UPDATE: UK Oil, Gas Exploration Faces Collapse -Industry Grp

(Adds background, context.)

LONDON (Dow Jones)--Investment and exploration in the U.K. North Sea oil and gas basin could collapse this year because of high costs and a funding drought, said the head of the country's oil and gas industry lobby Thursday.

Investment could have halved within two years and exploration and appraisal of new reserves in 2009 could fall to a third of the 2008 level, Oil and Gas U.K. Chief Executive Malcolm Webb told a special session of the U.K. parliament's Energy and Climate Change Committee in Aberdeen, Scotland.

"Since 2004, costs have doubled and the rate of tax charged on new developments has risen to 50%," Webb said. "With sources of credit drying up, the amount of capital available has drastically reduced and the falling competitiveness of U.K. projects means investment could halve in the next two years."

"To prevent these challenges in the short term wreaking long-term damage on the industry's productive capacity, Oil and Gas U.K. believes the government should take measures to unfreeze the flow of debt and credit facilities from banks," he said.

"It should also bring forward access to tax relief on exploration costs for small companies to the point where the well is drilled, as already happens in Norway, so that these sums can be re-invested in immediate activity. It must also use the value allowance it has already proposed to eliminate the 20% supplementary charge on corporation tax from all new projects," Webb said.

He said these proposals wouldn't lose the taxpayer money, because the increase in activity would make up for any fall in existing revenue.

Oil and Gas U.K. represents 81 companies who explore for and produce oil and gas in U.K. waters and companies in their supply chain.

In the third quarter of 2008, the most recent period for which government figures are available, the U.K. produced almost 90% of its own oil demand and 86% of gas demand. However, the North Sea has been extensively developed and production from most fields in is rapid decline.

The U.K. North Sea has some of the highest finding and development costs in the world, so its commercial viability has been hit hard by the more than $100 per barrel fall in the oil price since last year.

One of the largest North Sea producers, BP PLC (BP), said last month that its North Sea business is unsustainable at current prices. It has opened talks with key contractors and suppliers about reducing costs.

Small companies who were responsible for the bulk of new exploration in the region have also struggled to raise new capital since the financial crisis unfolded. The U.K. subsidiary of Canada's Oilexco Inc (OIL.T), which was the most active driller in the area, declared bankruptcy late last year.

Company Web site: www.ukooa.co.uk

-By James Herron, Dow Jones Newswires; +44 (0)20 7842 9317; james.herron@dowjones.com

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(END) Dow Jones Newswires

March 19, 2009 06:19 ET (10:19 GMT)


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