The North Sea oil and gas sector is in danger of becoming uncompetitive as rising costs damage profitability, the body representing operators has said.
Oil and gas production is expected to drop sharply
The UK Offshore Operators' Association (UKOOA) issued the warning following an annual survey of its members.
Capital investment is expected to drop by up to £1.5bn this year, after three years of steady growth.
UKOOA is now urging the government and industry chiefs to take steps to prevent such a decline.
The 2006 Activity Survey Report poses a challenge to the oil and gas sector's ability to compete for global investment, operators said.
The survey summarises the exploration, investment and production plans of North Sea companies.
It forecasts a 250,000 barrel per day drop in expected production over the next three years.
The report found exploration remained strong but that there was high cost inflation in 2006.
It goes on to predict a £1bn to £1.5bn drop in investment in the industry in 2007.
UKOOA chief executive Malcolm Webb said: "The survey provides a more challenging perspective on the future of the UK continental shelf than we have seen for some years.
"Whilst the strong level of exploration activity is welcome, the more rapid than expected decline in production; the significant cost inflation in 2006 and the forecast of a reduction in investment in 2007 are worrying.
"If steps are not taken to improve the industry's competitiveness, the implications for future production and secure indigenous energy supplies could be serious."
He said that both the industry and government had responsibilities.
Mr Webb added that the government needed to consider a new tax and regulatory regime which was better suited to the UK Continental Shelf.
The Scottish National Party leader and Banff and Buchan MP, Alex Salmond, said: "UKOOA is right to point out that getting the right investment incentives in place can ensure that North Sea production is maintained at a high level.
"If the right decisions are taken now, the seas around Scotland will be producing substantial supplies of oil and gas for the next 40 years.
"What is required now is the right package to support the industry's success for the long-term."