• North Sea could power third of UK in 2020, says industry • Reserves nearly 25bn barrels, but more investment needed

Britain's offshore oil and gas fields could still be delivering 1.5m barrels a day by 2020, enough to satisfy 35% of UK energy demand, according to industry trade body Oil & Gas UK – but only if high fuel prices and tax breaks combine to make viable a growing backlog of exploration and development projects in the North Sea.

Without renewed investment, production from already mature fields, currently meeting about two-thirds of Britain's energy needs, will drop to 0.5m barrels a day by the end of the decade, representing only 11% of energy demand.

Earlier this month Ofgem published its strongest warning to date that Britain was heading for an energy crisis. "For the next two to three years with gas supplies and power station availability, we are in a plentiful position," Ofgem chief executive Alistair Buchanan said. "The problem is the speed at which it deteriorates. To wait a few more years [without doing anything] could cause us trouble. We would get down to historically low levels of margins of plant, to when you are starting to ask if you have enough power stations."

Having surveyed 70 companies, Oil & Gas UK believes falling investment during the past four years has been a major factor driving down oil and gas production levels. Last year production fell 6% to 2.48m barrels.

The number of development and exploration wells drilled in 2009 reduced by 22% and 40% respectively, the lobby group found. Meanwhile capital expenditure has declined by 20% in the last three years. This year, however, could see a modest recovery Oil & Gas UK forecast, bringing investment back above £5bn.

In recent months the industry has identified up to 11bn barrels of oil and gas in new and existing projects, a sharp rise on previously years. It takes UK offshore reserves close to 25bn. But the cost of extracting the newly identified deposits, many of them located in deep water in the central North Sea or to the west of Shetland, is estimated at £60bn. Production costs at new sites is estimated to be on average 20% higher than for existing projects.

Speaking as Oil & Gas UK published its annual forecasts for offshore exploration, chief executive Malcolm Webb said: "Securing all the investments identified by our survey will demand action from industry to reduce costs and improve efficiency and from government to lower production taxes and lighten the UK and EU regulatory burden."

Recent years have already seen the government grant substantial production tax breaks to help costly projects in technically challenging deep-water fields.

"As recently noted by several government ministers, the UK's oil and gas industry is a huge asset to this country. It not only makes a major contribution to the economy but can also help secure energy supplies for decades to come," said Webb.

"The government has taken several welcome steps over the last eighteen months in reducing the rate of tax on various types of new fields; we now need to work together to extend that process to encompass other new and existing fields and positively encourage investment in this vital UK energy industry."