High operating costs and dwindling reserves will result in low drilling activity and few takeover deals in the North Sea over the coming year, consultancy Deloitte said in a quarterly report on Thursday.
Well drilling in the North Sea fell year-on-year in the first quarter as poor weather and high costs hampered exploration and appraisal work, Deloitte said.
British reserves in the North Sea are falling rapidly after around 40 years of production, making it one of the most mature oil and gas basins in the world and posing a tax revenue challenge to the government.
"Operators are definitely showing more caution, indicating, again, that incentives from government may be the only way to make the economics more viable," saidGraham Sadler, managing director of Deloitte's Petroleum Services Group.
The government has already allowed tax breaks for smaller fields to ensure Britain's reserves are exploited to maximum potential.
Twelve exploration and appraisal wells were spudded in the UK North Sea in the first quarter, an 8 percent fall compared with the same time last year.
Oil and gas companies concluded 21 deals in the British and Norwegian North Sea. The majority of them were farm-in agreements, which are typically struck to bring in a partner in order to spread risks and costs.
Oil industry veteran Sir Ian Wood said in a report commissioned by the government that operators must work together more closely to make the most of Britain's remaining oil and gas.
Deloitte said more incentives were needed.
"We'll need to see a concerted effort from government and industry to restore confidence in the sector in the short term and to ensure maximum recovery from the UKCS (UK Continental Shelf) in the long term," said Derek Henderson, senior partner at Deloitte's Aberdeen office.
(Reporting by Karolin Schaps; Editing by Dale Hudson)