Burden

Understanding "Burden" in the Oil & Gas Industry: A Cost Allocation Tool

In the complex world of oil and gas operations, meticulous cost management is crucial for profitability. One key concept in this process is "burden," a term that refers to overhead expenses allocated to specific projects or operations. While seemingly simple, understanding burden and its calculation is vital for accurate budgeting, cost control, and ultimately, achieving financial success.

What is Burden?

Imagine a drilling operation. Direct costs are easily identifiable: drilling equipment, labor costs for drillers, and fuel. But what about the costs of maintaining the rig, office administration, or insurance? These expenses are considered indirect costs, or overhead.

Burden represents the process of distributing these indirect costs over a relevant base, usually direct labor or material costs. This allocation allows for a more accurate reflection of the true cost of each project or operation, including both direct and indirect expenses.

Types of Burden:

There are various types of burden, each tailored to specific circumstances. Common examples include:

• Manufacturing burden: Allocated based on direct labor hours or machine hours used in production.
• Engineering burden: Distributed based on the engineering hours spent on a project.
• Project burden: Calculated based on the direct costs of a specific project.

Why is Burden Important?

• Accurate Cost Estimation: Burden helps create a realistic picture of project costs, going beyond just direct expenses. This allows for better bidding, resource allocation, and financial planning.
• Cost Control and Analysis: Tracking burden helps identify areas of potential cost overruns or inefficiencies. This allows companies to optimize operations and maintain profitability.
• Decision Making: Burden calculations provide valuable data for making strategic decisions regarding project prioritization, investment, and resource allocation.

Calculating Burden:

Calculating burden usually involves a two-step process:

1. Calculating the Total Burden: This involves summing up all indirect costs associated with a specific department or activity.
2. Determining the Allocation Base: This could be direct labor hours, material costs, or a combination of factors. The chosen base should be directly related to the activity being burdened.

The final burden rate is then calculated by dividing the total burden by the chosen allocation base. This rate can then be applied to individual projects or operations to determine the indirect cost associated with them.

Conclusion:

Burden is a crucial element in the cost management framework of the oil and gas industry. By accurately allocating indirect costs, companies can achieve a more realistic picture of project costs, improve decision-making, and ultimately enhance profitability. Understanding and mastering the concept of burden is essential for any oil and gas professional involved in financial planning, project management, or cost analysis.