Initially there were rumors that the fields of Baku were running dry. Such rumors were not easily dispelled. Indeed, one early effort to set the record straight was by the noted Russian scientist Dmitry Mendeleyev, who wrote a paper entitled “The supposed exhaustion of the Baku oilfields.”23 Output did decline but not in the country as a whole. The Russians sought to cope with the drop in output in existing wells in a variety of ways. First, as production fell in some of the older Baku fields, prospectors drilled new fields nearby. Second, new deposits outside the Baku region were discovered. Whereas Baku accounted for 96 percent of all Russian production in 1897, by 1910 it made up 85 percent and by 1913 even less.24 New fields that opened up at Grozny in Chechnia, at Emba (300 miles to the north on the northern shore of the Caspian Sea), and at Maikop, only fifty miles from the Black Sea, accounted for most of the difference.
Although there is some reason to believe that the existence and even early production at some of these sites as at Grozny predated the arrival of the Nobels, many of the more important fields were subsequently developed by foreigners like the Nobels, especially with English capital.25 Western assistance also helped improve the technology. Learning how to drill deeper produced the quickest results. The commonly used Russian drilling methods, which often relied on wooden, not metal, tools, made it difficult to go deeper than 300 feet. By the end of the nineteenth century, Nobel and some of the other foreign companies were drilling wells more than 1,800 feet deep. With the help of the American-produced rotary drilling system, by 1909 the wells went as deep as 2,400 feet.26
Yet ultimately the Russians could not prevent a sharp decline in their production and exports. The drop was partly due to the failure of Russian companies to import the necessary technology. In what will turn out to be a recurring pattern, few Russian companies bothered to keep up with the rapidly changing refining and drilling techniques. Russian oil companies also conformed to the period’s dominant international trend: ruthless corporate scheming and bitter rivalries. Inevitably, the jockeying for market share around the world by companies such as Standard Oil and Shell had some impact. Price cutting was a common tactic. As a result, many producers cut back on their operations and occasionally went bankrupt. Recurring depressions had the same winnowing impact. Russian markets were not immune to such rivalry. In 1911 Shell became a major player in the Russian market when it purchased the Rothschild family’s petroleum holdings. Shell entities then produced 20 percent of Russia’s petroleum output, second only to that pumped by the Nobels. Since the revolution and expropriation were only six years away, it was probably one of the smartest sales the Rothschilds ever made. But most deal making of this sort involved financial juggling, not technological innovation, and thus added little to the country’s productive capabilities.
Also hurtful to Russian production was the Czarist government’s decision in 1896 to change the concession system that had governed Russian oil production.27 In an effort to collect more revenue, the government instituted a combined auction royalty system. (It presaged the system that Middle Eastern states would come to use in the 1950s and 1960s.) At the time, however, the royalties demanded by the Czarist government seemed exorbitant, sometimes reaching as high as 40 percent. With the wisdom of hindsight, today that older Russian system looks like a bargain for a foreign investor. But considering that it was roughly seventy-five years before anyone else imposed such seemingly confiscatory terms, concession holders within Russia opposed the change and reduced output.
Most damaging, however, was the growing labor and civil unrest that hit the Batumi and Baku areas. Led in part by Stalin, strikes occurred in the Batumi area as early as 1901–1902.28 They were followed in July 1903 by an oil worker strike in Baku. Interspersed between almost annual strikes in 1904, 1905, and 1907 were the activities of the reactionary Black Hundreds, supporters of the Czar who often resorted to mob action. What the strikers did not pillage or burn, the Black Hundreds did. Nor did the complex racial mix of Tatars, Armenians, Jews, Russians, and Muslim Turks and Persians add to the tranquility of the region once tensions erupted. The climax came during the 1905 Russian Revolution. Two-thirds of all the oil wells were destroyed. As a result, overall production fell by more than 3 million tons and exports were cut in half.29 Whereas Russia produced 31 percent of the world’s petroleum output in 1904, by 1913, due to the labor unrest, Russia’s share had fallen to 9 percent.30 Neither production nor exports were to recover significantly until long after the 1917 Revolution.31
The rather disappointing years of production and export in the decade before the Revolution should not obscure the fact that the petroleum industry in pre-revolutionary Russia had an important role to play (see Table Intro 1). Not only did Russia produce more petroleum than any other country for a short period of time but there were also periods when petroleum contributed in a fairly important way to the country’s export earnings. True, petroleum exports never came close to matching grain export earnings, which accounted for 50 to 70 percent of the country’s export earnings from 1895 to 1914.32 But except for timber, petroleum was often the largest nonagricultural export. In the peak years of 1900 and 1901, petroleum generated 7 percent of Russia’s export earnings, a foretaste of the much greater role petroleum would play after the revolution.
THE REVOLUTION
The 1917 Bolshevik Revolution had an immediate impact on oil production. The unrest caused by the workers’ demands for more control over managerial decision making caused output to fall from 10.8 million tons in 1916 to 8.8 million tons in 1917. In some cases, workers’ committees were formed to superintend management. Naturally this interrupted production. The Bolsheviks declared formal confiscation the following year, on June 6, 1918, officially nationalizing the fields.33 Then production fell to 4.1 million tons.
The path of recovery was erratic because the revolution was followed by a counterrevolution that was supported by various foreign companies. As we saw, one of the more notable aspects of the prerevolutionary period of Russian oil development was the important role played by foreigners. Swedish, French, British, and even American investors and operators devoted large sums of money in an effort to gain control and increase production. With the exception of the Rothschilds who sold out earlier to Shell, the revolution meant a loss for most of them. The decade that followed was marked by the efforts and intrigue of many of the former foreign operators to out-maneuver the newly empowered Bolshevik rulers to regain or repatriate some of their money. Even with the help of foreign military intervention, most failed, but oil men have always been more venturesome and bigger risk takers than most of us.
The Turkish occupation of Baku in September 1918 provided the opening the old investors had been waiting for. Aware that the Bolsheviks were distracted by unrest in the north, the British sent in an expeditionary military force. It was tasked with helping Azerbaijan prop up its independence, which it had declared in March 1918, and later with insuring that Turkey remove its troops once the Armistice to World War I was declared in November 1918. This was not solely an anti-Bolshevik gesture, but also an anti-Russian step to protect Persia and block Russian access to British India. Much the same type of maneuvering took place after the Second World War, only in the late 1940s the Soviets attempted to reverse the process and extend their influence from Azerbaijan into the northern part of Persia/Iran.