temVenezuela, Brazil to Invest $4 Billion in Refinery (Update4)

By Matthew Walter and Jeb Blount
March 26 (Bloomberg) -- Venezuela and Brazil may invest $4 billion in a refinery in Brazil that would be operated by the two countries' state oil companies, Venezuelan President Hugo Chavez said.
Chavez met Brazilian President Luiz Inacio Lula da Silva during a state visit today to talk about the refinery plans, according to a statement from Venezuela's information minister.
``This is an important investment in a great refinery,'' Chavez said today in Brazil, according to the statement. ``Its part of our plans for a strong South America.''
Petroleo Brazileiro SA and Petroleos de Venezuela SA have failed to come to an agreement on the refinery since they began talks in 2005. Workers have already started work at the plant's site, and Petrobras, as the Brazilian state-controlled company is known, has said it's prepared to build and run the refinery alone if Venezuela won't sign an agreement.
The Jose Inacio Abreu e Lima refinery will process 200,000 barrels of oil a day starting in 2010, according to initial plans, the Venezuelan Information Ministry said. Output may eventually rise to 400,000 barrels a day.
Petrobras said today in a statement they the two countries had signed a ``preliminary'' agreement for the refinery.
``There is no final agreement,'' said a spokeswoman for Petrobras President Jose Sergio Gabrielli at an event at the refinery site today.
Project's History
The project was first proposed in 2000 as a Petrobras- PDVSA joint venture. Petrobras would own 60 percent of the refinery's shares and Venezuela 40 percent, under terms of the accord.
PDVSA may have trouble financing the project, as Chavez obliges the company to hand over more of its oil revenue to the government to pay for increased spending on social programs, said Patrick Esteruelas, an analyst at Eurasia Group in New York.
``Venezuela and PDVSA will have a lot of difficulty getting enough cash to go forward with the project, especially since refining is not a priority for them,'' he said. ``First is getting money to the state and keeping existing refineries maintained.''
Lula and Chavez were also set to discuss trade and security issues during today's meeting.
The two leaders are considering the creation of a South American security council that could become a forum for resolving conflicts in the region such as the Colombian military's attack this month on guerrillas hiding in Ecuador, according to a Venezuelan statement.
Trade, Diplomacy
A joint statement on their discussions was postponed this evening after dozens of government officials and oil executives were kept waiting for more than two hours. The release is rescheduled for 9 a.m. tomorrow, a government spokesman said.
Chavez and Lula will also talk about Venezuela's application to become a member of the Mercosur common market, joining Brazil, Argentina, Paraguay and Uruguay. Brazil and Paraguay's legislatures must still approve the request, the Venezuelan statement said.
``South America is going to become a great economic pole, a great power in the world, a balancing power for the universe,'' Chavez told reporters today in Recife, Brazil.
Chavez and Lula posed for pictures at the site of the refinery today, surrounded by Petrobras workers. The meeting may have more to do with showing that Brazil and Venezuela still have good diplomatic relations than about building a refinery, said Alexandre Barros, the founder of Early Warning, a Brasilia-based political risk consultancy, in an interview.
`Important Neighbor'
``This refinery will get built with or without Chavez,'' he said. ``Brazilian presidents have to appear to be getting along with Venezuela because it's an important neighbor.''
Brazil and Venezuela had trade of $5 billion in 2007, according to the statement. That trade is expected to expand 60 percent to $8 billion in 2008, according to Venezuela's embassy in Brazil, the statement said.
``Lula and Chavez basically have a marriage of Convenience,'' said Esteruelas, with Eurasia Group ``Lula's relationship placates the more radical and old fashioned elements of his party, and Venezuela is proving its willingness to integrate and deal with every country in the region.''