The deal could include a four-billion-dollar (A$5.3 billion) investment in the West African country’s infrastructure in return for the grant of four exploration licences to China’s state oil firm.
China's President Hu Jintao flew into Abuja airport as part of a four-nation tour of Africa and the Middle East, which analysts say is aimed at strengthening ties with oil-exporting countries.
It comes at a time when China is seeking resources to sustain its rapidly growing economy when world energy prices are rising dramatically.
Mr Hu was welcomed by his host, President Olusegun Obasanjo, at the start of a two-day state visit during which he will hold talks with his counterpart and address a joint session of parliament.
"I look forward to an in-depth exchange of views with President Obasanjo on promoting China-Nigeria relations and on international and other issues of common interest," Mr Hu said, in a statement released to the media.
"I'm confident that my visit will expand cooperation for mutual benefit in various fields and enhance China and Nigeria's strategic partnership," he said.
It is not yet clear how any deal would affect US energy interests.
Billion dollar deals
Last week, China's offshore operator CNOOC confirmed that it had signed a 2.7-billion-dollar deal to buy a 45-percent stake in another Nigerian oil block, the firm's largest-ever foreign investment.
Ahead of the visit, Nigerian officials said China's state oil company CNPC would be offered four oil exploration blocks in exchange for four billion dollars worth of repairs to a refinery and infrastructure projects.
It was not clear whether a deal would be signed during this week's visit.
"It is part of the memorandum of understanding we have with the Chinese, who are committed to invest four billion dollars in the Kaduna refinery," said Tony Chukwueke, director of Nigeria's Department of Petroleum Resources.
He said the two countries had agreed a draft proposal under which China will repair the outdated and rundown Kaduna refinery and undertake other investment projects in return for being given first refusal on the blocks.
Nigeria, which currently exports some 2.6 million barrels of oil per day, is due to hold an auction of oil exploration blocks around the country on May 19, and CNPC is expected to be one of the biggest bidders.
Chinese oil consumption is expected to rise from 6.59 million barrels per day in 2005 to 6.95 million this year as its once largely agrarian economy continues its rapid industrialisation and more of its citizens buy cars.
Last year China bought 38.47 million tonnes of African oil, about 30 percent of total imports, nine percent more than in 2004. Its biggest African suppliers were Angola, Sudan and Republic of Congo, according to Chinese figures.
Trade links
In addition to being a source of oil, Nigeria is a trading partner for China, buying many manufactured goods including electronics and car parts. Its contruction firms also have many contracts here.
"China is a very important economic partner to Nigeria, because it is a bastion of economic cooperation between Nigeria and Asia. China has invested a lot of funds in our economy," Mr Obasanjo's spokeswoman Remi Oyo said.
"President Obasanjo sees this visit as a way of furthering the economic relations between the two countries," she added.
Nigeria hopes to expand a relatively small-scale export of cassava chips to China, but it currently runs a huge trade deficit with its giant Asian partner.
In 2004, Chinese exports to Nigeria totalled 2.28 billion dollars while Nigeria's exports in the other direction, including oil, came to 460 million.
Mr Hu will visit Kenya after Nigeria, the last stop on his tour of Africa and the Middle East.