On display in Pavilion 14 of the Caucasus section were samples of oil and petroleum products from the Siemens Brothers photogen refinery at Imperial Springs, the full list of which included products entirely new to Russia, such as gasoline (specific gravity 0.682); ligroin (0.692); “separated” gasoline (0.716); light oil (0.760); straight-run gasoline (0.725); photogen (0.820); doubly-rectified photogen (0.818); solar oil for burning in lamps (0.867); heavy fuel oil for furnaces (0.875); vulcan oil for lubricating machinery (0.935); petroleum tar (0.968); oil tar for marine use; skin ointment; liquid cleanser for removing grease stains; bituminous varnish for iron and wood; and asphalt.
The long list of displays at the Siemens Brothers refinery exhibit demonstrated their wide range of expertise and showed that the first practical application of the deep refining of oil in Russia occurred at their refinery. An expert jury rated Siemens & Halske’s contribution to the development of Russian industry very highly. Werner, Wilhelm, and Karl Siemens were awarded a Certificate of Merit (First Class) for their “many practical applications of electric current,” and a Grand Gold Medal for their “collection of crude oil and petroleum products.” Friedrich Siemens also received a separate Grand Gold Medal for “perfecting regenerators for glassmaking and steelmaking furnaces.” In addition, the director of the company’s refinery, Karl Masing, was awarded the Polytechnic Fair jury’s written commendation “for his diagram of the regenerative apparatuses for the combustion of residual oil, which are converted into steam and gas.”
After the Polytechnic Fair, the Siemens brothers’ oil business continued to grow. By 1875, according to data from the Learned Mining Committee, Tiflis Province already had 101 drilled wells in production, including 72 wells in the Mirzan, Shirak, and Eldar districts, and 29 wells in the Nabamberi area, and just 14 hand-dug wells
In addition, two refineries were already operating in the area of these fields: one belonging to the Siemens brothers, and the other belonging to Karl Masing, their former manager, who had started his own business. In 1875, the Siemens Brothers refinery produced 3,138 barrels of photogen (lamp oil) and 3,741 barrels of other products, while Karl Masing’s refinery, which had just begun production, turned out 30 barrels and 13 barrels, respectively.
In 1878, the tax-farming system for Tiflis Province oil fields was replaced by a leasing arrangement, with an annual fee of 10 rubles per 2.75 acres paid directly into the treasury. Initially, this spurred the development of oil production in the region. By 1880, according to data from the Learned Mining Committee, Tiflis Province had only 51 drilled wells, producing 8,608 barrels of crude; this was refined into 4,069 barrels of lamp oils and lubricants.
However, subsequent operations at the Siemens Brothers oil field were not very successful. In 1882, their 41 wells produced only 4,508 barrels of crude, while the refinery turned out just 1,724 barrels of kerosene and 895 barrels of lubricants. It became clear that additional financial investments would be needed to recapture their former position in oil production and modernize the refinery.
At the same time, the accelerated development of the oil business on the Absheron Peninsula and completion of a railroad linking Baku and Tiflis opened the way for delivery of cheap Baku crude to Georgia, and the more expensive Imperial Springs oil could no longer compete. In the second half of 1883, the Siemens brothers decided to focus all future development on electrical manufacturing and sell off their oil business.
The Fight to Abolish Oil Tax Farming
The year 1861 marked a turning point for Russia. With the abolition of serfdom and the beginning of the period of “Great Reforms” initiated by Emperor Alexander II, Russia embarked upon a path of accelerated modernization. The old administrative system of feudal serfdom faded into the past, and a new epoch of economic development began. The socioeconomic progress of the Russian Empire required the achievement of a higher-quality national economy and industry, as well as substantial growth in gross indicators of industrial production.
Despite the dramatic changes taking place in Russia at this time, the tax-farming system, a rudiment of the feudal economy, continued to dominate Russian oil fields. The brothers Ludwig and Stanislav Perschke, noted researchers in the economics of the Russian oil industry, remarked: “The tax farmer, and equally the treasury, being interested during their brief administration only in the ephemeral present-moment maximum gain from the business, have absolutely neglected all considerations of strategic sense, and have not concerned themselves with improving methods of oil production or retaining obsolete oil wells and backward equipment and technology.”
Another aspect of the tax-farming system that exerted a stagnating effect on the Russian oil business was that the tax farmer, holding a monopoly, could dictate price terms to producers; under these conditions, most independent oil producers, who generally used credits granted by the tax farmer, were forced by economic pressure to sell crude to the farmer at his dictated price.
Beginning in 1862, the Absheron fields were farmed by Ivan Mirzoyev, a well-known entrepreneur in the Caucasus, who had entered into a corresponding agreement on December 18, 1862. For a term of four years, until January 1, 1867, he gained control over oil and salt fields located in Baku Province (the Baku, Shamakhy, Lankaran, and Nuxa Districts and most of the Shusha District), Derbent Town (in full) and the Kitag-Tabasaran and Zaqatala Districts (in full).
According to the agreement, Mirzoyev had at his disposal “all property at springs and lakes, as well as warehouses.” He was required not only to maintain “everything in a serviceable condition, but to strive to improve it, if possible, by increasing the production of oil and salt and making production more convenient, by preventing wells from clogging, and clearing them of kir and water.” If he “wished to open exploratory shafts, new oil wells, or basins in these forms, he was required to notify the Treasury Board, and if he so wished, or the importance of the work required it, a mining engineer could be appointed at the tax farmer’s expense.”
Ivan Mirzoyev’s tax-farming terms consisted of the following: an annual payment of 162,200 silver rubles. A mandatory price was set, at which he was required to sell oil and salt. He could open new permanent warehouses and stores only within the limits of his farm. He was given the right of unrestricted export to Persia at reduced prices, but for domestic customers, he was permitted to reduce prices only for the first three years of the agreement. Violation of this obligation would subject him to a fine equal to twice the difference between “the lawfully established price and the willfully established one,” and he would be taken to court for theft of treasury property.
The agreement also established a relationship between the tax farmer and local residents. Oil from the Baku and Surakhany hand-dug wells was produced by residents of Balakhany, who were assigned to the Balakhany oil field. They were required to carry oil on their oxcarts to Balakhany storage cellars and thence to Baku tax-farm stores for the duration of the first quitrent year. For production and carriage, Mirzoyev paid these residents at a rate approved by the governor general of the Caucasus. Other work was outside the scope of the residents’ obligation and was paid by voluntary agreement. Upon expiration of the mandatory obligation to produce (for a six-month term) and carry (for a one-year term), Mirzoyev organized the work through hiring at will. It is curious that tax-farmer Mirzoyev maintained a guard of 12 policemen at his own expense to maintain order in the fields.