China's biggest energy firm PetroChina (0857.HK) will join Exxon Mobil (XOM.N) in developing Iraq's giant West Qurna oilfield and is in talks with Russia's Lukoil (LKOH.MM) to buy into a second project at the field, industry sources said.

China is already the top foreign player in Iraq's oilfields. A deal at West Qurna, which is around 50 km northwest of the southern oil hub of Basra, would boost its dominance and could make PetroChina the biggest single foreign investor in Iraqi oil.

West Qurna is central to Iraq's oil expansion plans, with enough reserves to pump more than 5 million barrels per day (bpd), and it could rival the world's biggest producer, Saudi Arabia's Ghawar field, when its two phases are running fully.

"PetroChina will participate in developing the field," an industry source with direct knowledge of the deal with Exxon said on Friday.

The agreement would be announced in weeks, the source said, but declined to give further details on how the world's two most valuable listed energy firms would work together in Iraq. Both PetroChina and Exxon declined to comment.

PetroChina already partners BP (BP.L) at Rumaila, now Iraq's largest producer, and operates the Halfaya and al-Ahdab fields. The company was the first foreign firm to sign an oil service deal in Iraq after U.S.-led forces toppled Saddam Hussein.

Baghdad signed a series of service contracts in 2009 that committed international oil companies to raising Iraq's oil output by 2017 beyond 12 million bpd - more than Saudi Arabia produces now.

Infrastructure and security problems have since forced the government to cut the target to 9 million bpd by 2020. The issues are so acute Iraq could report a year-on-year output fall for 2013, its first after two years of robust gains.

Despite the frustrations, Exxon, which holds a 60 percent stake in West Qurna-1, has made steady progress with minority partner Royal Dutch Shell (RDSa.L) and the field, a $50 billion investment project, is pumping around 480,000 bpd.

In March, PetroChina's ex-chairman Jiang Jiemin told Reuters the Chinese energy major was willing to team up with Exxon at West Qurna.

GUARANTEED MARKET FOR OIL SALES

PetroChina is also in talks with Lukoil for a stake in another development project at the field, West Qurna-2, a Lukoil source said. The source declined to reveal the size of the stake under discussion.

"Lukoil bosses have already said they would prefer an Asian partner, a Chinese partner, in the project to secure a guaranteed market for oil sales," the source said.

Lukoil's Chief Executive Vagit Alekperov has said that the company wanted a Chinese firm to replace Norway's Statoil (STL.OL) at the project. Statoil agreed last year to sell its 18.75 percent stake.

China is the world's second-largest oil importer after the United States, and its growth in fuel consumption has driven global oil demand expansion for a decade.

Faced with falling demand for imported oil in the United States and Europe, producers from the Middle East, Russia, Africa and Latin America are all competing for a bigger share of China's growing market.

West Qurna-2 is expected to start up this year, produce 500,000 bpd in 2014, and need total investment of $30 billion. Lukoil plans to invest $5 billion in the project in 2013 alone.

Last year, Exxon offered to sell its West Qurna-1 stake after a dispute with Baghdad over contracts it signed with autonomous Kurdistan in the north, deals the central government rejects as illegal.

A source familiar with PetroChina's operations in Iraq said in March the two companies were discussing a deal that would enable Exxon to retain operator status at the oilfield, where Royal Dutch Shell (RDSa.L) is minority partner with 15 percent.

Some industry sources said it was unlikely that PetroChina would buy stakes in both projects, due to their sheer size.

But Iraq's oilfields are the largest in the Middle East open to foreign investment, making them hard to resist as China's dependency on imports rises.

"PetroChina is under big pressure to add output and reserves for its size," said a second industry official, who has direct knowledge of PetroChina's investment strategy abroad.

"Iraq, given its attractive contract terms, was among the brightest spots for PetroChina's international operations over the past three years, working shoulder by shoulder with global oil majors."

In a separate deal, Exxon and PetroChina agreed in late July to jointly study the 3,830 square-km Changdong block in northern China's Ordos basin, the companies said, which industry officials described as containing gas that is hard to access.