In July 1876, based on the results of a trip to the Absheron Peninsula, Ludvig Nobel began working on an analytical memorandum, “A Look at the Baku Oil Industry and Its Future.” Essentially, the memorandum contained a comprehensive program for radically transforming the Russian oil business. Ludvig Nobel began by considering the experience of the US oil industry, stressing that it was “the production of lamp oils [that] nevertheless proved a tremendous use of the wealth for America, yielding more than $100 million in net revenue.” He tried to identify the peculiarities and differences in oil production in the United States and Russia, and broke the entire industry down clearly into its major components: “Crude oil here is given out nearly free of charge, as it was temporarily in America, too.... Everyone understands that the business must have a tremendous future, but with the shortage of transportation routes holding back the entire business and in the absence of capital, enterprise, and skill to establish the business, I cannot foresee when the development of the Baku oil industry will actually begin.” Ludvig Nobel’s main proposals called for abandoning the use of animal-drawn vehicles to transport oil (it was stored in wineskins and drawn on oxcarts) and instead constructing oil pipelines from fields to refineries; constructing iron tanks for storing crude oil and petroleum products; more widely using residual oil (mazut) for heating and gas production; radically improving the quality of kerosene; introducing bulk carriage of oil in railroad tank cars and on inland and seagoing ships; and creating a diversified structure for storing and selling petroleum products in Russia. This program was received by most Russian oil industrialists with a fair amount of skepticism and excessive caution, so Ludvig Nobel decided to carry it out himself.
In the fall of 1878, Ludvig contracted Bari, Sytenko & Co. to build Russia’s first oil pipeline on the Absheron Peninsula for his enterprise. It was 5.6 miles long, with a pipe diameter of three inches and a capacity of 9,607 barrels of oil per day. By the end of 1878, only 101,012 barrels of oil had been pumped through the pipeline, but in 1879, it carried 670,451 barrels.
The installation of the pipeline had a drastic effect on the Nobel Brothers’ business: Whereas the company exported 750 barrels of kerosene from Baku in 1876, by 1879 the figures were 66,220 barrels of kerosene and 56,042 barrels of residual oil.
The Nobels also turned their attention to the technical modernization of the refinery as well. In 1877, they installed the first steam pumps for moving crude and residual oil to pressurized tanks that fed the distillation vats, and introduced the technique of cooling hot residual oil in the still using a cold-oil circulation system. This allowed the number of distillation cycles to be increased to 6–10 per day. In 1878, the refinery installed a large tube-type residual oil cooler, enclosed in a 2,400-barrel tank, which the workers nicknamed “Ivan the Great.”
However, the tremendous yield of crude oil and petroleum products could not be delivered to the domestic Russian market by sea or inland waterway in barrels. And here, Ludvig turned to the experience of the Astrakhan merchants, the Artemyev brothers, who had reconfigured their wooden sailing ship the Aleksandr in 1875 to deliver bulk oil along the Volga. In January 1878, Nobel contracted with Sven Almquist, director of the Motala Shipyard in Sweden, to construct the world’s first steam-powered oil tanker, the Zoroastr, named after the Persian philosopher Zarathustra. The Zoroastr had a load capacity of 4,083 barrels of kerosene stored in eight holds, and the ship’s engines were rated at 290 horsepower. In late 1878, it completed its maiden voyage on the Caspian Sea under a Russian flag.
Ludvig Nobel also looked to the experience of the Baku Oil Company and soon followed their lead in creating his own joint-stock company. On May 18, 1879, the family business obtained imperial approval of the charter of the Nobel Brothers Petroleum Production Partnership, which created a joint-stock partnership with fixed capital of 3 million rubles. The capital was distributed as follows: Ludvig Nobel 1.61 million rubles, Alfred Nobel 115,000 rubles, Robert Nobel 100,000 rubles, Peter Bilderling 930,000 rubles, Alexander Bilderling 50,000 rubles, Ivan Zabelsky 135,000 rubles, Fritz Blumberg 25,000 rubles, Mikhail Belyamin 25,000 rubles, A. Sandren 5,000 rubles, and Benno Banderlich 5,000 rubles.
A fundamentally new phase in the history of the Nobel Brothers Partnership and the activities of Ludvig Nobel began soon thereafter. Ludvig was tasked with achieving a leading position in the Russian oil business and turning the company into a vertically integrated enterprise, extending its activities from the oil well to the sale of end products to consumers.
The Executive Board’s report to the April 1883 general stockholders meeting of the Partnership stressed: “The Partnership’s objective was first, to displace American kerosene from Russia, and then to begin exporting kerosene abroad. The entire enterprise was organized in full accordance with the requirements of that objective.... The Partnership’s industrial operations to date have been accompanied by ever-greater successes. Sales have grown increasingly every year. The high quality of the Partnership’s products, and the reputation it has earned as a result, command high prices compared to those of similar products from other Baku entrepreneurs.”37
As for oil field development, the Nobel Brothers Petroleum Production Partnership bet on the development of machine drilling. Whereas Robert Nobel drilled the first well manually at Sabunchu in April 1876, by 1878 the company had seven wells, all drilled mechanically. By 1882, of the 271 drilled wells in all of Russia, the Partnership had 25 of them. The company’s first gusher was drilled in mid-1879, and others followed in 1880 and 1881.
Each year, the Nobel Brothers Petroleum Production Partnership continued to consolidate its position as a leader in the domestic oil industry. In just a short time, the company managed to turn itself into the leading Russian enterprise in the new field. Whereas in 1879 the company produced 38,548 barrels of proprietary crude and made 37,227 barrels of kerosene (including from purchased crude), by 1888, proprietary production had risen by more than 80 times, to 3.1 million barrels (13.4% of total Russian production), and kerosene production had grown by more than 40 times, to 1.5 million barrels.
Laszlo Sandor’s Shugurovo Failure
News of the oil riches of the Absheron Peninsula continued to inspire fortune seekers, even those located in the very center of the Russian Empire. Thus, when encouraging information about petroleum reserves in the Volga region surfaced, it attracted the attention not only of Russian business people, but also certain foreign entrepreneurs who sought the petroleum “bird of happiness.” Notable among these was a US citizen of Hungarian descent, Laszlo Sandor. He had previously acquired a respectable amount of capital supplying Pennsylvania kerosene to light St. Petersburg, which allowed him to prospect for oil in 1870 by drilling wells on the territory of the Bugulma-Belebey Rise. And, unlike the cautious Volga entrepreneurs, Laszlo Sandor was prospecting for oil on a large scale.