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An aerial view of Nexen’s Golden Eagle offshore drilling platform in the North Sea about 70 kilometres northeast of Aberdeen, Scotland.

This former fishing town on Scotland's east coast likes to boast that it's the "Energy Capital of Europe." It's a claim threatened by mounting challenges in the prolific offshore oil fields of the North Sea.

Aberdeen has an ancient air with its centuries-old architecture and silver-hued, granite buildings, but today is humming as a key centre in the modern oil business. Its busy docklands echo with repair work while a small convoy of supply vessels sit anchored off its sandy beach waiting to secure a berth in the harbour.

Some 70 kilometres off the coast lies Golden Eagle, a $3.3-billion project operated by Calgary-based Nexen Energy ULC that will produce 70,000 barrels of oil a day for a Nexen-led consortium.

Nexen – now owned by China's CNOOC Ltd. – is in the vanguard of an investment boom in the North Sea, as global energy companies spend record amounts of capital to squeeze more oil and gas from the mature offshore fields that have long been a boon to the British, and indeed global, economy. Over the previous year and this, the industry is expected to invest a staggering $45.6-billion, mostly on developing new fields and rehabilitating old ones.

After years of struggling with the giant Buzzard field, Nexen now has that property producing efficiently and is in the process of commissioning Golden Eagle. The project is both on budget and on schedule, managing director Archie Kennedy said in an interview.

"The bottom line is certainly we at NexenCNOOC see the North Sea as attractive, and we are continuing to invest both in projects and in exploration," said Mr. Kennedy, a soft-spoken Scot who joined the company in early 2012 to lead its North Sea operations.

But despite the current buzz, there are big questions about the future of Britain's North Sea oil industry.

Production has plunged in the past decade to 1.4 million barrels a day from 3.5 million. Per-barrel operating costs have soared more than fourfold, to £18 ($32) from £4 a decade ago. And while companies are spending heavily on development, exploration drilling has declined to the lowest rate of activity over the past three years since production began on the U.K. continental shelf (UKCS) in the early 1970s. Just 15 exploration wells were completed last year.

There's also political risk. The Scottish independence referendum scheduled for September has thrown uncertainty into the equation as opposing politicians in London and Edinburgh trade warnings about impacts on the sector if the vote does not go their way.

Reviving North Sea production

Without dramatic efforts to reverse course, production from the UKCS will continue to fall. That would gut a sector that employs 450,000 people in Britain, supports a homegrown, globally active service industry, and paid the equivalent of $11.7-billion in direct taxes last year.

It would also deprive the world of an important source of non-OPEC oil at a time when growing Asian demand and ongoing conflict in the Middle East will keep pressure on prices for the foreseeable future. Norway's aging North Sea fields have also seen a steep drop in production – to 1.4 million barrels a day in 2013 from 3.4 million in 2001.

Several Calgary-based companies – Nexen, Suncor Energy Inc., Talisman Energy Inc. and Canadian Natural Resources Ltd. (CNRL) – have significant investments in the U.K. North Sea, and the profitability of those investments rests in part on the ability of government and industry to work together.

After being blamed for driving away investment by raising taxes, the Conservative government of Prime Minister David Cameron is now working hard to revive the sector, even as it fends off challenges from Scottish nationalists who accuse London of mismanaging the resource. Last year, the government appointed industry doyen Sir Ian Wood to study and make recommendations on how to maximize recovery. It is now conducting a fiscal review with an eye to a creating a more stable and competitive tax regime.

There is plenty of oil left in the UKCS – the industry estimates as much as 24 billion barrels of recoverable reserves, compared with 42 billion barrels that have been produced since 1970, when Royal Dutch Shell PLC and BP PLC pioneered the offshore industry.

"The big message is the death of the North Sea is completely exaggerated. We're only two-thirds through the story," Energy Minister Michael Fallon said in an interview at his Whitehall office.

But much of that oil and gas is situated in harder-to-develop fields – sometimes smaller ones, sometimes at greater depths, or further from shore, often under high pressure and high temperature conditions or needing enhanced oil recovery techniques. That all means higher costs.

To produce it profitably, both industry and government need to rethink the business, Mr. Fallon said.

The government has committed to act on key recommendations of the Wood Review, which called for a better-resourced regulator whose job it would be to maximize recovery from the fields.

"We need a new approach that is more collaborative than the existing regime," said Mr. Fallon, who travelled to Calgary last month and met industry leaders such as CNRL's Murray Edwards and Nexen's Fang Zhi.

The new regulatory model now being implemented "invites operators to develop hubs, share infrastructure, work on reducing delays and provides a more hands-on approach to license management," he said. "What is fascinating about this is the degree to which industry has signed on to this. They see their own interest in maximizing recovery in the North Sea."

It helped that the recommendations came from Sir Ian Wood, an industry leader who made his fortune servicing the international oil companies that converged on his hometown of Aberdeen as the North Sea industry boomed.

