It 1863, during his first year as a tax farmer, Mirzoyev increased oil production to 40,830 barrels of crude, and thereafter increased oil production steadily, to 88,350 barrels in 1868, and then more than doubling that figure in 1869, to 202,350 barrels. Overall, taking the January 1, 1863 production of 28,820 barrels at the Absheron oil fields as a baseline, he increased oil production by nearly sevenfold, to 184,455 barrels, in the ten years ending January 1, 1873.
While expanding his operations on the Absheron Peninsula, Ivan Mirzoyev simultaneously turned his attention to the promising Grozny District. In early 1864, using a design of the Baku inventor Dzhevat Melikov, he built a small refinery in Grozny Gorge. Yevgeny Yushkin described the enterprise in his book, Beginning of the Grozny Oil Industry in Sketches [Nachalo Groznenskoy neftepromyshlennosti v ocherkakh]: “Fifty sazhens [350 feet] from the wells there were two small buildings with distilling vats and condensers, operated using oil and water from wells. Oil was piped from the wells into a 3,000-pood [360-barrel] covered rock basin for settling; the oil was pumped by hand to a 900-pood [108-barrel] covered wooden tub for final settling, after which it flowed by gravity to a refinery having seven stills with a total capacity of 1,880 vedros [6,118 gallons] in its two buildings, in a batch with a total volume of up to 1,335 vedros [4,344 gallons].” Some 4,325 barrels of crude were refined every month at the refinery. Photogen and kerosene were subsequently delivered to customers on oxcarts in plane tree barrels.
The following year, Mirzoyev expanded his tax farm by acquiring the Grozny, Mamakayev, and Karabulak oil springs from the Tersk Cossack Host effective June 15, 1865, for a ten-year term at an annual fee of 13,615 rubles.
According to an inventory drawn up that same year, there were 16 hand-dug wells on the bottom and eastern side of Grozny Gorge, nine of which had cribbing, while the remaining seven had one empty barrel each to prevent clogging by dirt embankments. The hand-dug wells produced about one barrel daily. Using a primitive gate driven by human muscle, the oil was hauled out of the wells in leather buckets called kops or kaps, which were leather bags of 180-pound capacity on iron hoops with a load weight on one side, giving the bucket the tilt necessary to excavate the oil.
The expansion of Ivan Mirzoyev’s oil production in Baku and Grozny was due primarily to an increase in the number of oil wells. Whereas there were 218 wells on the Absheron Peninsula in the first half of the 1860s— broken down by oilfield district as follows: Balakhany 102, Binagadi 65, Bibiheybet 27, Surakhany 19, and Bakhchi 5—by 1871 this figure had reached 239 wells.
Yet, despite efforts to expand oil production and the modest successes of entrepreneurs such as Ivan Mirzoyev, the stifling effect of the tax-farming system on the Russian oil business meant that in 1871, the United States accounted for nearly 81% of world oil production, producing 36 times more oil than Russia, which lagged far behind.
Leading Russian industrialists, including Vasily Kokorev, Pëtr Gubonin, and Gadzhi Tagiyev, joined in an active struggle to abolish tax farming, along with major government figures and officials, such as Nikolay Romanovsky, Gertsog Leykhtenbergsky, Caucasus Governor General Grand Prince Mikhail Romanov, and Minister Mikhail Ostrovsky, as well as many leading scientists and members of the technical elite.
Table 1. Russian Oil Production, 1863–1872 (in barrels and tons)
Source: Stanislav and Ludwig Perschke, The Russian Oil Industry, Its Development and Current Status in Statistical Data [Russkaya neftyanaya promyshlennost, yeyë razvitiye i sovremennoye polozheniye v statisticheskikh dannykh]. Tiflis (Tbilisi), 1913, pp. 4, 5.
In 1867, the governor general of the Caucasus, Grand Prince Mikhail Romanov, ordered the formation of a special commission to address this problem, and mining engineer Ivan Shteyman, head of the Bureau of Mines of the Caucasus and Transcaucasus Territory, was made its chairman. State Property Minister Mikhail Ostrovsky later remarked: “In 1867, the Caucasus governor general and grand prince charged a special commission with collecting detailed information on oil fields and presenting ideas for eliminating the tax-farming system and replacing it with another method of development more appropriate to the benefit of the treasury and industry.” The commission’s materials and conclusions were set forth in a document entitled, “Ideas of the Commission, Instituted with Permission of His Imperial Majesty the Governor General of the Caucasus, for Discussion of Issues Concerning the Development of the Oil Industry in Caucasus and Transcaucasus Territory,” which would later form the basis of legislation abolishing oil tax farming.
The commission noted: “The most important causes of the unsatisfactory condition involve the absence of legal provisions appropriate for the development of a private oil industry and in the widespread application of the tax-farming system to the production and sale of oil.” The commission concluded that “by eliminating tax farming, the government will open up an enormous profitable field for honest industry. The most important thing should be the government’s duty, and that is: only the removal of all economic obstacles on the path to development of any industry whatsoever. The rest will depend on the skill of private individuals to look after their business and their entrepreneurship.... The tax-farming system has forced the oil industry into a closed cycle in which the privileges granted to tax farmers to maintain revenue have prevented the entry of anyone else’s entrepreneurship, free competition in trade, and even conditions favorable for the discovery of new sources.”
The commission’s conclusions were approved by the capital government, but it would not be until February 1, 1872, almost five years later, that “supreme” [i.e., imperial] approval was obtained for the two government documents abolishing the tax-farming system on the Absheron Peninsula: “Rules of the Oil Industry and Excise Tax on Photogen Production,” and then on February 17, 1872, “Rules on the Cession into Private Hands of Treasury Oil Fields of Caucasus and Transcaucasus Territory, Now Subject to Tax Farming.”
The First Auctions on the Absheron Peninsula
Under the new 1872 Rules, the system of ceding oil fields to tax farming was abolished effective January 1, 1873. And that meant only one thing: the oil business, which until then had been strongly associated with progress the world over yet had pulsated fitfully in the snares of the feudal system only in Russia, would henceforth follow the capitalist track in Russia as well.
The principal feature of the 1872 Rules was the following: Effective January 1, 1873, the system of ceding oil fields to tax farming was abolished, and oil-bearing parcels of land were transferred to private hands at public auction for a one-time fee. The first paragraph of the Rules determined that “Chief oversight of private oil fields throughout the Empire shall be within the jurisdiction of departments of the Ministry of Finance and shall be concentrated in the Mining Department. The duties of the local mining administration shall include: a) observation of the adoption of steps undertaken in the performance of work to protect the health of workers, and also to prevent explosions, fires, collapses, and destruction; b) observation of the conduct of underground work plans and the extraction of only oil and kir on oil industry parcels; c) collection of statistical information on oil industry performance.”