The beginning of the industrial oil development in Baku refers to the second half of the XIX century when the city turned into the biggest oil region of Russia. In 1846 a little earlier than Colonel E.Drake in Pennsylvania (the USA, 1859), V.Semyonov, the Baku mining engineer drilled a well in the settlement of Bibi-Heybat near Baku. However, Semyonov’s report was delayed by the government instances almost for two years, and his method was not supported materially. The documentary proof of drilling the first oil well in Bibi-Heibat in the world was included in Count Vorontsov’s report of July 14, 1848 to the Russian tsar. This is considered the starting point of industrial oil extraction in Azerbaijan and in the whole world.

The imperial permission for drilling oil wells was given in 1868. The second oil well 64 m deep was drilled by mechanical means in the settlement of Balakhany in Baku in 1871. Beginning from 1871 the oil wells were drilled everywhere and a new method of oil extraction completely replaced the old method of well-sinking. As a result of this the oil extraction increased to 80 barrels a day from each well. The oil industry continued to develop at a great rate, and by 1913 about 3500 wells had been drilled in the vicinities of Baku.

Changes also occurred in the sphere of oil legislation. In 1872 “Rules on oil production and excise on the photogene production” and “Rules on the return of the public oil resources situated in the Caucasian and Trans-Caucasian territories from auction to individuals”. The lease system was abrogated. The oil industry was declared free, the main oil product – kerosene – was liable to excise (40 copecks per pood), and the oil areas were given to individuals by public auctions to be paid only on one occasion. The first auction took place on December 31, 1872. The fisk instead of an estimated sum of half a million got up to 3 million roubles. The repeated auction for the fields not purchased yet was held in 1880. An epoch of oil boom started in Baku.

With the abrogation of the lease system Baku turned into the centre of the flow of foreign capital. In 1879 the Nobel Brothers founded in Baku a joint-stock company “The Nobel Brothers’ Partnership”, which soon became one of the biggest oil companies in the world. In the 80s the flow of the French capital to Baku started, which was represented by Rotschild, the Parisian banker, who became at the head of the Caspian-Black Sea oil industry and commercial fleet placing the work on broad footing in 1888. By 1890 he had taken under his control 42% of the export of Baku oil. The British capital appeared in Baku in the 90s when several financial magnates with James Wishure at their head founded here three firms. From 1874 to 1899, 29 joint-stock companies were established with the participation of a foreign capital. By 1916 the number of oil firms reached 104.

The economic positions of the Azerbaijani bourgeoisie in the leading branches of industry – oil – were not strong. Back at the beginning of the abrogation of the lease system in 1872 out of 13 owners of the oil producing areas the Azerbaijani capital was represented only by two capitalists. The Azerbaijani capital was primarily represented by middle and small enterprises with a wide range of production capacity – from several ten thousands to 10 million poods of oil. The 135 oil industrialists of Baku in 1883 included 17 Azerbaijanis, by the end of the XIX century out of 167 – 49 or 29.3%. Distinguished were H.Z.Tagiyev, N.Salimkhanov, T.Ashurbekov, A.M.Gafarov, A.Garayev, M.G.Salimkhanov, G.B.Hashimov, I.Nuriyev, Sh.Asadullayev, M.Nagiyev, I.Hajinski, L.Manafov, M.Mukhtarov. Among the other oil barons were distinguished the Nobel Brothers, Rotschild, Rogozin, Wishua, Mantashev, Pashkovski, Tumanyan, Shibayev, Leonozov.

The flow of the foreign capital into the Baku oil industry had a direct impact on the exploration, extraction and transportation of Baku oil. In 1873 the exploration and exploitation of big oil fields (500 million tons) started in the territory of the settlements of Ramana, Sabunchu, Balakhany and Bibi Heibat. The number of oil refineries in Baku constantly increased. The first among them was built in 1859, and by 1867 their number had reached 15. In 1878 for the first time in the Russian Empire there was built an oil pipeline connecting oil fields in Balakhany with the oil refinery in Baku. The length of this oil pipeline was 12 km, and the diametre of the pipes – 75 mm. By the end of 1898 the total length of the oil pipelines of the Baku oil fields had reached 230 km with the carrying capacity of 1 million tons of oil. In 1896 – 1906 the construction of 833 km long Baku-Batumi pipeline was completed, the diametre of the pipes was 200 mm and its carrying capacity equalled 900 thousand tons per year. Thus the investment of big capitals in the oil production of Azerbaijan enabled the realisation of an industrial revolution in it. The transition of the Caspian and Volga commercial fleets, as well as a considerable part of the railway transport to mazute as fuel and the completion of the construction of Baku-Tiflis railway served as a great stimulus for the development of the oil and oil-refining industry.

In 1901 a decision was passed to dry the Bibi Heibat bay. This decision was approved in connection with the fact that a big oil field was found at the bottom of the bay. In 1906 a tender was announced, and in 1909 the drainage of the bay started. On the basis of a special project 23 vessels were prepared for the drainage and as a result by 1918 193 hectares of area of the Bibi Heibat bay had been drained. At the beginning of the 1920s this work was in progress and in 1927 the area of the drained land of the bay reached 300 hectares. One should point out that after the construction of the Panama channel it was the second event in the world for its level of hydro-technical work.

Close to the end of the XIX century the Baku oil industry, following the path of capitalist development, reached 50% of the volume of extraction from the world level of oil extraction of that time in less than two decades (by 1901).

However, having reached the highest point of its development, the oil industry of Azerbaijan underwent the blow of the world economic crisis of 1900-1903. It struck all the branches of the oil production: drilling, extraction and refining declined, the volume of the exploration work decreased, the number of the idle wells increased. If the oil extraction in Azerbaijan reached 671 million poods in 1901, then as a result of the slow slump it fell to 467 million poods in 1903. In the years of the crisis the flow of the foreign capital to Baku sharply reduced. However, its positions continued to remain utterly strong. By 1910 60% of the oil fields of Baku was taken under the control of three big trusts: “Royal Deutch Shell”, “The Nobel Brothers’ Oil Partnership” and “The Main Russian Oil Partnership”.

The political developments at the beginning of the XX century (Russian-Japanese war and the revolutionary actions of masses in 1905-1907) further aggravated the growing decline of the oil industry. World War I also favoured the reduction of the production indices of the oil industry. In 1910 the gross extraction of oil in Azerbaijan comprised 499 million poods, in 1913 – 449.4 million poods, and in 1917 – 402.1 million poods.