The oil and gas industry began its journey in 1844 with the drilling of the first well on the Absheron Peninsula - Bibi-Heybat, 11 years before entrepreneur Mirzoev set up the first drilling rig in Pennsylvania (USA), followed by a se­cond one the next year.

Civilization has developed extraction methods and various technologies over the nearly two centuries, and the pla­net’s population has more than doubled. However, the biosphere, nature, and various biological species have not been able to adapt to the accelerated pace of human consumption in their new environment. The climate is reac­ting to pollution from the combustion of coal, oil and gas, nuclear tests, and various man-made inorganic materials. Therefore, the very future of humans as a bio-subspecies depends on how well they manage to combine further technological progress with the preservation of natural, biological, and water resources, thereby ensuring a comfor­table habitat for themselves. It is no coincidence that today, when Azerbaijan has implemented more than 96% of its flagship oil and gas project Azeri, Chirag, Gunashli in the Caspian Sea, it was chosen as the venue for the UN Framework Conference on Climate, which will be held on November 11-19 in Baku. The conference will likely mark the beginning of a completely new industry based on reduced or complete absence of fossil fuel consumption in the co­ming years.

After the annexation of the Baku Kha­nate to Russia in 1806, the government formed a revenue item from the khan’s oil wells and began leasing them out. The methods of extracting and utilizing oil were primitive, and the population mainly extracted oil from natural wells.

For the first time among Europeans, Eichwald gave the most complete des­cription of oil production in Baku in his work «Reise auf dem Caspischen Meere und Caucasus» in 1825, where he vividly depicted the eternal fires and the cult of fire worshippers from India. Starting from the 1740s, percussion-rod well drilling began, and production was carried out using bailers. 1877 should be considered the moment when the Baku oil industry got on a solid footing. In 1879, there were 126 separate firms and entrepreneurs producing oil on an area of 411 acres.

From the beginning of the 20th century, the Absheron Peninsula was already producing 10 million tons of oil per year, which accounted for half of the world’s oil production. By this time, the oil industry was gripped by a dep­ression that peaked during the revolutionary period, although already in 1940, the republic provided 71.5% of oil in the USSR. The crisis continued until the economic recovery after World War II, when after receiving the first offshore oil in 1949, the offshore oil industry got its first impetus for development.

In the 1970s, thanks to the activities of the national leader of Azerbaijan Heydar Aliyev (he then worked at a leading position in the USSR), Azerbaijan was experiencing its renaissance. Factories for air conditioners, deep water jackets, computers, Ulduz, Ozon, the Nord production association, the Sumgayit chemical plant, the unique EP-300 facility, jewelry, shoe, and pasta factories, the Davachi poultry farm, and others were built. Oil refineries and the Mingachevir hydroelectric power station underwent major overhaul, and the Moscow Hotel, Gulustan Palace, and Republic Palace were built. The Agstafachay, Tartarchay and Khanbulagchay reservoirs were constructed.

During these years, a powerful complex of space instrumentation and scientific research was created in Azerbaijan, which became the basis for conducting the unique space experiment «Gunash» (Sun). In Ganja alone, several factories were built, including the «Billur» factory, a machine-building plant, a faience products factory, the second phase of a carpet-making complex, a bread products manufacturing plant, and others.

In the 1970s and 1980s, Azerbaijani scientists and oil workers played a crucial role in discovering and exploring major oil deposits in Kazakhstan and Western Siberia. While these discove­ries significantly diminished Baku’s role as a source of oil, they elevated its importance as a center for oil refining and production of oil extraction equipment. As oil fields in Western Siberia and the Urals developed, Azerbaijan’s share in the total oil production of the CIS countries decreased to just 2.62% by 1993. However, investments continued to flow into Azerbaijan, largely owing to Heydar Aliyev’s efforts. It is now clear that without the industrial potential created by Azerbaijan in the 1970s, the country would have faced insurmoun­table difficulties after the USSR collapse. The stability in the republic, the presence of highly skilled specialists, and the costly equipment for offshore oil and gas field development acquired in the 1970s were key factors that attracted Western oil companies to explore the riches of the Azerbaijani sector of the Caspian Sea starting from 1994.

