Lula-Chavez Recife Summit Summary

Venezuelan President Hugo Chavez arrived in the northern Brazilian city of Recife on 25 March to review with Brazilian President Lula the Abreu e Lima petroleum refinery, to be built under an agreement between Petrobras and PDVSA. The meeting itself resulted in little more than photo opportunities, but it did reveal a growing weakness in Chavez’s position. By the end of the summit, Chavez revealed he doesn’t have the money to pay for his end of the refinery. He agreed in principle to a regional military alliance, and signed deals that open up more trade flowing from Brazil to Venezuela.

Contrary to what many believe, Lula and Chavez are not good friends. They do have some ideological overlap, but Lula is interested in seeing his country take the regional leadership role for good. And if he has to crush Chavez to make that happen, so be it. But Lula’s tactics are not direct. He’d rather smile and hug Chavez, and only afterwards use Petrobras, a military alliance, and an unequal trade balance to pull Venezuela into a dependency that forces Chavez to acquiesce to Brazil’s political leadership in the region.

It is no secret that PDVSA has a cash flow problems. Chavez has outspent his enormous oil windfall and despite the high price of Venezuelan heavy crude, PDVSA cannot keep up with the production necessary to sustain Chavez’s expenditure appetite. It’s a matter of expertise and the ability to run an efficient refinery. Petrobras has both.

The Abreu e Lima refinery will have the capacity to produce some 200,000 barrels of oil a day with the potential of expansion to 400,000. Talk of the refinery has been ongoing since 2005 with no formal agreement in place.

During the presidential summit, no formal agreement was reached, indicating that Chavez simply doesn’t have the cash to put up his part the US$4 billion price tag for the refinery.

Most in Brazil expect Petrobras to build the refinery itself, scrapping the proposed 60-40 split between Petrobras and PDVSA. Lula’s bet is that by 2010, when construction of the refinery is expected to be complete, Chavez will have no choice but to do what it takes to get PDVSA crude oil into the Petrobras heavy crude oil refinery.

Lula has also moved to arrange agreements to continue exporting to Venezuela. Milk, beef, and other foodstuffs are at the top of the list, and trade between the two countries is expected to rise from US$5 billion in 2007 to US$8 billion in 2008. This increase in trade will undoubtedly become unbalanced in Brazil’s favor as Venezuela continues to import the food its own farmers and merchants can no longer sell Venezuelans at competitive prices.

Finally, with talk of the South American Defense Council on the regional agenda, it is likely Venezuela will sign onto the agreement. Brazil’s Defense Minister will travel to Caracas in the middle of April, and it is possible he obtains backing from the Venezuelan military. It would pave the way to bring other countries on board. Along with Venezuela, there is some indication that Brazil will pull in Bolivia, Colombia, Guyana, Ecuador, Peru, and Paraguay.

This summit did little for Chavez. He did manage to secure more foodstuffs for Venezuela and indicate that he’s at least interested in the military alliance. For Brazil, the summit was enough to solidify in Lula’s mind what many in Brazil have been thinking all along. It was wise to let Chavez act like the regional leader for a time. He had the money and some interesting ideas. But he burned hot and fast. In the coming months and years, it will become undeniably clear to Chavez and the rest of South America that Brazil is coming into its own and that Chavez was just a fad