Chavez is facing political pressures before the National Assembly elections in September over the effects of a drought that depleted water reserves in hydroelectric facilities, causing prolonged disruption in electricity and water supplies in both urban and rural population centers.

The drought broke this week with heavy rainfall and flooding in central Venezuela, but with the loss of two lives. Chavez hailed the rainfall, which followed speeches last month invoking God's help with the drought.

Amid signs that more rain could help refill the reservoirs and restore the hydro-based power grid, Chavez extended hospitality to old guerrilla fighter and new Uruguayan President Jose Mujica.

Chavez has bestowed discounted oil contracts on allies and friends in the past and used preferential oil deals to befriend Caribbean and Central American countries grouped together in Petrocaribe.

Welcoming 74-year-old Mujica to the presidential palace, Chavez offered to supply Uruguay more crude oil at discounted rates and help with raising the refining capacity at La Teja refinery, in the capital, Montevideo.

The refinery expansion has been planned for some time but has not been undertaken because of the high costs involved. Initially Venezuela's national oil company PDVSA offered to finance the whole project with a price tag of more than $600 million.

Under the deal announced by Chavez, Venezuela will likely supply Uruguay with up to 40,000 barrels a day of crude oil -- nearly the entire average consumption of the country -- on preferential terms.

There was no mention of the debt that Uruguay has already built up with previous preferential deals for oil it receives from Venezuela.

A 2005 agreement guaranteed Uruguay 17,000 barrels of oil a day in a deal that required only 75 percent of the payment in cash, with the rest paid over a 15-year period at 2 percent interest.

Uruguayan officials said the country's debt to Venezuela currently stands at $524 million. Repayment of the debt was not mentioned in official media reports on the talks between Chavez and Mujica.

Chavez said he would also like to include Uruguay in any future endeavors to explore the Orinoco basin for oil. Extensive tar sands in the river basin have given geologists hope the area may be a major source for crude oil.

Chavez lamented the decline of farming in Venezuela, pointing out the poor milk yields compared with those in Uruguay, MercoPress reported.

"Uruguayan cows average 25 liters per day; our cows hardly make two to three liters, we've even forgotten how to milk in spite of the fertile lands we have," Chavez said.

"Uruguayans are giving us a big hand in reintroducing the camp work discipline and improving the quality and efficiency of our cattle," said Chavez.

Uruguay hopes it can raise its earnings from Venezuela through more diversified exports that are still about a third of the annual value of oil it buys from Venezuela.

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