INTERVIEW-UPDATE 1-UK oil, gas output could plunge

* "Worst case" sees UK oil, gas output 0.5 mln boepd by 2020

* "Best-case" scenario sees production near 2 mln boepd

LONDON, July 8 - British oil and gas production could fall sharply over the next decade unless new investment is encouraged, industry grouping Oil & Gas UK said on Wednesday.

Chief Executive Malcolm Webb said that in a worst-case scenario, British oil and gas output could fall to around 0.5 million barrels of oil equivalent per day (boepd) by 2020, or just 12 percent of the country's expected demand.

But if sufficient investment were brought into the industry, Webb said oil and gas output could be as high as 2 million boepd or around 40 percent of Britain's projected consumption.

UK oil and gas output peaked in 1999 at 4.5 million boepd.

"Investment is the life-blood of the industry. If we don't go on exploring we won't bring those new fields into development," Webb told Reuters in an interview.

"In 2020, with the right investment, we could still be approaching 2 million boepd -- that is the best case scenario."

"But that requires sustained investment of around 5 billion ($8.03 billion) stg a year. If we don't make the investment we trend down towards only 12 percent of national demand in 2020."

"We should be trying to get investment up to 5 billion pounds or above and we are not getting there," he added.

Webb said his organisation, which represents all the big oil and gas companies in Britain, had seen exploration in the UK fall sharply after the collapse in oil prices in the last year.

Exploration was down 57 percent year-on-year in the first half of 2009 and development drilling, which enables new production, had fallen by 7 percent, he said.

TWENTY-FIVE BILLION BARRELS

Oil and Gas UK wants the British government to introduce a range of financial incentives, including tax measures, to encourage greater investment in the industry, which it says is still sitting on as much as 25 billion barrels of oil equivalent and has 40 percent of its reserves yet to be recovered.

Crude oil hit an all-time high of almost $150 per barrel in July 2008 but then plunged to a low below $40 in December before recovering ground earlier this year. On Wednesday, benchmark U.S. light crude oil futures dropped below $62 per barrel.

Webb said the average breakeven price for the production of UK North Sea oil was "round about $50 per barrel" and he said many producers in the sector would face real problems if oil prices below that level and stayed there.

"If we get below that things start getting very serious and you will have existing production fields that are going into negative cash-flow," he said, adding companies needed to look carefully at reducing costs to help keep production viable. "This is a high cost, mature basin. It has a great supply chain, great political stability and it is close to the market with established infrastructure. But it has a huge challenge in terms of its cost profile and the size of the oilfields we are going after are getting ever smaller."

Webb said production of oil and gas from the British sector of the North Sea had declined by an average of about 5 percent per year over the last couple of years.

"The underlying decline rate if you just left what's there with no further investment would be about 15 percent per year. By 2006, because of investment, the decline rate abated to about 5 percent. We expect that to be true for this year as well."

He said there had been a 20 percent decline in investment in the oil and gas sector between 2006 and 2008.

"Worryingly, capital investment moved from 6 billion pounds in 2006 to 4.8 billion in 2008. It is going to be lower this year and will be lower next year if we don't do something. You can see the trend of new development wells continuing to fall." "The UK North Sea does have a life ahead of it. We have potentially 30 years of significant amounts of oil and gas. But we need to do more to make the sector more attractive." (1 UK pound = $1.6065)