Development And Application Of A Cost Control System
Authors: Dwyer C.F. 
Published: December 2007

Production cost control is a matter of growing concern to the industry. Even with much effort toward reduction, producing costs continue to rise. The reason for this lies in the fact that effective cost control is first an attitude and then an operational problem. People must feel that costs can be improved People must feel that costs can be improved before they will even try. A planned and properly presented-cost control program will properly presented-cost control program will create a positive atmosphere. It will open closed minds. It will answer the prime rebuttal of, "How do you know my costs are high?". Above all, it will dispel the universal excuse, "My costs are different".

Such a program was initiated within Standard Oil Co. of Texas in early 1964. From the beginning it was realized that people, not procedures, reduce cost. However, procedures procedures, reduce cost. However, procedures and data properly prevented can influence the action of people. The system compares actual costs to forecast optimums to locate source and cause of high cost. The system embraces the philosophy that present expense does not always represent what is necessary; that experience does not dictate correctness. In brief, the past should not be the goal for the future. From results of this program, it is seen that tools to control cost are available. Tools alone., however, can build nothing. They must be used by people, in this case by line management.

Introduction

The cost-control procedures to be discussed were developed in the Western Division of Standard Oil Co. of Texas., a subsidiary of Standard Oil Co. of California. The Western Division operates approximately 2,500 wells located in the Permian Basin of West Texas and southeast New Mexico - Production ranges from 1,360 ft pumping to 16,000 ft flowing oil and gas. Operated oil and gas equivalent production was 120,000 BOPD in 1968 and will be production was 120,000 BOPD in 1968 and will be approximately 124,000 BOPD in 1969.

In early 1961 the cost-control system now used in the Western Division of Sotex was visualized. It could not be implemented, however, because the records necessary for control were not available. In 1963 and 1964 this production cost-control system was developed and sold to operating people with the result that the steady 10 percent per year increase in field controllable costs was arrested. There has been no decrease in production as a result of the program. On the production as a result of the program. On the contrary, the Division's production has increased considerably each year without a corresponding increase in cost. With optimum producing expense as its eventual objective, producing expense as its eventual objective, the program's ultimate goal is maximum profits at all times. Success is attributable to direct and active support by division and district management.

The system identifies areas of abnormal cost by comparing actual costs with forecast goals based on guiding standards. Comparison of actual costs vs guides identifies the particular fields in which costs are above the particular fields in which costs are above the forecast, tells why, and does so in time to allow corrective action.

RESULTS

For quite some time the Western Division's field controllable costs had increased 9 to 10 percent each year, or approximately $500,000 percent each year, or approximately $500,000 per year. There had been a corresponding per year. There had been a corresponding increase in production and, for this reason, the cost increase was not questioned.