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The UK has pledged its support to oil and gas firms by introducing major new tax allowances totalling £3bn as part of the 2012 budget.

Budget 2012 North Sea tax relief incentives

In his annual budget speech, Chancellor of the Exchequer George Osborne insisted that renewable energy will remain a "crucial part" of the UK energy mix, but that he is aware of the cost implications wind, tidal and solar power has on households and businesses.

"Gas is cheap, has much less carbon than coal and will be the largest single source of our electricity in the coming years," Osborne said.

"I want to ensure that we extract the greatest possible amount of oil and gas from our reserves in the North Sea."

Budget 2012 North Sea tax relief incentives

As part of the government’s plans for oil and gas extraction in 2012, the North Sea will be granted tax allowances for the as-yet undeveloped area west of Shetland and guaranteed tax relief for costs of decommissioning rigs and platforms.

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By GlobalData

Deloitte head of tax Derek Henderson said the proposals end 12 months of uncertainty over decommissioning tax relief.

"The measures announced today show willingness of government to work with industry to create an environment in which the maximum economic recovery of hydrocarbons from the UK North Sea can be achieved in the years to come," said Henderson.

"Deloitte anticipates proposed measures will incentivise and encourage higher exploration and appraisal activity levels, brown field and new field developments and overall investment in the UK North Sea. It may also trigger further confidence in the financial markets to support UK oil and gas investment plans."

"In his annual budget speech, Chancellor of the Exchequer George Osborne insisted that renewable energy will remain a "crucial part" of the UK energy mix."

Industry body Oil & Gas UK also welcomed the Chancellor’s announcements. Chief executive, Malcolm Webb, said: "The changes announced are the result of over a year of constructive, collaborative work and reflect the Treasury’s proper and considered approach to the industry’s proposals."

Richard Forrest, partner in the oil & gas practice of global management consultancy A.T. Kearney seconded that argument, and added: "The budget and its implications for North Sea oil production is a positive move and, in our opinion, very well-targeted, particularly following previous negative tax changes to these oil reserves.

"The move to create a £3bn new field allowance in the west of Shetland is also a great step forward. This will help drive innovation and capability in the UK oil and gas service sector and have the knock-on effect of supporting competitiveness beyond the UK."

Budget implications for UK renewable energy

In an attempt to attract investment in energy and secure energy security, the government will set 2014-15 carbon price support rates at the equivalent of £9.55 per ton of carbon dioxide in line with the carbon price floor set out at the last budget, in 2011.

The treasury also plans to publish a strategy for gas generation later this year and will introduce a package of oil and gas measures to secure billions of pounds worth of additional investment in the UK Continental Shelf.

RenewableUK welcomed the government’s recognition of renewable energy but urged it to help deliver green growth by announcing the results of its electricity market reform process.

Director of external affairs Jennifer Webber said: "For the industry to live up to its job-creation potential, certainty is required. Multimillion pound decisions about UK investment are waiting on the results of the Electricity Market Reform process. We urge the government to help deliver green growth by ensuring that this process is completed quickly."