I looked around to see what this is based on and, although it took me to a lot of sites that tried to give my computer a virus, I think I know the story you're referring to.

The story as repeated in a couple commercial books about tourist spots or the supernatural essentially goes like this: When the Vikings invaded northern England they came to the Marsden bay area in Tyneside and believed it was haunted by a sea serpent called the Shoney. To appease this spirit and to be able to pass by the area safely, they would draw lots and one of the sailors would be thrown in as a human sacrifice.

Now, I want to stress here, none of the books and sites I was able to find that talk about this story (which are all popular books, I couldn't find anything scholarly) cite a source for this. There's no chronicle or treatise from the middle ages, nor any reference to a later folklore collection. This just... seems like one of those stories someone started telling at some point, and that people kept telling. I don't know how prevalent this story is in modern Tyneside, since I haven't been there, but this seems like it might just be a bit of local folklore. But hey, maybe there is a source out there and it just got lost through the repetition of the story.

Now here's where the idea of a dragon cult surviving into the 20th century comes in: when did these sacrifices supposedly end? On the one hand some of the books and sites talking about this say it ended in the 12th century, though they do reference bodies still washing up in the area much later. However, others claim a much later date.

As far as I can tell, the idea of these sacrifices persisting beyond the middle ages can be traced back to an author called Mike Hallowell. He makes a living investigating (and writing books about) things such as haunted pubs and poltergeist activity. Supposedly, when investigating this story, he uncovered evidence for a secret cult that maintained the sacrifices. The date of the end of this cult isn't clear. Some of the sites/books I could find said it ended in 1928 with the last sacrifice (a date which some others simply give as the last time a body washed up in Marsden bay.) However others imply that Hallowell received threatening phone calls to stop his investigation, with the implication that the cult is still going today and still making sacrifices (*cue a dramatic gasp from the audience*)

I'd love to expand this post by looking at Hallowells actual arguments for this. But I can't. None of the sites and books I found list his arguments, they merely said that he said this and it's probably right. I assume it's in one of the books he has written but none of these sites give any indication in which one to look, and I do not have easy access to them in order to look through them and search for this story.

However I feel relatively confident in dismissing the story. Throughout the mid to late twentieth century, and even still today, stories of secret pagan/satanic cults carrying out horrible rituals have been common in Britain, with several authors peddling such stories to the public. In general, none of these have any evidence to back them up, so I doubt this story would be the exception.

So basically: This story, of a surviving pagan dragon cult in Britain, seems to derive from a story of Viking human sacrifice (whose source is unknown) which was later embellished with a lurid story about cult activity, and then got passed around among a bunch of books and sites that focus on the weird and strange. You're right to say it's far fetched, as it's probably wrong.

Interesting note: Shoney is also the name of a water spirit on the isle of Lewis who supposedly received a sacrifice of ale on Samhain. As far as I can tell there's no relation between him and the Tyneside sea monster.