The discovery of new offshore oil fields has significantly contributed to this, stimulating the growth of offshore oil production. Today, over 80% of the country’s total oil output comes from offshore fields. However, a large portion of Azerbaijan’s Caspian shelf remains unexplored, with optimistic estimates suggesting the presence of over 2 billion tons of oil equivalent and around 3 trillion cubic meters of natural gas.

Azerbaijan stands at the forefront of Caspian countries producing energy resources, having developed its offshore reserves since 1949. The country has made substantial progress in determining the geological structure of its sector’s fields and establishing routes and priorities for exporting energy to global markets ever since. More than 160 structures, primarily with anticlinal uplifts, have been identified in the Azerbaijani sector of the Caspian Sea. A total of 69 fields have been discovered, including 27 offshore, with 61 fields in commercial operation, 21 of which are on the offshore shelf. SOCAR, the state operator of Azerbaijan’s oil industry, conducts operations on oil fields, many of which have been in production for over 50 years and have entered a period of declining output. Despite this, Azerbaijan anticipates primarily gas discoveries at great depths of 6,000-7,000 meters. The steadily decreasing volume of oil production has not diminished Western businessmen’s inte­rest in Azerbaijan’s subsoil; on the contrary, it has increased since the country gained independence. 

Contract of the century

On September 20, 1994, under the leadership of Azerbaijan’s national leader Heydar Aliyev, a groundbreaking international agreement was signed with 11 companies from 6 countries. The agreement covered the joint deve­lopment and production sharing of the Azeri, Chirag, and Gunеshli oil fields, stipulated that all associated natural gas would be provided to Azerbaijan free of charge. The agreement which was immediately dubbed the Contract of the Century by media outlets swiftly became a global event.

The initial consortium included major players such as bp plc./Amoco – 34.1267%, Socar-10%, Lukoil – 10%, Statoil – 8.5633%,  Exxon – 8.00006%, Pennzoil – 4.8175%, Unocal – 10.0489%, Ramco-2.0825%, Itochu – 3.9205%, TPAO – 6.8%, Delta – 1.68%.  It should be noted that the Iranian company OIEC was initially also part of AIOC, but after the first meeting of the steering committee, at the insistence of American investors, its shares were transferred to European companies and the State Oil Company of the Azerbaijan Republic (today SOCAR). This was the geopolitics of that time, which has not undergone many changes today. 

The PSA for the Azeri, Chirag, and deep-water part of Gunashli field became the starting point, the reference point for enormous constructive work for many decades to come. In August 1997, SOCAR and a consortium of Japanese companies - JNOC (Japanese National Oil Corporation insures risks), JAPEX, Inpex, Itochu Oil, Teikoku Oil signed an Agreement on the basic principles of activities for the Yanan Tava, Atashgah and Mugan-deniz project in the southern part of the Azerbaijani Caspian shelf. And, on January 25 of the same year, the Azerbaijani-Japanese PSA contract was signed.

In October 1997, Azerbaijan ce­lebrated the production of the first oil from the Chirag field. On November 7, a ceremonial event marked the start of «early oil» production at sea. A total of 15.6 million tons (115.7 million barrels) were extracted and exported to world markets, including 1.512 million tons of Azerbaijan’s profit oil. The Chirag field’s daily oil production has now reached an impressive 16,000 tons (118,400 barrels).

Despite the challenges posed by the ongoing war in Chechnya, Azerbaijan began exporting its crude oil through the modernized Northern Pipeline Route Baku-Grozny-Tikhoretsk-Novorossiysk on October 25. Russia’s Transneft successfully completed the pipeline system’s modernization, bypassing Chechnya through Dagestan to Novorossiysk. The first tanker left Novorossiysk on December 12, 1997, coinciding with the third anniversary of AIOC and the commencement of the Early Oil Project. The western route Baku-Supsa was put into operation in 1998, following agreements signed in February and March 1996.

Between 1997 and 1998, nine more Agreements on Joint Development and Production Sharing (AJDPS) were signed, with many still under negotiation. European (consisting of European companies and an Iranian company), American, and Japanese consortiums were formed, taking into account the geopolitical situation and Azerbaijan’s interests. An  Agip representative said investors in Baku had to «engage in a real battle» to secure contracts, as exem­plified by Agip (ENI) paying $22 million in an initial state bonus (!) to Azerbaijan to win the tender for the offshore Kurdashi project. The commercial conditions for all AJDPSs are acceptable but strict, reflecting the go­vernment’s growing interests, as stated by the first president of AIOC, Terence Adams. Each contract has the direct force of law and is individually ratified by the Milli Majlis, providing investors with confidence in the clearly defined contractual terms and obligations from the very beginning.

