THE fall in oil prices will take a shattering toll on the North Sea as firms slash investment in ageing fields off Scotland, a US banking giant has warned.
Bank of America Merrill Lynch said the sector is especially vulnerable to the effect of the plunge in oil prices because too much production comes from older fields that are costly to run.
It believes firms will decide it is not worth the expense of trying to maintain production from such fields if oil prices remain at the kind of levels they have fallen to recently.
The bank forecasts total oil output from the UK North Sea will fall by around 20 per cent over the next five years.
"The fast drop in global oil prices is likely to have devastating consequences for the region," said the bank in its Global Energy research report.
It added: "Reinvestment in older North Sea fields will simply tumble on $50/Bbl (per barrel) oil."
The warning also covers the Norwegian North Sea.
However, the report will add to fears the UK industry is facing a crisis that could hit Scotland especially hard, with many ageing fields in the sea off the north east.
It comes days after oil and gas tycoon Sir Ian Wood warned six billion barrels of oil reserves could be abandoned unless there is a big change in conditions.
A series of oil and gas firms, including BP and Talisman Sinopec, have already announced plans to slash jobs in Scotland as they cut activity in response to the fall in prices.
This week drilling operator KCA Deutag announced plans to axe 230 North Sea jobs.
The Bank of America Merrill Lynch report will increase the pressure on the Government to take action that could provide a lasting boost to the industry.
Trade body Oil & Gas UK said swift action was needed to help make the industry more competitive.
Mike Tholen, economics director, said: "The industry is doing its part, making tough decisions and implementing necessary cost reduction and efficiency improvement measures."
He added: "HM Treasury must radically reduce the tax burden, which currently faces headline tax rates of 60-80 per cent, and simplify the fiscal regime."
The organisation wants tax cuts to be included in Chancellor George Osborne's Budget next month and it is canvassing members about their investment plans.
While firms such as BP and Shell are investing heavily in developing new fields off Shetland, the projects were approved during a long period when oil traded at more than $100 a barrel, which ended in June.
Bank of America Merrill Lynch said the pipeline of projects is set to dry up and predicts conditions will remain tough for oil and gas firms for years.
The bank forecasts that Brent crude will sell for an average $60 to $90 per barrel in the five years to 2019. Prices will be volatile.
It fetched $115 per barrel in June before prices started falling amid plentiful supplies from US shale areas and muted demand.
The price fall accelerated sharply in November when the OPEC organisation of oil exporters decided not to intervene.
Analysts have suggested OPEC wants to drive US shale producers out of the market.
Bank of America Merrill Lynch warned that Saudi Arabia, the biggest OPEC producer, could live with low prices for years.
It forecast production in the North Sea will fall at a rapid rate in coming years.
"Oil output declines in the North Sea are as predictable as the weather: bad or worse than bad," said the bank.
The bank projects that oil production in the UK will average 768,000 barrels daily this year, compared with 858,000 last year.
It predicts output will fall to 684,000 barrels a day in 2019, around half the level in 2010.
While Brent crude sold for $61 a barrel yesterday, Bank of America Merrill Lynch forecast it would trade below $40 over the next two months as supply exceeds demand.
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