* Decision on replacement for Exxon expected by mid-2013 * Iraq refuses to pay second tranche of payment to Kurdistan * Shahristani urges OPEC members to observe production quotas By Simon Falush LONDON, Nov 14 (Reuters) - Exxon Mobil is in the advanced stages of talks with potential buyers to take on Iraq's West Qurna 1 oilfield and there are enough appropriate candidates, the country's deputy prime minister for energy said. Exxon is selling its stake in the south of the country to enable it to focus on its deal for exploration blocks in semi-autonomous northern Kurdistan. Hussain al-Shahristani also said Iraq would not pay a second tranche of an agreed 1 trillion Iraqi dinars ($860 million) to the Kurdistan Regional Government (KRG) because it had not met an oil export target agreed in September. Exxon Mobil, which has signed oil deals in the Kurdistan region that are seen as more lucrative but are dismissed by the central government as illegal, has informed Baghdad it wants to pull out of the $50 billion West Qurna 1 project in southern Iraq. The central government had told Exxon it had to make a choice between working in southern Iraq or Kurdistan. The U.S. oil major opted to stick with Kurdistan. Shahristani said Exxon would soon find a buyer. "A decision will have to be made shortly. To transfer the assets will take some time, but it will be sooner (than the middle of next year)," he told Reuters on Tuesday. "There are sufficient number of interested buyers with the financial resources and the technical know-how to buy their interest," Shahristani earlier told reporters. Uncertainty over who can replace the U.S. major in the project has raised questions about Iraq's targets for increasing crude output. Shahristani told the Oil and Money conference in London earlier in the day that Iraq could lower its oil production target to between 9 million barrels per day and 9.5 million bpd between 2017 and 2020 as part of a review. Iraq had previously stated plans to boost its production capacity to 12 million bpd by 2017 with the help of foreign firms, but this target has widely been seen as unrealistic. Shahristani told reporters on the conference sidelines that Exxon would soon hand over the field to a company that had the capabilities to exploit it. He declined to say how many companies were involved in the process or to identify their country of origin. "Exxon Mobil has already specified deadlines to submit the bids and as soon as they receive their bids, there is more than one interested qualified buyer," he said. "As soon as (Exxon) make a request to us to allow them to sell the interest to that buyer, then it will be known how long it will take them to finalise the arrangements. We have already agreed with Exxon on the timetables to finalise the arrangement," he added. Some industry sources have said Baghdad is keen to replace Exxon with companies from Russia or China. But it was unclear which companies would have the financial heft to follow Exxon. Russia's second largest crude producer Lukoil said on Friday it would study an offer from Exxon to take over West Qurna-1, Interfax news agency said. Lukoil, which is already developing West Qurna-2, has previously said West Qurna-1 is "too big for it to swallow", but on Friday it said it would at least look into the proposal. KURDISH DISPUTE The oil contracts row is part of a broader battle between Baghdad and Kurdistan over oil rights and territory. Baghdad and the KRG agreed in September to settle a dispute over oil payments after the KRG promised to continue exports and Baghdad pledged to pay foreign companies working there. Under this deal, the KRG agreed to pump 200,000 barrels per day of oil for export from October in exchange for the 1 trillion dinars. A first payment of 650 billion dinars was received in October, but Shahristani said no more would be paid. "There is no second payment. There is only a payment for 650 billion dinars and this has been made," he said. "The agreement required the KRG to pump 200,000 barrels a day from October and they have not been able to meet that requirement." A KRG official said: "We believe the political will is there to make (the agreement) work." Turning to OPEC policy matters, Shahristani said some members of the Organization for Petroleum Exporting Countries should cut their current levels of production. "The total quota for OPEC is 30 million barrels per day, OPEC is producing 31 million bpd, so there are some members overproducing their quotas. We are calling, and some other members are calling, for the quotas to be observed," he said. "There is no need for overproduction, the market is well-supplied, prices are stable, there is no great demand, so there is no need to over-produce," Shahristani added.