Armed with a psychology degree from Aberdeen University, Sir Ian in 1964 joined his family's ship repair and marine engineering business that serviced the fishing fleet. Made managing director three years later, he quickly began expanding into general marine servicing.

His timing couldn't have been better. In 1969, Amoco discovered the Montrose field, 200 kilometres east of Aberdeen. The following year, BP struck oil at the Forties Field, and then Shell discovered the giant Brent field east of Shetland.

From its origins in the fishing industry, the Wood Group is now an international oil servicing giant, with 40,000 employees in 50 countries, including all the major offshore basins.

Its long-serving chairman retired from Wood Group two years ago, and agreed to lead a review of an industry that was clearly heading for crisis, despite the short-term investment boom that will stem the production declines for a couple of years.

A new industry model

One of the fundamental problems in the U.K. North Sea is that companies are now operating some 300 fields, and many of the new ones are fairly small in scale. As a result, companies need to share infrastructure such as the pipelines to bring the oil and gas to shore and subsea processing units. That cumbersome system – as well as a lack of investment in aging equipment until recently – has resulted in a 25-per-cent decline over the decade in production efficiency, or the amount of time crews and equipment are actually working.

In an interview in his Aberdeen office, the retired executive said there is plenty of opportunity left in the U.K. North Sea.

The improved business practices and regulatory oversight recommended in his report could boost production by as much as four billion barrels over the next 20 years – or an average of roughly 500,000 barrels a day.

"The implementation has come from the industry itself," he said. "Collaboration is the way ahead for a significant number of issues and problems. The key question is will they actually collaborate."

The industry has largely endorsed the new model, said Malcolm Webb, chief executive officer of the industry's association and lobbying arm, Oil & Gas UK. But just as important – if not more so – is the government's commitment to reform the fiscal regime.

Mr. Webb said the current investment boom will quickly fade unless companies are encouraged to explore in the deeper waters west of the Shetland Island and in the more complex, high-pressure, high-temperature fields.

In fact, the sheer scale of the investment is an indication of the challenges the industry faces.

The record spending is occurring because companies "are progressing development projects in an era of higher oil prices, but also because they are pursuing much more technically challenging projects as well," Lindsay Wexelstein, Edinburgh-based analyst for the global consultancy Wood Mackenzie Group.

With a new focus on capital discipline, international oil companies are shifting investment away from plays that offer substandard returns. California-based Chevron Corp. and Norway's Statoil ASA have both recently shelved major projects in Britain's offshore.

"Some of the projects that are being progressed at the moment are very marginal," Ms. Wexelstein said.

"The cost escalation we've seen in U.K. North Sea really is putting pressure on these project economics."

Fast-rising operating costs are "unsustainable and will result in yet more fields being shut-in and prematurely decommissioned if it is not addressed," Oil & Gas UK says.

Indeed, while companies such as BP and Nexen are doubling-down in the offshore region, Calgary-based Talisman is beating a retreat.

Two years ago, Talisman sold a 49-per-cent interest in its U.K. North Sea assets to China Petrochemical Corp. (Sinopec), and shifted operating control to a joint venture subsidiary based in Aberdeen, which has interests in 42 fields. Talisman committed to spending $2.5-billion over five years on the joint venture, a deal that recently-appointed chairman Hal Kvisle called a "major burden" for the company.

The Calgary firm is now looking for a buyer for its remaining 51-per-cent interest, and its not the only company with British assets on the block.

Political uncertainty

With costs pressures and aging infrastructure, the political uncertainty arising from the independence referendum is one more challenge for operators in the North Sea.

The industry has – for the most part – been determined to stay out of the political debate. Nexen's Mr. Kennedy said the company is "hugely interested, but hugely neutral" in the outcome of the September vote, but that it hasn't affected any investment decisions.

Certainly, the politicians from each camp have argued their side would provide the best stewardship for the North Sea bounty.

The Scottish National Party have slammed London's management, especially the series of tax increases since 2002 when oil prices began climbing. The SNP has vowed to create a savings fund, similar to the much-praised Norwegian fund that now has more than $900-billion in assets.

Whitehall's Mr. Fallon said the British government is best positioned to manage the North Sea industry, given the need for a well-financed regulator and tax concessions to cover things such as unconventional development and decommissioning costs.

Scottish Energy Minister Fergus Ewing scoffed at that reasoning, saying smaller jurisdictions such as Norway and even Newfoundland and Labrador have shown themselves perfectly capable of managing an offshore industry.

"We hear a lot of political assertions [from London] that are contradicted by the facts," Mr. Ewing said in an interview. "The U.K. has treated the North Sea industry like a cash cow to be milked in times of trouble."

Oil & Gas UK's Mr. Webb said the industry will have to work with whatever result emerges from the independence debate, where polls show a consistent but not commanding lead for the No vote. Whatever the result, the government that holds sway will face a big challenge to ensure that milch cow doesn't run dry.