Britain's ageing North Sea oilfields need flexible tax, collaboration

* Oil and gas output has plunged by two thirds since 2000

* Norway has had tax-based exploration incentive since 2005

* Review led by Ian Wood has scope to promote collaboration

By Sarah Young

ABERDEEN, Scotland, Sept 6 (Reuters) - Norwegian-style taxbreaks for exploration and more cooperation by companies to cutcosts such as transport would help Britain's ageing North Seaoil industry to fight decline, industry leaders say.

Oil and gas production has plunged by two thirds since 2000and particularly steep falls of 14.5 percent last year and 18percent in 2011 have aroused government concern.

With the North Sea in its fifth decade of pumping oil andgas, finds tend to be small and costly to exploit, while oldplatforms and pipelines need more maintenance, cutting outputand profits.

The government has sought to cushion the blow of a shock taxhike on producers in 2011, introducing tax breaks for some newfields that are harder to develop and for revamping olderfields. It has also launched a review of the North Sea tomaximise the industry's economic benefits.

The outlook over the next two to three years is rosier.Investment is forecast to reach a record 13.5 billion pounds($21 billion) in 2013, as much as 6 billion pounds more than twoyears ago, and production is expected to pick up in 2015.

Beyond that, the picture is less clear.

"At the moment we don't see this level of investmentcarrying on post-2016. For spend to be at the level it is now,we do need to see more exploration success," said LindsayWexelstein, an analyst at energy consultancy Wood Mackenzie.

Prolonging the North Sea's life in the longer term willrequire a flexible tax regime, said company bosses at aconference in Aberdeen, the centre of Britain's oil sector.

"Given the maturity of the North Sea, it will beincreasingly important to adapt fiscal policy to differentactivity types," Andrew Gould, the chairman of BG Group,which has extensive interests in the UK North Sea.

Tax relief on enhanced oil recovery - an expensive techniquewhich involves pumping associated gas back into oil fields toraise the recovery rate - could lift volumes, said the chiefexecutive of industry body Oil & Gas UK, Malcolm Webb.

"There are huge volumes of oil in this," he said, addingthat only about half the oil in any field is now extractedbefore it is shut down.

Graham Stewart, chief executive of Faroe Petroleum,said a tax-based exploration incentive like one operating inNorway since 2005, would help promote new finds.

"Norway took a gamble and it paid off for them. I believesome similar arrangement could work here," said Stewart, whosecompany explores for oil in Britain and Norway.

Exploration off Britain has fallen behind that of Norway,with which it shares the North Sea. Big discoveries in Norwayinclude the Johan Sverdrup field - 2011's biggest find globally.

The number of exploration wells drilled off Britain has beenin decline since a 2008 peak of over 40 and was 24 in 2012, morethan the 14 drilled in 2011. Off Norway more than 40 have beendrilled each year since 2008.

Oil & Gas UK estimates that between 3 billion and 9 billionbarrels of oil equivalent have yet to be found off Britain -which produces 0.2 percent of the world's oil and 1.2 percent ofits gas, but small operators want more help over tax.

Around 90 percent of Britain's oil and gas is in Scottishterritory and prospects for North Sea output are vitallyimportant to the Scottish National Party which is seekingindependence in a referendum next September.

MORE COLLABORATION

The government-commissioned review of the North Sea, thefirst in more than 20 years, will not make recommendations ontax but Webb said it could be influential in other respects.

Encouraging more collaboration between companies is one area where the review, led by Ian Wood, former chairman of FTSE100 oil services group Wood Group and due to be publishedearly next year, could help the industry.

"We all - industry, suppliers, government, communities andNGOs alike - need to get better at working together," said SamLaidlaw, chief executive of utility Centrica, whichproduces oil from more than 20 fields off Britain's coast.

More collaboration between companies could help ensure anynew oil fields found can be linked to existing infrastructure.

Currently smaller oil companies, who increasingly make upthe North Sea's population as majors such as BP and RoyalDutch Shell hunt bigger opportunities elsewhere, canstruggle to gain access to pipelines.

There are fears that if infrastructure is taken down beforenew discoveries are made, new smaller fields that are foundlater could be uneconomic without it.

"If the North Sea is to remain a competitive investmentprospect it must achieve a step change in the cost ofexploitation," Gould said.

The investment climate has grown increasingly competitiveover the past decade as new finds and technologies have openedup dozens of big new oil and gas areas elsewhere in the world.

Harnessing new technologies will help cut costs, Gould said,adding he expects there will be fewer staff based offshore infuture, while more equipment will be controlled remotely.

Marcus Richards, chief executive of Aberdeen-based DanaPetroleum, a unit of Korea's National Oil Company, said NorthSea companies needed to start working together to bring downtheir supply chain costs, as they do in the Gulf of Mexico.

"An example would be a company which runs logistics acrossthe North Sea and has multiple service partners. What you do, isa bus run instead of a bespoke trip from shore to the offshorefacilities," he said.