A chronic shortage of rigs and workers has doubled the cost of producing oil and gas in the North Sea, threatening to make the UK’s domestic oil industry uncompetitive, warned UKOOA, the association of North Sea offshore operators.

Signs that costs are crimping investment emerge in the association’s survey of North Sea activity, published today. It predicted that spending in 2007 will fall by £1 billion to £1.5 billion from last year’s £5.6 billion.

Further evidence of the dramatic worldwide oil industry cost escalation emerged yesterday in a new index showing a 53 per cent increase in project costs over just two years.

The Upstream Capital Costs Index, launched by IHC and Cambridge Energy Research Associates (Cera), climbed 13 per cent in the six months to the end of October because of soaring inflation in hiring rigs, shipyard fabrication and labour.

Cera predicted that confidence in new oil services capacity would remain if oil stayed above $55 per barrel.

Britain’s oil and gas output fell 9 per cent last year to 2.9 million barrels per day, and the decline is expected to steepen. The North Sea operators association has cut its output projection by an average of 250,000 barrels per day, owing to project delays, increased maintenance and poorer well performance.

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