The Schomburgk Line

In 1828, Robert Hermann Schomburgk had a lot of problems.? He became a partner in a tobacco factory in Richmond that burned down.? Ruined financially, he suffered more hardship when he lost all his belongings in a fire on the island of St. Thomas.? With no savings or wealth, he left for one of the Virgin Islands and surveyed the island despite not having special knowledge of such work.? He sent his report to the Royal Geographical Society in London. His report created such an impression that in 1835 he was entrusted to lead an exploration team to map out British Guiana.?

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His survey was a great success, and he was knighted by Queen Victoria in 1845.? More riches followed thereafter.? One of the reasons for the change in his fortune is that he created a provisional boundary between Venezuela and British Guiana called the “Schomburgk Line”.? This line went well beyond the area of British occupation and gave British Guiana control of the mouth of the Orinoco River and the Essequibo.? How can you not knight someone who magically expanded your territory??

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Unfortunately, almost 200 years later, the dispute on the Essequibo has come back to the modern day and may have a major impact on oil prices.?

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A Little History of a Place You Probably Didn’t Care About

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Venezuela was not happy with the Schomburgk Line and disputed the findings in 1844 claiming all of Guiana west of the Essequibo River.? In 1850, Britain and Venezuela agreed not to colonize the disputed territory, which was easy to do because the land was a bunch of jungle and not much else.? But then gold was discovered in the region along the Cuyuni River in 1876.? In 1881, Venezuela reasserted its claim.?

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Venezuela appealed to the U.S. in 1894 to intervene under the Monroe Doctrine, which opposed European colonialism in the Western hemisphere.? Venezuela hired a big-name lobbyist and President Grover Cleveland intervened.? Britain was forced to accept arbitration of the disputed territory.?

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Rival claims were presented in 1899.? The arbitration panel consisted of two Britons, two Americans and one Russian.? Venezuela wanted to have at least one member on the panel, which was granted on the condition they choose an American.? The deciding vote was the Russian, Fedor Fedorovich Martens (FF Martens).? The case started fairly. ?An American lawyer, Severo Mallet-Prevost, represented the Venezuelan side.? Each side spoke for 13 days.? The case then adjourned for two weeks.? The U.S. side went to Paris for some relaxation, while the two Britons went to London with FF Martens.? When they got back, Mallet-Prevost was called into a meeting with the two American judges.? They revealed that FF Martens had been in to see them and presented them with a terrible option: either accept a deal that would give Venezuela control of the Orinoco River and 5,000 square miles of territory, or about 10% of their claim, or he would side with Britain and give them 100% of the claim.? The Americans decided to go along with the judgment creating a unanimous decision.? The U.S. judges and counsel had been ‘played’ and ended up giving Venezuela a worse deal than if it had brought international arbitration on its own accord.

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We are not sure what FF Martens extracted for Russia, but it’s thought that Persia took a poorly conceived loan of ￡2.4 million from Russia, which forbade it to borrow from any other country.? Britain had been concerned on Russian military and diplomatic movements in the Middle East and seemed to look the other way on the loan.?

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Mallet-Prevost released his memoirs after his death in 1949 where he showed that Venezuela had been screwed.? But despite a heightened sense of grievance, Venezuela accepted the outcome.?

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But then came Communism.? In 1959 Fidel Castro came to power and he fuelled red movements throughout Latin America.? One of these was around Cheddi Jagan in Guyana who had Communist sympathies (so British Guiana became Guyana upon independence in case you are confused).? Counting on the Americans, firmly anti-Communist Venezuelan President Romulo Betancourt denounced the 1899 arbitration award and declared it null and void in 1962.? In a memo to President John F. Kennedy, Secretary of State Dean Rusk mentioned one option to overthrow Jagan was to encourage Venezuela and possibly Brazil to pursue their territorial claims.?

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Since that time attempts to settle the dispute didn’t go anywhere as both sides handled the dispute similarly to Boeing’s attempts to build a rocket that can take people to the moon.? In other words, there was a lot of delay.?

