Moves in Congress to open off-limit areas of Alaskan wilderness to oil exploration are causing a diplomatic flap between the United States and Canada - and one that could ultimately test President Clinton's veto powers.

At issue is Alaska's Arctic National Wildlife Refuge and a 1987 agreement between the two countries to protect the 170,000-strong Porcupine caribou herd, which ranges across the Porcupine River between the ANWR and Canada's Yukon Territory."The original agreement was to maintain this as a wildlife refuge, and it's our government's policy to maintain that and prevent any further development," said Ann Garneau, a consul at the Canadian Consulate in New York.

Drilling advocates, including the state of Alaska and oil companies like Atlantic Richfield Co., Los Angeles, argue that development would disturb no more than 12,500 acres along the ANWR's coastal strip, out of the refuge's 19 million acre total.

But Canada maintains that the conservation agreement gives them the right to block oil development on the U.S. side of the caribou's range, regardless of the oil wealth that is likely to be found.

"We have a very close and complex relationship with the United States," said George Rioux, a spokesman at the Canadian Embassy in Washington, D.C. ''Our two-way trade is now over $2 billion a day. We have 230 agreements with the United States, with more on the way. But when we sign agreements with other countries, we expect them to be respected."

A similar view was expressed in September in a "diplomatic note" from Canadian Ambassador Raymond Chretien to the U.S. State Department, asking that ''every effort is made to reject development and instead seek permanent wilderness protection" for the area.

But the Canadian government has been "disingenuous" on the issue, said Roger Herrera, director of Arctic Power, a Washington, D.C., advocacy group that claims 12,000 members, mostly from Alaska, who hope the ANWR will be opened to drilling.

"They say they are protecting the caribou herd, but they fail to mention what they've done to destroy it on their side of the border," said Mr. Herrera. "They built the Dempster Highway right through the caribou herd, which, given their position in Alaska, is totally irresponsible."

What's more, he said, Canada hopes to establish its own Arctic oil production in the Canadian sector of the Beaufort Sea to the east of the ANWR, and then export that oil south to the United States. So far, Canada has made several small offshore discoveries in that area, but none large enough to carry the cost of pipelines to move it to market, said Mr. Herrera.

"They've yet to find one large enough to justify commercial development, but they're still looking," he said.

Perennial attempts to open the ANWR to drilling have all failed, and last year's legislation was killed by a filibuster before it could reach a vote. This year, however, a robust campaign by Sen. Frank Murkowski, R-Alaska, chairman of the powerful Senate Energy and Natural Resources Committee, has brought oil exploration in the ANWR closer than ever before.

Those measures are included in both House and Senate budget bills that will be debated later this month. There is a good chance, however, that because of the opposition of moderate Republicans, ANWR provisions will not be be included in the House version of the budget reconciliation act, which will receive a final vote in November before moving to President Clinton for signing.

There is no formal movement in the Senate to remove the drilling provision

from its budget bill and a spokesman for Mr. Murkowski said Monday: "We're firmly committed to making this happen this year, and we're not too concerned about the House" opposition.

If ANWR provisions are included, however, Secretary of the Interior Bruce Babbitt has said he would recommend a presidential veto. Alice Rivlin, President Clinton's budget director, has also said that a budget veto is likely, even though the sale of the ANWR's oil leases would raise $1.3 billion in federal revenue over seven years, as well as another $1.3 billion over that period for Alaska.

There is plenty of reason to drill. Government estimates suggest that the ANWR contains the last potentially giant oil field left to be discovered in North America. The proposed sight, known as area 1002, almost certainly contains at least 3 billion barrels of crude oil, with upward estimates reaching 12 billion barrels of recoverable reserves.

That would make it the largest U.S. oil find since Arco discovered Alaska's Prudhoe Bay field, about 60 miles west of the ANWR, in 1968. Prudhoe Bay has produced about 10 billion barrels of oil over the last 20 years. It continues to produce more than 1.5 million barrels a day, but is now in decline.

Oil interests hope the ANWR will take up where Prudhoe Bay leaves off. The field might produce 1.5 million barrels of oil a day for up to 25 years, or 25 percent of current U.S. daily production, and save the United States an estimated $14 billion a year on its oil import bill, according to Sen. Murkowski.

But that coastal strip of fragile tundra happens to be the exact area where 92 percent of the Porcupine caribou come to calve in the spring and feed on the first grass of the season. It is also home to hundreds of other animals, including more than 140 kinds of birds.

"Shortly after the caribou calve, the whole herd comes together in the area because it is relatively free of biting insects," said Dave Brackett, director general of the Canadian Wildlife Service in Ottawa. "It's important to the survival of the caribou."

It is also important to the survival of the 7,000 indigenous Gwitch'in people who live in the region and depend on caribou meat to support their traditional way of life.

"We rely on the caribou for our life sustainance, and we are making an appeal to the American people," said Norma Kassi, a Gwitch'in and member of the Yukon Legislative Assembly, on a visit to New York. "All the rest of Alaska is open for development. This is one small area of the Arctic that is very biologically diverse. Our whole way of life depends on the caribou herd."