BP to go ahead with $500 million Shetlands investment

British oil group BP is pressing ahead with a $500 million-plus investment in the Shetland Islands, a shot in the arm for the government's efforts to revive the North Sea oil industry to help kickstart a flagging economy.

Though North Sea output has fallen by about two thirds since 2000 and a surprise tax increase in 2011 led to dire predictions about its future, industry body Oil & Gas UK in February forecast a pick-up in production from 2014, fuelled by renewed government support and a surge in investment.

BP's investment, which could pave the way for a big add-on project at its Clair field, coincided on Thursday with a government effort to boost investment in the oil and gas sector.

Business Minister Vince Cable and Energy Secretary Ed Davey will travel to Aberdeen, known as the oil capital of Europe, where they will pledge government commitment to a stable tax regime for the industry, and announce plans to develop Britain's supply chain further and try to plug an engineering skills gap.

Under BP's plans, it will drill at least five appraisal wells in the giant Clair field off the west coast of the Shetland Islands, north of Scotland, to discover whether it is worth further development.

BP and its Clair partners, Shell , ConocoPhillips and Chevron , in 2011 said they were investing 4.5 billion pounds in a second phase of development for the field, which first started pumping oil in 2005.

"If successful, the appraisal program could pave the way for a third phase of development at Clair - this is now a real possibility," BP's North Sea regional president Trevor Garlick said in a statement.

Big oil companies have tended to look beyond the North Sea in recent years, favoring new oil provinces with more potential, but the rich geology of the areas around the Shetland Islands has kept them hooked.

The British government has been at pains to reclaim the trust of oil and gas industry after the 2011 shock tax rise.

New tax breaks, for older oil fields, heavy oil fields, deep-water fields and clarity over field abandonment tax relief have over the last two years helped give companies the confidence to move ahead with new plans.

BP's plan for Clair follows other recent new investments in the North Sea, including a $7 billion project announced by Norway's Statoil in December and a 1.6 billion pound ($2.4 billion) investment by Canada's Talisman Energy two months earlier.

"This is an expanding industry. We can either help create more jobs and opportunities across the UK if we get this right or see work going overseas if not," Business Minister Vince Cable, who once worked for Shell, said in a statement.

Britain's oil and gas industry contributes more to government coffers than any other sector and paid over one fifth of total corporation taxes in 2012. It also employs over 400,000 people including its supply chain.

The government said it will invest 7 million pounds to establish a new centre for subsea engineering and help the industry by establishing a program to retrain ex-military personnel to work in oil and gas.

BP, which has the biggest stake in Clair at nearly 29 percent, said that it had already started drilling the first appraisal well and it could complete up to 12 wells over two years, depending on the results of the first wells.

($1 = 0.6617 British pounds)

(Editing by David Goodman and Mark Potter)