Melrose Resources, the oil and gas independent, said it would slash capital expenditure by 25% next year to reflect falling oil prices and warned that production would also fall.

Melrose Resources, the oil and gas independent, said it would slash capital expenditure by 25% next year to reflect falling oil prices and warned that production would also fall.

The company said it is planning to spend $165m (£111m) on exploration and development activities from Egypt to the US next year, compared with $220m in the current year.

"The reduced expenditure level reflects the company's desire to focus its investments on high capital efficiency projects during a time of oil price weakness," the company said.

The announcement comes a month after Melrose put a relatively brave face on the steep fall in oil prices, since they peaked at $147 a barrel in July. In an interim management statement Melrose noted the bulk of its production was in fixed-price gas.

However, the decline in oil prices has gathered pace in recent weeks, leaving oil trading at around $48 a barrel and rattling nerves in the sector.

The size of the spending cut points to a marked change in thinking over the course of the year. Directors appear to have decided that it is not worth going flat out. Others may reach the same conclusion.

Melrose noted the expected slowdown in activity would bring some benefits: "A number of non-essential work programme items have been deferred in order to take advantage of the expected decline in the cost of oil field materials and services over the forthcoming months."

Melrose forecasts its average daily production rate in 2009 will be 15,000 barrels of oil equivalent daily (mboepd) on a net entitlement basis.

In October Melrose cut its guidance for this year to reflect the run down of the Galata gas field off Bulgaria and what is said were "minor operational delays in Egypt". Galata will be converted into a gas storage facility.

Melrose said it was prudent to reduce its 2008 net entitlement production guidance from 19.2 to 18.3 mboepd.

Melrose moved to offer some reassurance on the production front yesterday.

"We expect production volumes to increase again in 2010 when we will benefit from a full year of contribution from our new Bulgarian discoveries and the West Dikirnis field in Egypt should be on peak production," said chief executive David Thomas.