Baku in the early 19th century.
Count Yegor Kankrin (1774–1845), Russian Minister of Finance, was an advocate of the tax-farming system for Russian oil fields.
The Viceroy of the Caucasus, Prince Mikhail Vorontsov (1782–1856), insisted on sending a sample of Russian crude oil as an exhibit to the Great Exhibition of the Works of Industry of All Nations in London in 1851.
Russian Emperor Nicholas I (1796–1855) paid considerable attention to the oil production of the Absheron Peninsula.
Russian Emperor Alexander II (1818–1881) liberated the Russian oil industry from the tax-farming system, a relic of feudalism.
Manual oil extraction at the Absheron Peninsula fields prevailed right up to the mid-1870s.
The great Russian scientist Dmitry Mendeleyev (1834–1907), creator of the periodic table of the elements, was an energetic advocate for expedited development of the domestic oil industry.
Title page of Dmitry Mendeleyev’s book, The Oil Industry in the American State of Pennsylvania and in the Caucasus (1877).
Table 2. Russian Oil Production, 1873–1877 (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.
As for exports, the main foreign destination for Russian crude oil and petroleum products in those days was Persia. In 1880, Russia exported 21,579 barrels of crude oil and petroleum products to that country from Baku, including: 6,953 barrels of kerosene, 6,480 barrels of residual oil, and 8,142 barrels of crude oil.
The First Vertically Integrated Oil Company
The abolition of the tax-farming system and the promotion of individual and group entrepreneurship paved the way for the development of joint-stock companies in the Russian oil industry. The strong inflow of private capital into the industry created unprecedented competition. The forms of business organization that existed at the time—individual and family businesses, full and trust partnerships—were not well-suited to the changing economic environment. They could not adequately respond to rapidly changing competition in the emerging national kerosene market, nor could they fully support the growth of petroleum product production or overcome the technological gap between the Russian and US oil industries.
After witnessing the results of the first year of escalated competition among oil industrialists on the Absheron Peninsula, entrepreneurs Vasily Kokorev (1817–1889) and Pëtr Gubonin (1825–1894) decided to create a large joint-stock company capable of performing the full spectrum of oil production, petroleum products manufacture, and sales.
In late 1873, they began organizing this first joint-stock oil company in earnest. Explaining his position to prospective stockholders, Vasily Kokorev issued a brochure, “Explanatory Note on the Charter of the Baku Oil Company” (St. Petersburg, 1874), in which he convincingly justified the advantages of concentrating capital within a single company for successful industrial oil production, as well as the manufacture and sale of petroleum products.
The most salient arguments for creating such a company were: 1) the need to radically change the Russian oil business to satisfy mass demand for petroleum products and to displace American kerosene from the Russian market; 2) the geographic remoteness of domestic oil production on the Absheron Peninsula from the bulk of customers in Central Russia and the rest of the Russian Empire, which demanded the creation, under market conditions, of an effective business structure to manufacture and sell petroleum products; 3) the real ability of a vertically integrated structure to substantially accelerate the entire cycle of capital turnover and cost payback and to maximize the growth in the size and rate of return by reducing unit costs throughout the production chain in view of the concentration of capital and the availability of a unified infrastructure and controlled sources of raw materials.
The founding of the Baku Oil Company (BOC), the Russian oil industry’s first joint-stock company, on January 18, 1874 can properly be considered a milestone in Russian history. However, even from the start there were difficulties securing financing as the oil business was still a decidedly risky venture for the average (patriarchal) Russian entrepreneur. Yet these initial difficulties only encouraged the founders, and on July 9, 1874 the company began operating officially. According to the second paragraph of its charter, “The company shall gain lawful title to certain works, lands, ships, oil wells, basements, and warehouses, both belonging personally to business councilor Kokorev and also belonging to him jointly with state councilor Gubonin, by joint agreement of the owners and the company, according to an inventory to be presented at the first general stockholders meeting.” At the outset, the BOC’s fixed capital was 2.5 million rubles, and was backed by the issue of 20,000 shares having a par value of 125 rubles.
The BOC’s first report, for the period from July 1, 1874 through April 1, 1875, described all the company’s assets in detail. The oil production sector included: “Six groups in Balakhany, in an area of some 60 desyatinas [165 acres] with drillholes and hand-dug oil wells. Lands in Sabunchu, with an area of about 22 desyatinas [60.5 acres] with hand-dug wells and a basin. Oil basins and other buildings under construction by July 1, 1874.” By 1875, the BOC owned 10 drilled wells at the Balakhany oil field that were 161 to 245 feet deep with daily flows of 72 to 1,200 barrels.
The refining sector included: “A refinery with all accessory buildings, apparatus, machinery, and combustible gas coming from the land, valued at 1.2 million rubles. The value of the new division currently under construction and supplies on hand is taken as 13,669 rubles.”
The BOC’s transportation sector included a small fleet based at Zykh wharf, consisting of six schooners, the steamer Artelshchik, and five barges. It also had its own anchorage at Baku, with a sailing schooner and barge for carrying residual oil. In 1875, BOC built the sailing schooner Vasily, a ferry boat, and five barges at Tsaritsyn, and purchased the steam schooner Transzund.
The company’s sales sector was comprised of a Baku office, 11 agencies, and four commission offices. The agencies, along with the major buildings and warehouse facilities, were located in Moscow, Saratov, Samara, Tsaritsyn, Kazan, Simbirsk, Sarapul, Perm, Nizhny Novgorod, Yaroslavl, and Astrakhan. The BOC’s commission offices were operated out of Rybinsk, Penza, Vologda, and Vyatka. In Moscow alone, the BOC built six warehouses on leased land with an area of 5.5 acres 4,900 square feet and a total capacity of 423,500 gallons. In addition, the Moscow agency operated a retail petroleum products store that was very popular among Muscovites.
The company’s board was located in St. Petersburg. It was headed by the proactive manager Nikolay Ignatyevsky, and it included the financial and mining specialists R. Kraft, I. Milyutin, and K. Gusev. Later, I. Gorbov and D. Polivanov joined the board.
The BOC managed to achieve impressive results after only three years, and the company soon became the leader of the Russian oil industry. Whereas in 1874/1875, the company reported production of 115,969 barrels of crude oil and 35,702 barrels of kerosene, it reported respective figures of 285,749 barrels and 62,482 barrels in 1875/1876, and 450,690 barrels and 108,475 barrels in 1876/1877.