On a sunny November day in 1975, the Queen, the prime minister, his cabinet and about 1,000 guests gathered in an enormous marquee in Aberdeen. It was not often, Harold Wilson told the assembled crowd, that one could point to a current event and, “without the benefit of hindsight, identify it as being of major long-term significance; the ‘turning point’ beloved of historians and journalists”.

But this, he said, was one of those moments. The Queen pushed a gold-plated button and Britain’s oil started flowing from the North Sea for the first time.

Mr Wilson was right, of course. Since that day, the North Sea’s riches have transformed Britain’s economy and boosted the public finances. Over the years, it has supplied tax revenues to cash-hungry governments equal in total to about 27 per cent of gross domestic product.

But lately the North Sea has been more of a hindrance than a help. Since the coalition government came to power in 2010, oil and gas production has plunged about 40 per cent thanks to a string of technical problems and unplanned shutdowns.

This sharp decline has dragged on economic growth and knocked a hole in the public finances at a time when the government has staked its credibility on trying to repair them.

The Office for Budget Responsibility estimated on Wednesday that oil and gas revenues, which last year accounted for about a fifth of total corporation tax receipts, fell more than 40 per cent in this fiscal year to £6.5bn.

The collapse has been particularly painful for George Osborne, the chancellor, because it has coincided with the contraction of Britain’s financial sector, another significant contributor to both economic growth and the government’s coffers in the years before the crisis.

Is this what Mr Osborne and future chancellors should expect from the North Sea in future as the oil and gas starts to run out? Alex Kemp, professor of petroleum economics at the University of Aberdeen, says, not so fast. Although production peaked in 1999, his modelling suggests we will still be extracting oil and gas in 30 years’ time.

Still, about a third of the platforms in the North Sea are more than 30 years old, making unplanned shutdowns and volatility a real risk. The sector is investing in “asset integrity” in mature fields to try to avoid a repeat of the past two years, Mr Kemp says.

“There are indications the industry is making a big effort to try to reduce the downtime, but clearly it is important and has big effect on tax revenues and everything else,” he says.

These efforts are part of a bigger investment boom, including in the development of new fields. Oil & Gas UK, the industry trade group, says overall spending is set to increase from about £11.4bn last year to about £13bn this year.

Indeed, both Oil & Gas UK and Prof Kemp expect North Sea oil production to increase over the next five to six years as a result of all this investment, before resuming its secular decline.

The OBR presented a more sober view on Wednesday. Using forecasts from the Department of Energy and Climate Change, it assumes the extra investment will succeed only in halting the declines in production.

In addition, all that investment would reduce the sector’s tax bill: “With 100 per cent first year allowances available to oil and gas firms, higher investment leads to an immediate reduction in receipts,” the OBR said.

Oil and gas prices also have a significant effect on revenues, and the OBR assumes they are set to fall gently between now and 2017-18. As a result, it reckons North Sea revenues will fall each year from £6.8bn in 2013-14 to £4.3bn in 2017-18.

Carl Emmerson, deputy director of the IFS, a think-tank, says Britain needed to realise two things about its North Sea tax revenues. “We should (a) accept it’s going to be volatile, and perhaps not worry too much about that, but (b) there’s this long-term trend, presumably to zero, and we should plan for that as best we can,” he says.

“The other argument you could make is maybe we should have banked the money and never have been spending it, which is exactly what Norway did,” he said. “[But] it’s a bit late for that now.”

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