ONGC Videsh Limited (OVL) had earlier indicated to the Vietnamese authorities its plans to terminate operations in the 128 block as it could not begin oil exploration due to hard sea bed and wanted quit for "techno commercial" reasons.
A formal announcement to extend the contract for exploration of hydrocarbons in the block to the overseas arm of ONGC, is going to take place soon, a top government official told a group of visiting Indian journalists.
The development came amid rising tension in the South China Sea with US, India and a number of ASEAN countries asking China to resolve the standoff through talks with the concerned countries as per international law.
China has been objecting to the Indian exploration projects in the region, claiming that the territory belonged to it.
The standoff in the region intensified earlier this month after China's state-owned oil firm China National Offshore Oil Corporation (CNOOC) called for bids from foreign companies offering exploration of oil in nine blocks in the South China Sea, sparking off protests in Hanoi.
Sources here said part of the oil block number 128, which was contracted to ONGC also fell under the blocks that CNOOC put up for bidding. Vietnam said the oil blocks belong to its exclusive economic zone.
Vietnamese authorities and Petro Vietnam with which OVL had struck a deal took up the issue with Indian Government insisting it should not withdraw from the block.
The officials said ONGC preferred to withdraw operation than paying penalty for not being able to start exploration of hydrocarbons with a deadline set earlier by Vietnamese authorities. The OVL had returned block 127 to Vietnam three years ago after realising that it did not have much hydrocarbons.
The OVL had agreed to re-examine withdrawing from block 128 if Petro Vietnam renews the contract.
Unfazed by Chinese objections, India had inked an agreement with Vietnam in October last year to expand and promote oil exploration in South China Sea.
The Chinese claim on the South China Sea has been rejected by both India and Vietnam, saying as per the UN, the blocks belong to Vietnam.
At the ASEAN Regional Forum meeting in Phnom Penh on Thursday, External Affairs Minister S M Krishna asserted that freedom of navigation and access to resources in the area must be ensured in accordance with laid down principles.
China has been opposing resolution of the dispute under international laws and insisting on resolving the issue through bilateral talks with respective countries.