LARGE-scale consolidation has been predicted for the oil and gas industry in 2015 by an influential sector analyst, which warns companies around the world will need to cut costs by as much as $170 billion to maintain net debt at 2014 levels.

The extent of the challenges facing the industry in light of plunging oil prices - now below $50 for a barrel of Brent Crude - have been set out in a report by Edinburgh-based Wood Mackenzie.

It predicts the industry will ramp up efforts to slash costs after "dipping its toes" in 2014, estimating that companies around the world will need to trim expenditure by 37 per cent to maintain debt at 2014 levels at a Brent Oil price of $60 a barrel.

And in the North Sea it forecasts the falling price will hasten efforts to cut capital investment on projects.

While before the price slump it predicted the $19 billion to $20 billion spent on projects last year would roughly halve by 2017, Wood Mackenzie now expects that 50 per cent cut to have taken place by 2016.

This is likely to heap further pressure on the North Sea, where major operators such as BP, Shell, Chevron and ConocoPhilips have slashed wages and jobs in response to the falling oil price.

The report anticipates that cuts will be spread across investment in new projects, exploration budgets, operating costs and shareholder dividends.

Ian Thom, head of the upstream research team at Wood Mackenzie, said companies operating in the North Sea have been forced to take "significant action" in the short term to absorb the dramatic effect on cash flow from the falling price of oil.

And in the longer term he expects operators to delay investing in new projects until the outlook becomes clearer and they have adjusted budgets to the lower price.

Mr Thom said: "We always had expected capital investment in the North Sea to reduce quite significantly after there was a big boom in investment over the last three or four years. That was expected to tail off three to six months ago.

"We have updated our profiles for the projects on stream and the new ones, and we are now seeing an even steeper drop in capital investment. This will absolutely impact on the North Sea."

The Wood Mackenzie report, which spotlights five key oil and gas themes to look out for in 2015, signals companies face the prospect of declining earnings and rising in response to falling revenues.

And it suggests 2015 could be a "true buyers' market" as distressed companies and assets are put up for sale. "Financially strong players will put rationalisation programmes on hold but some companies will find themselves with little choice, unable to achieve the cuts required in discretionary spend required to balance the books," the report states.

"Large scale corporate consolidation is more likely than at any point since the late 1990s."

The report is likely to intensify calls for the Treasury to ease the tax burden on North Sea operators.

Chancellor George Osborne has signalled measures to shore up the industry will be announced at the Budget in March, with industry body Oil & Gas UK arguing for the abolition of a supplementary 30 per cent charge on corporation tax.

Mr Thom anticipates any changes in the tax regime will focus on the supplementary charge, adding that waiting until the Budget to act will not present any real difficulties.

He said: "Oil companies are looking at investments in a 10, 20, 30 year time horizon. Already I think we can say it is inevitable there is going to be some reduction in the headline tax rate in March. That's a matter of weeks away now.

"From an oil company's perspective, compared to a project life cycle, there's a reasonable certainty there will be a reduction in the tax rate. The Chancellor has made that clear. For a company that is quite soon still."

A spokeswoman for Oil & Gas UK said: "We believe urgent action is now needed to secure the long-term future of the North Sea.

"Industry will continue to implement necessary efficiency measures, the new Oil and Gas Authority must be fully established as soon as possible, and HM Treasury must act radically to reduce the tax burden."

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