NORTH Sea oil and gas companies will generate a £10 billion cash surplus this year putting the Treasury in line for £2bn tax receipts but many services firms are still struggling amid a continued slump in drilling activity.

A report by trade body Oil & Gas UK published today finds the crude price rally since late 2016 combined with efforts to increase efficiency has helped spark a dramatic improvement in the finances of the North Sea industry.

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The £10bn free cash flow projected for this year would be the highest figure achieved since 2010 when the industry was enjoying a boom. This was followed by a deep downturn after the oil price tanked in 2014.

The North Sea industry cost the Exchequer £300m in 2016-17 as the bill for tax breaks exceeded the total revenue collected.

Oil & Gas UK noted companies are also set to increase total annual output in the North Sea after starting production from projects in areas such as West of Shetland that were approved during the boom.

However, claiming the industry is at a crossroads, Oil & Gas UK warned production is set to fall again after 2020 unless firms ramp up drilling activity.

“A 50 per cent decline in drilling activity over the last five years means real concern about the ability of industry to realise its potential,” said Oil & Gas UK chief executive Deirdre Michie.

The increase in the crude price has encouraged firms to approve North Sea field developments again after slashing spending amid the downturn. However, the six projects approved this year are not big enough to replace the output that will be lost as oil fields mature.

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If the potential of the North Sea is to be realised there needs to be a big increase in exploration work and in the development of finds that have been left idle.

But exploration is expected to remain at record lows this year in spite of signs of interest in areas such as West of Shetland.

Firms are focusing spending on lower risk activities. Oil and Gas UK said cost control and capital discipline remain high on the agendas of firms that operate fields.

It warned the supply chain may not be able to support increased exploration and development activity if firms in areas such as drilling support have to wait too long.

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“Revenue and activity reductions in recent years have stretched cash flow and margins resulting in loss of capacity,” said Ms Michie. “Coming from such a baseline there has to be concern around the ability of the supply chain to sustainably service an increase in demand.”

Oil & Gas UK said employment trends appeared to have stabilised recently after firms cut thousands of jobs amid the downturn.

The industry supports over 280,000 jobs in the UK, down from 450,000 in 2014. The number of people employed in the industry is expected to fall in the period to 2035, reflecting the increasing maturity of the basin and continued efforts to increase efficiency.

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The report said 10 billion barrels could be recovered from the North Sea by 2035 if the right moves are made, against 7bn on baseline forecasts.

Firms must work with each other and with the Government to help meet the challenge.

“Recent fiscal and regulatory changes have helped to position the United Kingdom Continental Shelf as one of the leading destinations for investment,” said Ms Michie. “Ensuring a stable and predictable fiscal regime will be key ... especially with Brexit approaching.”

Oil & Gas UK estimates a ‘hard’ Brexit involving the country adopting World Trade Organisation terms could add £500m a year to the industry’s costs. The best case scenario, with minimal EU tariffs, could generate £100m savings annually.

It said the only element of expenditure which had increased throughout the downturn was decommissioning spend. This is expected to average £1.5bn to £2bn a year to 2023.