The Chancellor must abandon a planned North Sea tax rise in the Budget this week or more oil and gas projects will be scrapped, the industry has warned.

George Osborne announced in the Autumn Statement a surprise clampdown on what he said was “abuse” of legal tax avoidance schemes by some oil service companies, which lease rigs and other equipment to drillers.

The industry says extra tax costs imposed on the contractors would simply be passed on to exploration and production companies, killing off marginal projects already struggling with rising costs.

The change could be confirmed in the Budget but industry has lobbied strongly for a rethink and argues it would be baffling for the Chancellor to press ahead with the damaging measure just weeks after the Prime Minister pledged his support for the North Sea at the unveiling of Sir Ian Wood’s review into maximising oil and gas recovery. Sir Ian made clear that more tax breaks would be needed to avert a steep decline in production.

The Chancellor had also pledged fiscal stability for the North Sea following his 2011 tax raid on the sector.

Industry body, Oil & Gas UK, has urged Mr Osborne to scrap the latest change. In a February letter to the Chancellor, leaked to Aberdeen’s Press and Journal, its chief executive, Malcolm Webb, wrote: “We strongly urge this proposed measure …. be withdrawn due to the serious adverse impact it will have on investor confidence, UK continental shelf exploration and the cost base of our sector.”

Mr Webb said that exploratory drilling had plunged to record lows, due in part to a lack of available rigs and a shortage of capital to fund exploration. “This measure threatens to worsen the situation on both counts,” he wrote. Production costs were also at an all-time high, he added.

Treasury documents acknowledge that the tax will increase the rates for hiring rigs and equipment by up to 14pc, and that much of this will be passed through to investors.

Alan McCrae, UK head of energy tax at PwC, said: “The original proposals were profoundly unhelpful.” He added that, despite consultation with government, “industry still wants them withdrawn, as it is very concerned about the potential impact of cost and current projects”.

He said that while the measure would only increase total annual tax – and therefore industry costs – by £140m a year, with other costs rising “there just isn’t any more money; there is nothing more to give”.