OIL and gas firms could slash investment in the North Sea by more than £10 billion annually over the next three years after incurring their worst cash flow deficit since 1976 amid the crude price plunge, experts have warned.

Predicting that annual investment in the UK North could be cut by more than two thirds by 2017, Oil & Gas UK raised the prospect of more hefty jobs losses as firms rein in spending.

Industry players including BP and Shell are reckoned to have cut 5,500 jobs in total in recent months.

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However, Oil & Gas UK calculates 65,000 jobs have been lost across the wider supply chain since January last year as the effects of the crisis rippled through the economy.

In its latest annual Economic Report, the trade body reckons cost cutting will help firms save £2bn next year providing a much needed boost to competitiveness.

Chief executive Deirdre Michie said the industry had turned a corner. But she said firms were only half to two thirds of the way through the process of getting themselves in shape to live in a world of volatile oil and gas markets.

“This great industry of ours is facing very challenging times,” said Ms Michie.

The savings secured so far may not be enough to stop firms deciding to close down a range of fields that do not make enough money.

Oil & Gas UK said the continued low crude price will inevitably cause companies to reflect on the future viability of their assets.

On Monday the new Oil and Gas Authority regulator said whole areas of the UK North Sea may be shut down as fields are closed resulting in vital pieces of infrastructure being taken out of service.

The slowdown in the industry will send tax revenues plunging.

Lamenting the recent lack of exploration activity, Oil & Gas UK warned billions of barrels of the oil that remains under the North Sea could be left undeveloped.

The organisation welcomed tax breaks provided by the Government in the March Budget but said more needs done to boost activity.

The 2015 Economic Report provides a sobering assessment of the state of an industry that is reeling from the effects of the plunge in the oil price.

Brent crude traded at around $49 per barrel yesterday compared with $115/bbl in June last year.

The fall in the crude price brought an end to a period of booming investment in the North Sea which saw firms sanction huge projects in areas like West of Shetland.

With supply running well ahead of demand, Oil & Gas UK noted market movements increasingly suggest prices may trade within the current range of $45-65/bbl well beyond the end of 2015.

It reckons 20 per cent of North Sea production is uneconomic at $50 per barrel following increases in costs during the boom that ended last year.

“The significant fall in production efficiency and sharply rising costs have left the UK sector particularly exposed to the drop in oil price,” noted Oil & Gas UK.

The body reckons UK North Sea firms lost £4.2bn in 2014, the worst result since 1976.

Noting that the situation had been exacerbated by the continued fall in commodity prices in recent weeks, Ms Michie said:"This is not sustainable and investors are hard-pressed to commit investment here with so few new projects gaining approval.”

While a number of projects approved during the boom are still to be completed the industry could shrink dramatically unless firms commit to new developments.

Capital investment in new assets is expected to drop from £14.8bn in 2014 by two to four billion pounds in each of the next three years.

Oil & Gas UK predicted 50 depleted fields will be in the decommissioning process by 2018, up from 14 currently.

The figures do not include fields that may be closed on economic grounds.

Retrenchment could continue to take a heavy toll on jobs. Oil & Gas UK estimates jobs supported by the industry have fallen by 15 per cent, since the start of 2014, from 440,000 to 375,000.

“It is likely that capacity may have to be reduced still further in order for the business to weather the downturn,” said Oil & Gas UK.

Ms Michie noted exploration for new resources has fallen to its lowest level since the 1970s.

She applauded the Government’s efforts to stimulate activity by cutting tax rates and providing funding for surveys.

However, the former Shell executive observed: “With lower commodity prices expected over a prolonged period, it is now time to consider further lightening of the tax burden.”

Oil & Gas UK said concerted action by the industry to improve efficiency across the sector will lead to an estimated 22 per cent reduction, worth over £2bn, in the cost of operating existing assets by the end of 2016.

Production is expected to rise by around three per cent this year reflecting increased output from existing assets and the new Golden Eagle field. This means total costs will be spread across more barrels, helping to reduce unit operating costs by £2 per barrel to £15-£16/bbl in 2016.

“The industry is under a lot of pressure and it is now widely recognised that a transformation in the way business is done is required if the UK sector is to become more resilient and competitive in a world of sustained lower oil prices. The challenges are being tackled head on,” said Ms Michie.