HO CHI MINH CITY – News of the discovery of a new offshore oilfield in northern Vietnam may be drawing toasts at home, but it threatens to add fuel to a longtime controversy with China over a territorial dispute in the South China Sea.

Just a day after last Wednesday’s announcement of the find by a partnership of oil companies from Vietnam, Malaysia, Singapore and the United States, a Chinese government spokeswoman made clear Beijing’s position toward future oil exploration in the region.

“China is seriously concerned and strongly dissatisfied,” Foreign Ministry spokeswoman Zhang Qiyue said. In contrast, an official with the oil companies called the oil find a “lucky” one for Vietnam.

The oil find, announced by a partnership of companies comprising Petronas Carigali Overseas of Malaysia, American Technology Inc Petroleum (ATI), Singapore Petroleum Co and PetroVietnam’s Petroleum Investment and Development Co (PID), is at the Yen Tu field, about 70 kilometers east of Vietnam’s Hai Phong seaport.

According to ATI general director Dinh Duc Huu, many companies have been exploring Yen Tu for oil and natural gas but this was the “first oil strike” in the waters off northern Vietnam. Huu, who estimated preliminary reserves at 181 million barrels, said most of the country’s daily oil output comes from oilfields off the country’s southern coast.

Vietnam is the is the third-largest oil producer in Southeast Asia with output of 400,000 barrels per day. Indonesia, with crude oil output at 966,465 barrels per day in September, is the region’s No 1 producer, followed by Malaysia.

The partnership, which discovered the oil in the 14,000-square-kilometer area of Blocks 102 and 106 in the Yen Tu field, an area close to Chinese territorial waters, started operations in mid-2000. The companies have spent about US$20 million on exploration and, according to Huu, will need $100 million more over the next two to three years before oil could be removed. Chinese firms earlier had also struck oil in several fields near Block 106.

The latest find is west of China’s Hainan Island and, for Beijing, not too far from the South China Sea, where its territorial claims cover 80% of the area. The South China Sea is also home to the much-disputed Spratly Island chain. Six claimants – China, Vietnam, the Philippines, Brunei, Malaysia and Taiwan – lay claim to part or all of these islands.

At the height of wariness by China’s neighbors about its intentions, this area used to be considered a key security flashpoint in the region, especially when different claimants used different means to strengthen their presence there.

Tensions rose over actions such as Malaysia’s announcement that it would organize tours to the region. In the mid-1990s, the Chinese put up what it called shelters for fishermen on islets claimed by the Philippines, fueling concerns in the Association of Southeast Asian Nations (ASEAN) about increased aggression by China and prompting increased diplomacy to engage Beijing.

China’s reaction this month to the Vietnamese government’s invitation for public bidding in oil exploration in the South China Sea is a reminder that while relations between Beijing and Southeast Asia are much warmer these days, old territorial disputes are very much alive.

This is particularly so for China and Vietnam, whose forces clashed in the South China Sea in 1988 and 1992, and where on both occasions the Chinese emerged victorious.

Beijing has signaled its intent to assert its control over the South China Sea in case oil and gas are found there. China, having already declared the Paracels to be part of its historic waters after seizing the small island chain from Vietnam, now considers them part of its nearby island province of Hainan.

Last year, China and Vietnam agreed to keep the status quo in the region and abide by the Declaration on the Conduct of Parties in the South China Sea, which was signed by China and ASEAN in 2002 after years of refusal by the Chinese to discuss the issue multilaterally. The Southeast Asian grouping considers the document vital to avoiding moves that add to tension in the disputed waters.

Now China is invoking the same document, reflecting its worries that oil exploration involving foreign companies dealing with Vietnam would undercut its claims. China’s spokeswoman Zhang Qiyue urged Hanoi to “correct its wrong conduct” and abide by the consensus reached in the declaration.

“As is known to all, China has indisputable sovereignty over the Nansha Islands and the adjacent waters,” the Chinese official said. “The above action by the Vietnamese side constitutes an infringement upon China’s sovereign rights and maritime rights and interests.”

China calls the Spratly Islands Nansha, while Vietnam calls them Truong Sa. Both countries have fielded historical and archeological evidence to support their claims in the disputed waters.

Zhang Qiyue has asked Vietnam to “cease to adopt any unilateral action that would complicate or give rise to further expansion of the disputes”. She also called on international petroleum companies to “cease to do anything that would impair China’s sovereign rights and maritime rights and interests”.

Of late, Vietnam been offering new investment opportunities for foreign crude-oil and gas firms.

At a Hanoi seminar on October 15, PetroVietnam invited foreign companies to Vietnam’s 2004 Licensing Round, which covers nine blocks in Phu Khanh Basin, an area the government said may hold the equivalent of a sixth of the nation’s total oil and natural gas reserves. The deadline for bids was set for next March 31.

“Phu Khanh Basin may contain the equivalent of 5.4 billion barrels of oil, or 16% of the 33.6 billion estimated to lie in Vietnam’s continental shelf,” Tran Duc Chinh, PetroVietnam’s acting general manager for exploration, said in an interview.

The nine blocks, named 122 to 130, cover about 10,000 square kilometers and are 600km northwest of Ho Chi Minh City. According to PetroVietnam chief executive Tran Ngoc Canh, they are at an “early exploration stage”.

But as PetroVietnam vice president Nguyen Fang Lieu remarked: “When oil prices are high, the efficiency of investment increases.” Record-high oil prices of more than $50 a barrel will probably spur interest from oil companies in the Phu Khanh Basin, officials said.

South Korea’s biggest oil refinery has already expressed its interest. Chey Tae-won, chairman of SK Corp, won a pledge by Tran Ngoc Canh to push for joint exploration activities in Vietnam’s offshore oilfields. So far, PetroVietnam has signed 43 contracts with foreign firms to carry out exploration and production operations in shallow-water areas with a depth of less than 200 meters.