The agreement was signed by Venezuelan President Hugo Chavez and his Paraguayan counterpart Nicanor Duarte.
Mr Chavez said such agreements were important to create an energy alliance across South America.
Paraguay will pay for 75% of the oil on delivery and will have 15 years to pay the balance.
After signing the deal, President Duarte said it would allow Paraguay to invest US $75m in social programmes.
Venezuela says it produces some 3.1m barrels of oil a day but critics say it produces closer to 2.6m barrels.
Mr Chavez says regional integration is one of the arms of his "peaceful revolution".
He has proposed the creation of two regional energy companies to boost oil production and distribution in South America and the Caribbean.
Venezuela already has deals for preferential oil rates with more than 15 countries in the region.