The oil and gas industry has traditionally been pivotal to the economy; in 1891, Azerbaijan produced more than half of the world's total oil production. In 2001 refinery production accounted for over 14.9% of total industrial production, second only to the 58.6% accounted for by the extraction of crude oil and natural gas, according the Azeri government statistics. Oil refining is concentrated in the Azerineftyag (Baku) refinery, with a capacity of 230,000 bpd, and the Azerneftyanajag (New Baku) refinery, with a capacity of 212,000 bpd. The total domestic production of oil in 2001 was 311, 200, of which an estimated 175,200 bpd (56%) was exported, which left the two refineries were operating well below capacity, with overall utilization rates as low as 40%. Both refineries are in need of modernization, which the government estimates, will cost $600 million to $700 million. The US Trade and Development Agency financed a $600,000 feasibility study, awarded to ABB Lumas in January 2002, on up-grading the refineries and the specialized oil port of Dubendi. Failure to replace worn and outdated technology as well as falling demand in the rest of the former USSR resulted in a steady decline in the production of oil products since the early 1980s. Total output averaged 185,000 bpd in 1995, as compared to 285,000 bpd in 1987, and has declined further since. Output of refined products in 2001 included heating oil (approximately 50%), diesel fuel (28%), gasoline (10%), motor oil (7%), kerosene (3%), and other products (3%). Petroleum production is situated in 40 deposits on land and 12 offshore deposits in the Caspian Sea. The offshore Gunashli petroleum mining operation supplies half of the country's petroleum. As of June 2002, Azerbaijan had entered into 23 production-sharing agreements (PSAs) involving about 30 companies from about 15 countries involving 13 offshore fields, and 10 onshore fields. Only six—the off-shore Azeri, Chirag and deepwater Gunashli (ACG) field being developed by the AIOC consortium for connection to the Baku-Tbilisi-Ceyan (BTC) pipeline, and five relatively small onshore fields—were actually producing measurable daily output in 2002.
In line with the historic importance of the oil sector for the Azeri economy, the fabrication of equipment related to petroleum production had been one of the country's major industries. As a source of 70% of the former Soviet Union's oilfield equipment, it also held great importance for other oil-producing post-Soviet republics in the early years of the transition from Communism. Azerbaijan's petroleum equipment manufacturing industry comprised the second-largest concentration of such industries in the world (behind that of the US). Like most other of the country's economic sectors, however, the industry was plagued by plant obsolescence. Industrial production and export statistics for 2001 indicate no manufacturing or export of oilfield equipment. On the contrary, the US Commercial Service has issued bulletins pointing to upwards of $10 billion in procurement opportunities in Azerbaijan for foreign suppliers of oil field equipment in the period 2002–2005. In August 2002, CCC, a Greece-based construction and project management firm, won the contract for laying the pipeline for the Azeri portion of the BTC pipeline.
Other important industrial sectors in the Azeri economy include electrical power production (12.1% of total industrial production in 2001), chemicals (3.4%), food processing (3.2%), cars and other transport equipment (2.9%), and tobacco goods (1.6%), as well as various kinds of light manufacturing. As with fuel and oilfield equipment production, however, output in almost all of these sectors declined or stagnated in the 1990s due to the conflict with Armenia.
In aggregate terms, the real value of total industrial production in Azerbaijan dropped 21% in 1995, following already steep declines of 31% in 1992, 8% in 1991, and 17% in 1990. In 1998 total industrial production index registered its first year-on-year increase in the decade, moving from 28% of the 1990 to 29%. By 2001 the index stood at 34% of the 1990 level, and it is estimated that pre-transition levels industrial output will not be achieved until 2007. Manufacturing, the main component in the industrial production index, is lagging the most. In 2001 it stood at only 24% of the 1990 level, whereas other components, namely, the extraction industry and utilities (electric, gas, and water), had reached 83% and 69%, respectively, of 1990 levels of output. A structural change is evidenced in the relative weights of production and refining actives in industrial production between 1997 and 2001. Refining declined from 34% to 14.9% of the total, while extraction increased from 31.2% to 58.6% in 2001. In 2001 total industrial production rose 5.1% over 2000.