Drilling for North Sea oil and gas slumps by 57%

Ministers must raise tax relief to avoid decline in exploration, say experts

Oil and gas drilling operations in the North Sea have more than halved in the past year, while activity in the equivalent sector in Norwegian waters has shot up, figures showed yesterday.

The Norwegian energy industry is reaping the rewards of a more generous tax incentive scheme, experts warn. Unless the British government follows its example the consequences could be dire.

Lower oil prices and tight credit markets have put intense stress on oil and gas companies. Only 15 exploration wells were drilled in the three months to June, 57 per cent fewer than last year, according to research from the business advisory group Deloitte. At the same time, activity in Norwegian waters has shot up by 50 per cent.

The findings will up the pressure on the Government to change the fiscal regime covering the UK Continental Shelf (UKCS). The rapid growth in drilling in Norway is the result of tax breaks for unsuccessful exploration, which were introduced in 2005. Although Alistair Darling's April Budget did include some additional tax relief for explorers, the measures are too narrowly targeted to make the necessary difference, said Derek Henderson, a senior partner at Deloitte.

The danger is not only that Norway draws investment away, but also that existing UKCS infrastructure lapses and is not economically recoverable. "We can't afford to let the time run out because of issues around the integrity of infrastructure," Mr Henderson said. "And if exploration falls away there will be a direct impact on production."

Oil & Gas UK, the industry body, warned on Wednesday that oil and gas investment could fall below £3bn in 2010, stunting the supply chain and threatening future expansion. It is calling for a relaxation of the punitive tax regime on the sector.

At current rates, the UKCS will be meeting just 20 per cent of Britain's energy needs by 2020, compared with up to 50 per cent if investment is maintained."That is a really big gap to have to make up from somewhere else," Mr Henderson said. "The North Sea is currently not as politically attractive as renewables, but it would be criminal not to exploit what is left there to the maximum extent possible."