In total, between 1995 and 2000, foreign consortiums discovered more than 10 fields with non-commercial reserves in the Azerbaijani sector of the Caspian Sea (each ranging from 70 to 450 million barrels in oil equivalent). These include Karabakh (CIPCO consortium), Dan Ulduzu, Ashrafi, operated by NAOC, Oguz, operated by ExxonMobil, Kurdashi, operated by Agip, Lankaran-Talish, operated by TotalFinaelf, Absheron, ope­rated by ChevronTexaco, now French Total, Ateshgah, Yanan-Tava, Mugan-Deniz, operated by JAOC, a consortium of Japanese oil and gas companies, Nakhchivan, operated by ExxonMobil, Zafar-Mashal, operated by ExxonMobil, Inam, operated by BP, Alov-Araz-Sharg, operated by BP, Yalama, operated by a consortium of Russian companies. The Azerbaijani sector of the Caspian is considered highly promising and, given today’s latest exploration drilling technologies, still poorly studied. 

The decline in exploratory drilling has reduced the number of discove­ries when there are no longer mega-oil offshore discoveries exceeding 100 million barrels of recoverable reserves. However, for oil companies, reserves of 25 to 75 million barrels of oil equivalent are commercially attractive (with new technologies increasing the effectiveness of both exploratory dril­ling and hydrocarbon recovery depth to 80-90%), and the Caspian shelf may expect a new stage of oil upstream. Accor­ding to Azerbaijan’s Ministry of Ener­gy, «Azerbaijan’s industrial reserves today amount to 2.2 billion tons of oil, but in case of successful exploration, they could increase to 5 billion tons.» Therefore, the issue of state stimulation of the study and development of the Azerbaijani shelf may still remain on the agenda.

 Baku-Tbilisi-Ceyhan

After relatively short negotiations for a project of this scale regarding the main export pipeline (initially called MEP) and subsequent construction (from 1998 to 2006) in the Mediterranean port of Ceyhan, on July 13, 2006, a ceremony was held to send off the first tanker. The solemn ceremony was attended by Presidents of Azerbaijan Ilham Aliyev, Türkiye Ahmet Necdet Sezer at the time, the United States George Bush, and Georgia Mikheil Saakashvili, along with several officials. The maximum throughput capacity of the Baku-Tbilisi-Ceyhan pipeline, which was later named after Heydar Aliyev, was 50 million tons of oil per year. 

Almost simultaneously, on July 16, 2006, with the launch of BTC, St.Petersburg hosted the G8 Summit, which adopted the document on Glo­bal Energy Security. For the first time, its participants addressed the issue of environment and the shift to renewable energy sources. The G8 Summit then became the starting point for China’s global investments in alternative ener­gy sources, which today account for 34% of Chinese market energy consumption, making China a leader in this industry. 

The problem of energy security became the cornerstone for the entire world community, pushing aside a number of political and national issues in the EU and G8 countries, as eloquently stated in the fundamental documents on energy security of the countries belonging to these associations. Demographic and economic boundaries between highly developed and less developed countries are blurring, as evidenced by China’s involvement in G8 discussions and the latest EU energy directive - the «Green Book” that defines the energy strategy of EU countries until 2030 also adopted in St. Petersburg.

Gas boom

The year 2006 marked a turning point for the gas industry. It was the year when negotiations began on the ambitious Nabucco project, which aimed to deliver Caspian gas from the Shah Deniz field to the Austrian Hub in Baumgarten. The talks on the classic Nabucco variant lasted for over seven years, with seven declarations signed and just as many conferences and summits held in support of the project. The absence of a main export solution constantly delayed the investment decision on the start of industrial development of the Shah Deniz field in the Azerbaijani sector of the Caspian Sea. As a result, Azerbaijan had to extend the contract with the foreign consortium operating the project by five years, until 2036.

This continued until 2011, when Azerbaijan and Türkiye took full financial responsibility for the project. “We decided that in this area, too, Azerbaijan should take the lead, just as in the mid-1990s, Azerbaijan took the lead, all the responsibility, and obligations for the implementation of the Baku-Tbilisi-Ceyhan project,” Azerbaijan’s President Ilham Aliyev said. The project was named TANAP - the Trans-Anadolu Natural Gas Pipeline. TANAP will extend 2,000 from the Georgian-Turkish border to Türkiye’s border with Europe, and have a capacity of up to 40 billion cubic meters per year. The investments total $10 billion.

