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Britain's shrinking oil and gas supplies

Regular walkers along the banks of the Cromarty Firth in Ross-shire, Scotland, will soon gaze out on a changed seascape. Redundant North Sea oil rigs that have used the dark waters off Invergordon as a parking lot are being readied for action.

Local Brent crude prices hit a record $51.50 per barrel yesterday, helping to trigger a rush in local demand for semi-submersibles. But the mini-boom in exploration and development will do little to allay fears about the rapid rundown in Britain's domestic oil and gas supplies.

Oil firms such as BP and Shell have been retreating from the North Sea and plunging their billions into places such as Angola and Azerbaijan. The cost of hiring North Sea rigs has now soared from $50,000 (£28,000) a day to $100,000.

Houston-based Transocean - the biggest rig owner in the world - is busy reactivating two "stacked" drilling units from Cromarty and is bringing a third over from Angola. Rival Diamond Off shore is also transferring equipment from west Africa so it can begin work next year off Britain for Talisman Energy.

The UK Offshore Oil Association, UKOOA, which represents the major North Sea players, says its members are increasing their spending by 10% from £8.6bn in 2003.

Meanwhile 21 offshore development schemes have received government approval so far in 2004, compared with 14 last year. But the UK saw its oil output peak in 1999 and in gas some time later - and this summer, Britain becomes a net importer of oil for the first time in decades.

Nobody will put an exact date on when Britain will run dry of oil but energy consultancy Wood Mackenzie believes the country will be producing as little as 23,000 barrels of oil a day by 2025.

That figure compares with just under 2m barrels today, although the estimate does not include new discoveries that could boost supplies further into the future.

UKOOA will only say that Britain will produce 2.4m of oil and gas by 2010, a figure that is still almost half today's combined total.

Britain has witnessed the rapid withdrawal of the oil majors who really built the North Sea; typical of this retreat was BP's decision last year to sell the Forties field. The group is spending £680m on the Clair field development but this is exceptional. In 1997, the six biggest firms in the world focused 18% of their investment on the North Sea but this year it has fallen to 6%.

The large players have lost interest in an area where new fields are likely to be counted in tens of millions of barrels of recoverable oil rather than the hundreds of millions to be found off Angola, Kazakstan or the Gulf of Mexico.

While the public may be unaware of the rapid rundown in Britain's oil and gas, the government is not. Gordon Brown did the sector no favours by imposing a windfall tax on it in 2002, but since then attempts have been made to ensure the North Sea fiscal regime is more attractive.

The Department of Trade and Industry has been engaged in schemes alongside UKOOA aimed at prolonging an element of self-sufficiency. The DTI has eased the codes of practice for holders of licences to make it easier for smaller firms to come in, and started a "Brownfields" project to maximise recovery from existing schemes.

Last month the DTI also issued a code of practice on access to infrastructure, designed to ensure traditional owners do not sit on old acreage without investing in it and do not block newcomers' ability to use pipelines and platforms.

The industry is pleased with the outcome of such moves but there are still concerns. Mr Blakeley worries that the majors are being encouraged by $50 a barrel prices to hang on to fields in which they are no longer investing.

Rhodri Thomas, an analyst with Wood Mackenzie, believes the region can still be vibrant for years to come.

"It's a changing environment, with new types of company coming in, but it is just following a pattern we saw in the shallow water [exploitation of the] Gulf of Mexico and Canada," he says.

When Britain's oilfields run dry

The kind of turbulence that Britain faces when it is no longer a major oil producer was on display yesterday as US crude prices reached a record high of $54 per barrel and shares in Russia's Yukos were suspended.

The value of oil soared on the back of hurricanes in the Gulf of Mexico, worries about supplies from Nigeria and more announcements from the Russian government that it would sell part of a Yukos subsidiary to pay for taxes owed.

Higher oil prices mean more cash to British-based oil companies and extra tax for the exchequer. But as domestic supplies run dry the future will bring increased import bills for crude, petroleum products and gas, which is also running out.

Oil globally will not run out for 40 years, after which Britain and everyone else must look to a hydrogen economy based upon renewables and nuclear power. But meanwhile oil and gas for Britain will come increasingly from developing, and often politically unstable, countries such as Azerbaijan, Iraq and Russia.

Editorial Notes: Part 2 of the Guardian's series on Britain's shrinking oil and gas supplies. Part 3: "Buoyed by the black stuff" at www.guardian.co.uk/oil/story/0,11319,1326626,00.html Part 1:"Britain's oil bounty is running dry" www.guardian.co.uk/oil/story/0,11319,1324917,00.html -BA

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