The Rules permitted unhindered oil prospecting on all free treasury lands of the Caucasus by “persons of any status, both Russian subjects and foreigners.” Applicants were permitted to lease no fewer than 2.75 acres and no farther than 560 feet around the application post. As stipulated in the lease, an industrialist was required to begin oil development within two years of receiving the deed to the area. For the use of such leases, the industrialist was required to pay rent of 10 rubles per 2.75 acres. The maximum lease term was set at 24 years.
Soon after receiving the text of the “Rules of the Oil Industry,” the Main Administration of the Caucasus Governor’s Office formed a special commission in Tiflis to handle the first oil auctions on the Absheron Peninsula.
Four auctions were held during December 1872. Entrepreneurs Vasily Kokorev and Pëtr Gubonin acquired six parcels (165 acres) in Balakhany containing 48 hand-dug oil wells for 1,323,328 rubles (with an opening bid of 365,296 rubles). Former tax farmer Ivan Mirzoyev acquired four parcels (110 acres) in Balakhany containing 30 hand-dug oil wells for 1,222,000 rubles (with an opening bid of 134,791 rubles). In addition, three parcels (82.5 acres) in Balakhany containing 18 hand-dug oil wells went to the entrepreneurs Benkendorf and Muromtsev for 120,834 rubles (with an opening bid of 17,040 rubles). Entrepreneur Stepan Lianozov acquired one parcel (27.5 acres) in Balakhany containing six hand-dug oil wells for 26,220 rubles (with an opening bid of 1,310 rubles). One parcel in Surakhany containing 21 hand-dug oil wells went to entrepreneur Ivan Ter-Akopov for 22,950 rubles (with an opening bid of 2,290 rubles). Finally, the two entrepreneurial teams of Tagiyev and Sarkisov and Zubalov and Dzhakeli acquired one parcel each in Bibihey bet containing 18 and 9 hand-dug oil wells, respectively, for 9,095 and 18,950 rubles, respectively.
From an economic standpoint, the results of the first auction demonstrated the correctness of the chosen policy for the Russian government. Whereas the state budget had collected a total of 5,966,000 rubles over the first 51 years of oil field exploitation, the treasury immediately received 2,980,307 rubles, half of the collected amount, from the first auction and was assured of a stable source of income in the future.
However, at the same time, the Russian government, having abolished the feudal oil tax-farming system, had simultaneously imposed a burdensome excise tax on lighting materials, i.e., it had enacted a time-tested indirect tax on a consumer good, kerosene.
Furthermore, it should be noted that the tax-farming system in oil fields of the Russian Empire was not abolished at a single point in time, but over the course of a complex process that lasted for more than 20 years. The jurisdiction of the 1872 Rules covered only the Caucasus and Transcaucasus, while the tax-farming system in Turkestan Territory was not abolished until a decree of June 10, 1892, “On the Application of Rules on Private Industry in Free Treasury Regions to the Transcaucasus Region.” And finally, in 1894, Emperor Alexander III (1845–1896) approved “Rules on Oil Fields on the Lands of the Kuban and Tersk Cossack Hosts.”
On the Way to Real Entrepreneurship
As a result of the first auctions in December 1872 on the Absheron Peninsula, at the beginning of 1873 an active process of converting Russian oil fields from a semifeudal state to a capitalist form of industrial development was launched.
In that year of 1873, which was so noteworthy for the Russian oil industry, intensive drilling of oil wells began on the Absheron Peninsula, and their number grew rapidly. Whereas there had been only one drilled well in 1872, there were 17 in 1873 and 50 in 1874.
These early days have been dubbed “the great oil fever.” According to eyewitness accounts of the events, areas of oil production became completely unrecognizable. Seemingly overnight, a forest of derricks sprouted from the earth, the land whined with steam engines, and everything around was transformed.
In June 1873, in an area belonging to the Khalafi Partnership, a gusher occurred from a depth of 98 feet, erupting continuously for four months, and no one knew how to quell it. Several oil lakes formed around the gusher (named the Vermishev gusher, in honor of one of the founders of the partnership). The gusher’s appearance served as a concrete demonstration of the colossal riches of the Baku lands.
Oil production on the Absheron Peninsula was further increased as a result of a new method of well bailing. This new kind of bailer was a tub used originally to produce oil from hand-dug wells, but more elongated, with a considerably smaller diameter than when used previously in hand-dug wells, so that it could pass through the bore of a well casing with a bottomhole valve that opened inside. As the bailer was lowered into the well, the valve opened and the bailer filled with oil, but as it was raised, the valve fell, closing the opening, and the oil was raised to the surface.
By the spring of 1873, more than 80 refineries had been built around Baku, and by the end of the 1870s, their number had jumped to 200. The Baku sky, despite endless winds, turned black with soot, because the countless large and small refineries used the same crude as fuel when distilling oil, and they burned it in the same primitive way, on a furnace bottom. In the Black City outside Baku, an eyewitness wrote: “a continuous rain of black soot impregnated the soil, all buildings, and even darkened the southern sun.”
As proponents of abolishing the tax-farming system (including Dmitry Mendeleyev) had predicted, the oil industry’s conversion to new market conditions caused a substantial rise in the volume of crude hydrocarbon production and considerable development of the refining sector. In the first year following the new legislation, oil production rose by a factor of 2.6 over the previous year, reaching over 475,000 barrels.
The data presented below convincingly show that in the first five years following the abolition of the tax-farming system on the Absheron Peninsula, the Russian oil industry was able to achieve unheard-of rates of oil production under conditions of free enterprise, with Russian oil production nearly quadrupling from 1873 to 1877.
Ancient fire-worshipers’ temple on the Absheron Peninsula near Baku.
Antique clay oil lamp, or chiragh.
Russian Emperor Peter I (Peter the Great, 1672–1725) whose 1700 decree formed the Mining Office, the first state department, which initiated radical transformations in Russian mining.
The first printed Russian newspaper, Vedomosti [“Gazette”], of which Peter I was the editor in chief, noting the discovery of oil on the Sok River in the Volga region (1703).
Jacob Bruce (1670–1735), first president of the Mining Board, made a major contribution to the development of mining in Russia.
Map of the oil-bearing areas of the Volga region (1773).
The great Russian scholar and encyclopedist Mikhail Lomonosov (1711–1765) devoted much attention to studies of petroleum.
Mikhail Lomonosov’s laboratory still (from the collection of the Russian State Historical Museum).
Russian Emperor Alexander I (1777–1825) authorized the annexation of the oil-bearing Absheron Peninsula to the Russian Empire.