with every passing day, ultimately overflowing into the February 1917 revolution and the overthrow of autocracy in Russia.

Under the Fragments of the “Oil Olympus”

On March 2, 1917, in a train car at Pskov railroad station, Russian Emperor Nicholas II signed a Manifesto abdicating the throne, thereby ending the more than 300-year history of Russian government by the Romanov dynasty.

The accession of the Provisional Government during the revolution was met with hope by many industrialists, who realized that the country needed radical transformations.

The events that occurred in the country in February 1917 were reflected both on the Absheron Peninsula and in other oil-producing regions of the country. As early as March 3 and 4, a general strike was called at all major Russian oil fields and refineries, followed by an endless series of various mass activities among the workers, including rallies, parades, and demonstrations. Everywhere, an atmosphere of faith and hope for decisive and favorable changes in Russian society prevailed.

Speaking at a meeting of industrialists, traders, and financiers with members of the Provisional Government in the Alexander Hall of the Petrograd Duma on March 8, 1917, Chairman Emanuel Nobel of the St. Petersburg Society of Plant and Factory Owners declared, “I am speaking on behalf of the whole Russian oil industry. Believing firmly in the powerful forces of the new Great Russia, we set ourselves the immediate objective of providing our armed forces with the petroleum products needed for the army and navy on land, on and under the seas, and in the air in a timely fashion.”

On March 10, 1917, the Provisional Government abolished all restrictions on the oil industry that had existed in the Russian Empire. At the same time, however, the revolution laid the groundwork for a new round of tighter state control over business operations. The new rulers were essentially in a no-win situation: on the one hand, economic reforms and liberalization were being demanded; on the other, the war had to be continued, which required control over strategically important facilities.

The Provisional Government saw a way out of the emerging economic crisis through the further centralization of economic administration. In particular, it formed the Main Economic Committee, which concentrated an extensive network of supply agencies in the hands of the state. However, despite these steps, the Provisional Government could not handle the fuel and food crisis. Soon, hopes for a Russian renaissance and the restoration of its position in the world began to plummet. Industrialists and entrepreneurs became convinced of the complete inability of Aleksandr Kerensky’s Provisional Government to offer Russian society a realistic plan of action.

Economic chaos in transportation and industry became an awful reality of those days. In this context, oil production volumes on the Absheron Peninsula fell to 48.4 million barrels in 1917 versus 57.2 million barrels in 1916.

It should be noted that in 1917, reduced production at the four old Baku areas, which had yielded 83.3% of all production in 1913, was inevitable. The scale of drilling had declined 20.2% in 1914, 8.0% in 1915, and 9.0% in 1916. At the time, wells took an average of two years to drill. The average flow from a new well did not increase—it decreased—and old wells were being retired faster than new wells were being drilled. Drilling volumes fell in Grozny as well, but during the war years, previously developed high-flowing wells with gushing oil were brought online.

The direct and most acute cause of the reduction in drilling volumes was the shortage of steel, especially casing pipe. Oilmen began feeling the steel shortage as early as 1914, and acknowledged it very clearly in 1915.

The situation continued to deteriorate, and a tragic turning point in the supply of pipe and other steel products occurred in early 1917, when even the smallest orders ceased to be filled; the shortage of steel for the oil industry reached 40–50%. Nearly all steel went to complete the drilling of old wells; only 77 new wells were started in Baku in all of 1917, compared with 319 in 1913. The main cause of the lack of steel was that its production had declined sharply. As the managing director of the Prodmet syndicate reported to the war and naval ministry on March 21, 1917: “Just under 50% of blast furnaces are inactive, and those that are still operating are at half-capacity. Most rolling mills have been shut down, and the smelting of pig iron is systematically declining, having fallen from 16.5 million poods [2 million barrels] in October 1916 to 9.5 million poods [1.1 million barrels] in February 1917. The main cause of the catastrophe is transportation and fuel.”

Yet another force that struck a serious blow against the industry was the destructive actions of social organizations of field workers. One of the first acts of the Provisional Government was to promulgate the “Statute on Worker Committees at Industrial Enterprises,” referring to committees that soon began making decisions regarding issues such as general management and personnel. The incompetence and capriciousness of these spontaneous bodies soon had negative results. Neftyanoye delo reported during this period that: “In the Baku oil district, we observe an ever-increasing number of field and factory administrative personnel removed by workers. For example, through May 14, workers had removed the managers of the Zubalov company and Bibiheybet Oil Company, as well as Field Director Shibayev. In addition, the field director of the Caspian Partnership, the enterprise manager of the Nobel Brothers, and the field director of the Participators’ Partnership [Souchastniki] left under pressure from workers. In nearly every company, a great many engineers and heads of divisions and field parcels have been removed.”

The unauthorized seizures of oil fields and expulsions of owners and administrators from the fields, as well as the establishment of worker self-government, were generally ineffectual. They only served to exacerbate negative trends in the industry and led to a complete crash of the Russian oil business. Domestic oil industrialists pleaded with the authorities more than once for them to put an end to the seizure of fields by workers. The Provisional Government’s minister of labor, Mikhail Skobelev, urged Russian workers to end the violence against white-collar workers and attempts at unauthorized seizure of enterprises. Naturally, the minister’s speech had no effect, and the oilfield workers put forth an increasing number of new demands.

After the overthrow of the Provisional Government on October 25 (November 7), 1917 and the accession to power of the Bolsheviks led by Vladimir Lenin (Ulyanov), a new epoch in the history of the Russian oil industry began—the “communist experiment,” which lasted over seven decades.