Britain is earning less from the North Sea as soaring costs, a weak gas price and dwindling output erode company margins and crimp government tax receipts from oil industry profits.

UK Oil & Gas (UKOG), which represents Britain’s offshore oil industry, predicts that revenues will fall well short of Treasury forecasts. The lobby group said that weaker profit margins and higher taxes would drive investment overseas and cause a more rapid fall-off in UK oil and gas production.

Mike Tholen, head of research at UKOG, said that Britain’s oil and gas industry had struggled to deliver more barrels despite a big boost to its capital budget. It invested £5.5 billion in rigs and pipelines last year, £1 billion more than budgeted and up from £3.5 billion in 2004, but oil and gas production remains weak. “Part of it is eaten up in inflation,” Mr Tholen said. “Capital efficiency has declined and that is one of the biggest worries in the North Sea.”

The cost of operating North Sea rigs has doubled since 2003 to $10 per barrel of oil produced. Meanwhile, the price of equipment and building costs have also soared. Mr Tholen said: “The question is: are we getting enough bang for our buck?”

That is rebounding on the taxman. The Government’s share of the North Sea cake peaked in the 2005-06 fiscal year, when it almost doubled to £9.8 billion because oil prices were up. Confident that he was digging a rich seam, Gordon Brown, then Chancellor, doubled the rate of supplementary corporation tax on oil profits.

However, the plunging gas price and soaring costs have played havoc with the Treasury’s plans. Instead of expected revenues of £11.7 billion, the North Sea yielded just £9 billion last year. UKOG reckons that Alistair Darling, the new Chancellor, will have only £8 billion in receipts, instead of the £13 billion previously forecast.

Malcolm Webb, UKOG chief executive, said: “We believe there are lessons to be learnt from the much sharper-than-anticipated decline in government revenues witnessed after the rate increase of 18 months ago. Higher tax rates do not always generate more tax.”

UKOG believes that a big resource remains on the British continental shelf, but Norwegian gas exports to the UK have sent the gas price down.

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