Last checked at 
* Oil, gas output seen stagnating this year
* Investment growth coming to a halt
* Big increase in Arctic resource estimate
By Gwladys Fouche
STAVANGER, Norway, Jan 15 (Reuters) - Norway cut it oil andgas production forecasts on Wednesday and warned that risingcosts are thwarting investment even as resource estimates riseon more Arctic riches.
The world's seventh-biggest oil exporter and WesternEurope's top gas supplier cut its forecasts on capacityconstraints, a big slowdown in investment and project delays.
It also warned that new developments are at risk.
"The biggest challenge is that costs have increased," saidBente Nyland, director of the Norwegian Petroleum Directorate(NPD).
"Higher costs have already led to some projects beingdelayed ...and higher costs and uncertain future oil and gasprices is a significant challenge."
Energy firms around the world delayed or cancelled bigprojects last year, trying to rein in capital spending and savecash for dividends after a decade-long boom in investment.
Norway's state-controlled Statoil last year delayeddevelopment of the $15.5 billion Johan Castberg oil field in theBarents and $7 billion Bressay field in the U.K. North Sea,citing rising costs, among other factors.
For 2014, the NPD cut its oil production forecast to 1.46million barrels per day (bpd), in line with last year, but belowa previous 1.52 million bpd forecast. It also sees steady gasproduction after earlier predicting a rise.
It also lowered its investment forecasts, predicting just 2percent growth over the next two years before a decline.
INCREASED M&A?
"If oil and gas prices fall and costs remain stable or rise,this will have an impact on decisions to start up new projects,and will entail lower investments than included in theforecasts," the NPD added.
To improve efficiency, mergers and acquisitions activity mayincrease, Nyland said.
"There are a lot of companies on the shelf. We have saidearlier that this kind of restructuring is possible to happen,particularly now when you see the capital strains and you needthe capital to fulfil your obligations," Nyland told Reuters.
"That might be tough for some of the smaller companies withno production or income," she added.
"It's very obvious that costs are a major challenge," saidThina Saltvedt, an oil analyst in Nordea Markets.
"Investments will slow down and the scale of investmentswill be significantly lower."
Even as investment growth slows, the NPD sharply increasedits total undiscovered resource estimate to 18.5 billion barrelsof oil equivalents (boe) from a previous estimate for 16.3billion with much of the rise coming in Arctic waters.
That number can grow further, the NPD said.
"When new areas are opened, the amount of resources ...canincrease," Nyland said.
Oil and gas resources in the Arctic Barents Sea are seen at8 billion boe, 33 percent more than earlier, following a stringof recent discoveries. The resource estimate for the NorwegianSea was increased by 9 percent to 5.3 billion boe.
The NPD expects energy firms to drill 50 wells this year, upfrom 47 last year, with over a fifth set for the Barents Sea.
Norway's top oil producers include Statoil, Shell, BP, ConocoPhillips and ExxonMobil.
