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* Small firms dominate North Sea exploration
* Oil price fall to curb investment, tax receipts
* Mergers could help create more robust businesses
By Karolin Schaps
LONDON, Dec 22 (Reuters) - Plunging oil prices haveincreased the strain on the many small energy firms operating inthe North Sea who were already facing diminishing returns froman area that once helped power the British economy.
With fields more mature and oil harder to find, heavyweightssuch as BP and Shell turned their attentionelsewhere long ago, leaving smaller independent firms to explorethe more remote areas.
As many as 133 companies are now active in the British partof the North Sea. However, a third of those companies are deemedby experts to be too small to finance big ticket projects and a fall of around 45 percent in oil prices since June has lessenedthe sector's appeal to big investors.
Efforts to find new oil and gas fields have slumped to thelowest level since exploration started in the 1970s because ofreduced investment. That has sharply cut the amount of revenuethe government can expect to take from the sector in taxation.
"Nothing less than radical change will prevent the prematuredemise of the basin, let alone maximise economic recovery," saidDave Blackwood, former head of BP's North Sea business, addinghis voice to industry calls for tax cuts.
Britain's finance ministry has said it is working on areform of its oil and gas tax policy but its drive to reduce thebudget deficit will limit its ability to cut rates. An electionnext May only adds to the political uncertainty.
British oil companies pay a supplementary levy on top ofproduction income tax, which will drop by 2 percentage points to30 percent on Jan. 1. The oil industry is crying out for steepercuts to help dampen the impact of surging costs.
"You've got to get the tax change right. If you put it uptoo much, and arguably that has happened, then it stranglesactivity," Mark Routh, chief executive at small North Sea playerIndependent Oil and Gas, told Reuters.
RECEIPTS FALL
During the early 1980s, annual tax receipts to MargaretThatcher's government peaked at 12 billion pounds ($18.8billion) when booming North Sea oil output coincided with highoil prices, four times the 3 billion pounds predicted for 2014.
Promised oil revenues were in part used to justifyScotland's independence movement which banked on oil tounderwrite a historic break for the rest of Britain, thwarted ina referendum in September.
Instead, Brent crude prices fell as low as $58.5 a barrellast week and the major oil firms are shifting their focus tomore promising new areas in south-east Asia, Africa and shaleoil plays in North America.
While Britain's growing pool of small-scale firms, such asParkmead, Hurricane Energy and Infrastrata, can be more nimble when it comes to adopting newtechnologies, many of the areas remaining to be explored are remote and therefore costly.
"If they don't have the money they can't fund activity,"said Brian Nottage, general manager at oil and gas advisoryHannon Westwood.
An example is Atlantic Petroleum, which producesoil in the UK North Sea and has cut its exploration spending for2015 by 75 percent, arguing it needed to save cash to fund itsoperating fields in the current oil price environment.
An increasing number of firms looking to enter new fieldsare now offering "farm-outs", allowing investors including rivalcompanies, to take a stake in the new project.
"(But) not that many are successful, hence the problem thatwe see in exploration activity," Nottage said.
Of the 133 companies in the UK North Sea, more than a thirdhave not developed reserves in the basin, meaning they cannotbank on any revenue from production in the short term.
In the longer term, the large number of small-scale playersaccessing the North Sea exploration market could lead to mergeractivity to create more robust businesses.
"The UK North Sea is definitely at an inflection point. Thatinflection point will either send it down or have the potentialto make sure it remains as a basin for another 10-15 years,"said Alison Baker, head of PwC's UK oil and gas practice. ($1 = 0.6398 pounds) (Additional reporting by Alistair Smout and Balazs Koranyi inOslo; editing by Keith Weir)