Another important decision was made about the competition between two routes - the European branches of TANAP; the Nabucco West project, which subsequently lost, envisaged the construction of a 1,300 km pipeline (412 km in Bulgaria, 469 km in Romania, 384 km in Hungary, and 47 km in Austria) from the Turkish-Bulgarian border to Baumgarten in Austria. The other branch of TANAP is the Trans-Adriatic Pipeline (TAP). The estimated cost of the pipeline construction project is $2.2 billion.

On March 15, 2015, Turkish President Recep Tayyip Erdogan and Azerbaijani President Ilham Aliyev took part in the foundation-laying ceremony of TANAP in Kars, Türkiye.

 In record time, just three years later, the commissioning ceremony of the TANAP section from the Turkish-Georgian border to the city of Eskisehir (phase O) took place on June 12, 2018, and commercial gas supplies began on June 30.

Azerbaijani President Ilham Aliyev noted at the 7th meeting of the Southern Gas Corridor Advisory Council that when looking at the Southern Gas Corridor project, one can see its uniqueness in many respects. Its length is 3,500 kilometers, and the project unites seven countries. 

“Without close cooperation between these countries, its implementation would have been impossible. The pipeline passes through very complex geographical spaces, 2,500-meter-high mountains, and its more than 100-kilometer section runs along the bottom of the Adriatic Sea. The Southern Gas Corridor meets the highest environmental standards, and this was the main condition for us when planning and implementing this project,” said Ilham Aliyev.  The project will be commissioned at full capacity in 2026.

Contrary to the statistics of rising costs for all projects of this scale as they develop, the cost of this project was initially estimated at $44.6 billion. However, as a result of effective management and proper planning, the project cost decreased to $33 billion. Azerbaijan made a significant financial contribution to the project in the amount of $10 billion.

On September 14, 2017, a revised and redeveloped agreement was signed for the joint development and production sharing of the Azeri, Chirag, and the deep-water part Gunashli (ACG) oil fields in Azerbaijan. 

Following the agreement’s approval, the ACG partners’ shares were distri­buted as follows: BP - 30.37%, SOCAR - 25.00%, Chevron - 9.57%, Inpex - 9.31%, Equinor - 7.27%, ExxonMobil - 6.79%, TPAO - 5.73%, Itochu - 3.65%, and ONGC Videsh Ltd. (OVL) - 2.31%.

In one of his speeches, President of Azerbaijan Ilham Aliyev stated, “We have done a lot, but it’s too early to be complacent; we have even more to do.”

The agreement for the development of the deep-lying layers of the ACG block provides for the additional production of 233 billion cubic meters of gas and 44 million tons of condensate. These figures were obtained from the results of 8 previously drilled explo­ratory wells not related to the contract horizons.

Back in 2007, the BP management approached the government of Azerbaijan with a proposal to start negotiations on a new agreement regarding the deve­lopment of the lower horizons of ACG. The subject of the negotiations was the legal form of the agreement, with SOCAR insisting on a new risk-service agreement instead of the traditional production sharing agreement (PSA) previously used in Azerbaijan. President Ilham Aliyev stated that “the contract will be signed if all of Azerbaijan’s conditions are met.”

Under the current PSA contract, the ACG project partners were granted the right to develop oil horizons only up to the Pereryv Suite. Now, foreign companies have access to the Nadkirmaki and Podkirmaki suites, which exceed the previously developed horizons in terms of capacity.

Speaking at the launching ceremony of the new flagship vessel Khankandi, the Azerbaijani leader announced the signing of a new contract for the development of the Azeri-Chirag-Gunashli block. “We will extend our activities in this field until 2050. This once again demonstrates that Azerbaijan has very large oil reserves,” the President emphasized.

The ACG field remains Azerbaijan’s leading oil asset, covering an area of 400 square kilometers and featuring six offshore production platforms. Oil has been produced here since 1997, with an average daily output of 584,000 barrels in 2018. 

