Reduction of Crude Oil Production Cost in Nigerian Indigenous Company using Activity Based Costing

Abstract

The aim of this study is to investigate the impact of activity based costing in reducing crude oil production cost in Nigerian indigenous oil and gas company. This research work identified strategies to effectively reduce the cost of crude oil production by adopting a cost reduction tool for crude oil production and to establish a good crude oil flow to the surface for production. Activity based costing was the cost reduction tool used for this work. The tool helps to differentiate between value added costing and non-value added costing. Non-value added costs must be reduced or eliminated during production so as to maximise profit. Data was collected from an indigenous oil service company. The collated data were tabulated and graphs were plotted with the aid of Microsoft excel. The analysis revealed a total sum of ₦ 416,978,977 was wrongly spent for a duration of three years on crude oil production due to non-value added costing. The activities are: poor transportation of crude oil, that is, use of mobile tanker for haulage instead of laying 4 inches coated pipes for a distance of 5km and contracting the treatment of produced water to a contractor instead of setting up a water treatment plant. Also, using a diesel engine generator for electric power supply while gas was available as a fuel gas for natural gas consuming generator was a non-value added activity. Lastly, inadequate oil well flowing practice by flowing the well through an adjustable choke for a long period of time instead of using a fixed choke. This is a huge loss for indigenous oil producing fields operated by an indigenous oil service company in Nigeria. The loss was due to inability of the producers/field location owners to set up few equipment to meet up with complete operation standard.