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But in 2015, Guyana awarded oil licenses for offshore drilling to the Essequibo to Exxon, CNOOC and Hess (note that Shell had the original concession and sold it to Hess).? Because of the danger (or because Guyana doesn’t negotiate well) the concessions have some of the most lucrative terms in the oil industry.?

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The dispute has flared up anew and Venezuela has made menacing military movements.? Venezuela is 20x larger in population than Guyana.? Guyana is pressing its claim to the ICJ (International Court of Justice), which was the dispute mechanism the UN had chosen some time ago.? Venezuela feels it will likely lose so rejects their authority.???

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According to data published by the U.S. Energy Information Administration last week, Guyana had the third fastest oil production growth rate globally after the U.S. and Brazil.? Guyana now produces 645,000 barrels of oil daily sourced offshore.? Exxon believes oil tapped from the Starbroek Block could reach 1 million barrels daily by 2027.? They have made 30 discoveries and there are 11 billion barrels of reserves.? By 2030 Guyana would like to produce 1.64 million barrels daily by 2030.? Europe is now 63% of Guyana’s exports as European refiners look to switch from Russian crude.? Much of Guyana’s crude is traded in Rotterdam.

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Many villages in the Essequibo use generators, a reminder that the World Bank’s president walked back from financing a giant hydroelectric project in Essequibo after receiving an ominous letter from Venezuela.? In the 1970s, American cult leader Jim Jones presided over the largest mass suicide in world history in the jungles of Essequibo.? The reason the Guyanese Prime Minister allowed the settlement was that he thought the presence of Americans would deter a Venezuelan military invasion.?

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“Essequibo is ours” is appearing all over Venezuela.? 90% of Venezuelans voted that Essequibo belongs to Venezuela and the ICJ is not a legitimate arbitrator (this does not seem to be a manipulated vote).? In the first days of the Ukraine War, Venezuelan President Maduro sided with Putin.? Maduro plans to visit Russia soon after his election campaign.? The Venezuelan vote is scheduled for July 28th.? Maduro’s opponent is polling ahead 2 to 1 in the polls and the Venezuelan military and Maduro don’t like it.?

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The U.S. says they fully support Guyana, and the UK dispatched a warship that amazingly did not break down.? There are recent videos posted on social media by the Venezuelan military and others which show Venezuelan armed forces’ vehicles crossing a bridge built by the Venezuela army engineers over the Cuyuni River to Ankoko island, on the current frontier of the Essequibo territory.? Whereas previously Venezuelan military movements had the aura of a Potemkin village, the latest fortifications seem real.?

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Markets feel that a military confrontation is unlikely.? First, China has investments in both Venezuela and Guyana and told the countries to work it out.? They can play a stabilizing role.? Another factor is that the U.S. has committed to Guyana’s defence and the U.S. Southern Command is ready to go.? A third is that Latin American countries have been attempting to prevent a conflict through Caricom, which is a political and economic union of fifteen member states.? Finally, Venezuela has questionable resources to pursue a war.

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However, markets seem too sanguine.? In a Venezuelan invasion, the U.S. would have to engage in a real military conflict with American troops unlike the Ukraine where it’s supporting a country and its army.? Bombing from the air could be ineffective given the jungles.? Naval ships could help defend the seas, but as the Houthis have demonstrated, drones are hard to defend if targeting an oil vessel like Exxon’s.? The United Nations would be ineffective as Russia could exercise its veto.? Russia would probably do everything possible to help Maduro including air defence systems, drones, and naval vessels.? Anything that bogs down the U.S. helps their Ukraine campaign.? Because the U.S. military would effectively be helping an oil company, this war might not be so popular and be another foreign policy black eye during an election year.? More Venezuelans may attempt to emigrate to the U.S. illegally.? China favours the status quo, but it’s a minority partner and maybe there is a back-end deal with Venezuela.? They probably would just stay out of it.? Caricom may be the best hope, as Maduro cares about his peers, but if you have nothing to lose it might not matter.? Joe Biden seems to on a path of creating a nothing to lose situation with his sanctions.?

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I think the probability of an invasion is much higher than the market is pricing.? If so, that could create a significant spike in oil prices and inflation in the months ahead as both Guyana and Venezuela oil production could be impacted.? Watch this space.?