Transition

On December 31, 2020, a symbolic “glass of champagne with natural gas” was raised to celebrate the launch of the Southern Gas Corridor as a culmination of 15 years of intense negotiations. Gas was supplied to Greece and Bulgaria via TANAP through an interconnector, and after passing through these two countries, eventually reached Italy. For the first time in history, five Caspian countries gained access to a new export system, and also for the first time, Caspian natural gas was exported to the European market via pipelines. After the successful connection of TAP to the Italian gas distribution network on November 15, commercial natural gas was delivered from Melendugno in Italy and from Nea Mesimvria to Greece and Bulgaria.

“The need for our oil and gas resour­ces will be felt for many years to come, including in European markets,” said President Ilham Aliyev. “In 2022, the EU and Azerbaijan signed a Memorandum on Strategic Partnership in the energy sector, and natural gas supplies to the European Union are growing. Currently, half of Azerbaijan’s natural gas exports, namely 12 billion cubic meters, is supplied to the EU market. Based on the mentioned Memorandum, exports to the EU should reach 20 billion cubic meters by 2027. At the same time, Azerbaijan started to implement its green agenda even before the country was selected a host for COP29. The capacity of wind and solar power plants that Azerbaijan will launch this year alone will be 1300 megawatts. By the end of 2027, we hope and are confident - since contracts have already been signed - that we will generate 2000 megawatts of green solar energy,” said President Ilham Aliyev. “It will be generated by nine power plants. And by 2030, another 10 solar and wind power plants will produce 5000 megawatts (5 GW) of electricity. Thanks to this potential, we will largely replace gas consumption for electricity production, noted the head of state.”

“Regarding volumes, I think at least five billion cubic meters of gas will still be exported to Europe. At the same time, we are now in the final stage of developing a feasibility study for the construction of integrated power lines from wind farms in the Caspian Sea to Europe, including a cable laid along the bottom of the Black Sea,” said Ilham Aliyev. “This will allow exporting 4 GW of Azerbaijani green energy to Europe. Our proven offshore wind energy reserves are 157 GW. For many years, the wind caused certain inconveniences for Baku residents. But now wind energy will become a reason for great acti­vity, coo­peration, partnership and will strengthen energy security.” According to the President, energy security issues should be considered at the level of national security issues of countries, but at the same time, countries with fossil fuels should demonstrate solidarity on issues related to climate change. 

In November, Azerbaijan will host the 29th session of the Conference of the Parties to the UN Framework Convention on Climate Change - COP29, where leaders of 50 countries will reaffirm their commitment to the transition from fossil fuels and demonstrate steps in this direction, agree on an achievable financing goal where both public and private financial resources will be available, as well as adaptation to climate change and implementation of the Paris Agreement (launching an international carbon market according to the rules of environmental integrity, transparency and accountability), and the introduction of “green” technologies in participating countries. 

Thus, we see how the recent history of Azerbaijan is acquiring new outlines, an oil well drilled in Baku at the beginning of the 19th century, today these are wind generators, solar pa­nels, energy from the waves of seas and oceans, innovations, inventions that are yet to be discovered. The Contract of the Century, which has been successfully implemented, brought Azerbaijan and its partners not only economic dividends and geopolitical advantages, but also a direct political asset - the liberation of Karabakh and adjacent regions of Azerbaijan, which had been under occupation for about 30 years. In 2020, as a result of a 44-day military operation, Karabakh was liberated and today refugees are returning to newly rebuilt homes, territorial integrity has been restored. “Karabakh is liberated and now remains forever as part of Azerbaijan,” said President of Azerbaijan Ilham Aliyev. The clearly built multi-vector political strategy founded by national leader Heydar Aliyev in 1994 continues to bring dividends to Azerbaijan, the Caspian littoral states, and the world market. 

“Each year we see decreasing water levels in our rivers, while the Caspian Sea is shrinking. Azerbaijan also faces water scarcity, President Ilham Aliyev said as he addressed the participants of the Pre-COP29 event held in Baku in October, according to AZERTAC.

The head of state also noted: “Azerbaijan takes bold steps to overcome these challenges. At the national level, we are successfully implementing our socio-economic priority of ‘clean environment and green growth.’ Azerbaijan has announced 2024 as the ‘Green World Solidarity Year’. Our abundant wind and solar potential enable us to advance renewable agenda. The liberated Karabakh and East Zangezur, declared green energy zones, host sufficient renewable sources.