It drives me mad that every time the question comes up about the energy crisis on Hannity & Colmes, Alan always challenges the program's conservative guest that George Bush's own Department of Energy states that the U.S. only has 3% of the world's oil reserves and annually consumes 25% of the world's annual production. Consequently, the U.S. can't resolve the shortage by drilling.

Alan then follows with a comment, "Shouldn't the oil companies be required to drill the leases they hold before they are given rights to drill offshore?"

Sean, tell Alan Colmes to get his facts straight. First of all, regarding the 3% reserve, you can't determine an oil reserve without drilling. Since we haven't drilled in a systematic manner prospective offshore continental slopes targets or deep-water targets, let alone prospective, but restricted, continental targets, we shouldn't be forming national energy policies and solutions based on a number that is misleading. The 3% only refers to known oil reserves. Areas that haven't been drilled can't be accurately categorized as to whether or not they have the potential to contain hydrocarbons unless they have been drilled.

In an August 14, 2008, Washington Post editorial, a point was made regarding the 3% reserve. According to the Department of the Interior's Mineral Management Service (MMS) there was an estimated 18 billion barrels of oil in the off-limits portion of the Outer Continental Shelf (OCS) prior to 2006. The estimate was made using old data from now-outdated seismic equipment. In the case of the east coast, the data was collected before Congress imposed a moratorium on offshore drilling in 1981. In 1987, the MMS estimated that there were nine billion barrels of oil in the Gulf of Mexico. After major advances in seismic technology and deepwater drilling techniques, the MMS resource estimate for the Gulf of Mexico had ballooned to 45 billion barrels in 2006.

Advances in technology, followed by drilling, has increased known reserves. New drilling in currently restricted areas both onshore and offshore will result in the discovery of new oil fields. A recent example of successful expansion of U.S. oil reserves in conjunction with advances in technology is the Devonian-Mississippian Bakken Formation in the Williston Basin (Montana and North Dakota).

In the 1980s and 1990s, the upper Bakken was the focus of considerable drilling activity, but the wells were marginally economic and difficult to produce. Consequently, the upper Bakken was looked at as a drill hole termination point rather than a target.

A 1995 U.S. Geological Survey (USGS) assessment of the Bakken Formation estimated a reserve of 151 million barrels of oil. The assessment was made using a "tried and true" geology-based assessment methodology. The USGS is required by the Energy Policy Conservation Act of 2000 to provide assessment of the identified priority basins in the United States. Thirty-two basins have been identified as priority basins, and they contain 96% to 98% of the known oil and gas resources for the United States. These basins are prioritized according to resource potential and the percentage of federal land.

This view of the Bakken changed dramatically in 1995 when oil prospector Dick Findley, of Prospector Oil Inc., recognized that the fractured middle dolomitic section of the Bakken had good porosity and could be a host for oil. This observation and successive drilling led to the discovery of the Elm Coulee, Montana, oil field, which contains an estimated 43 million barrels of oil.

Successful Bakken production wells require vertical drill holes to a depth of 10,000', and then horizontal hole deflection into the dolomitic middle Bakken. The horizontal deflections may extend for another 10,000' or so in order to tap the oil from the porous and fractured dolomite. Bakken wells typically cost $5 to $6 million each, depending on required completion work.

Horizontal drilling alone is not the key to successful production. The determinative factor is the multiple zones of fracing (induced fracturing) that allows oil flow from separate zones by utilizing drill-hole swell packers that can be used to isolate zones so flow can be enhanced by managed stimulation (water and/or gas injections).

Interestingly, the Energy Policy Act of 2005 states that the same methodology must be used in assessing the Bakken formation as what was done to assess the other priority basins. This insistence on using the same methodology suggests that the latest technological advances in resource modeling have not been used in this recently completed assessment.

Using a geology-based assessment methodology, the USGS reported in April 2008 that the Bakken now contains an estimated mean undiscovered volume of 3.65 billion barrels of oil, 1.85 trillion cubic feet of associated/dissolved natural gas, and 148 million barrels of natural gas liquids.

The oil in the Bakken is considered to be a continuous oil accumulation, which is spread throughout the formation, as opposed to a conventional oil accumulation, which occurs as discreet pools. The spread-out nature of the Bakken oil makes it expensive to recover, and may limit the amount that can be produced.

According to the MMS, there were 7,457 active oil and gas leases as of June 8, 2008. Of those, only 1,877 leases were classified as producing. In FY2007, the MMS collected and distributed $11.45 billion in revenue from energy production on Federal and American Indian lands, and from the OCS. Annually, revenue from leases is distributed to American Indians and states on a regular basis. This lease revenue is generated from royalties, rents, bonuses (revenue generated from oil and gas lease sales), and other money collected by the MMS. The distribution of revenues associated with onshore Federal lands is split 50-40-10, with 50% of the money going to the state where the lease occurs ($2 billion to the states in 2007). FY2007 revenues are also distributed to various Federal special-use accounts, such as the Land and Water Conservation Fund ($900 million), the Historic Preservation Fund ($150 million) and the Reclamation Fund ($1.5 billion), and to the General Fund of the U.S. Treasury ($6.8 billion).

The breakdown of the FY 2007 revenue collected by the MMS included a record $4.4 billion in oil royalty revenue, which surpassed the $3.9 billion in FY2006. Additional FY2007 revenue included $4.6 billion from natural gas royalties, $900 million in bonus revenues, and annual rental revenues of $267 million.

Regarding leases on government land, oil and gas companies pay billions of dollars for the rights to explore on federal lands. If a company does not produce within the term of the lease, it must give the lease back to the government, and the company does not get its investment back.

There are considerable risks and challenges involved in finding and exploring for oil and gas. There are no guarantees that a particular lease will contain hydrocarbons. It is not unusual for a company to spend in excess of $100 million only to drill a dry hole. A company may only have limited geologic knowledge about the leased acreage unless previous work has been done in the area by the company, or information has been acquired from another operator. Companies are not in the habit of spending money evaluating government land until a lease has been acquired. Companies can take several years to determine whether or not a lease warrants drilling. In some cases, they may attempt to joint-venture their lease and get a partner to put up the funds to drill.

In the lower 48 states, about 85% of the OCS and 67% of onshore federal lands are off-limits or impose significant restrictions toward development.

In July 2008, the Bureau of Land Management (BLM) provided written Notice of a Competitive Oil and Gas Lease Sale that will be held on September 9, 2008, in Reno, Nevada, at the BLM Nevada State Office. The leases will be issued for a term of 10 years, and they will be allowed to continue beyond the 10-year term if oil and gas is produced in paying quantities on or for the benefit of the lease. Lease rates are $1.50 per acre for the first five years ($2 per acre after that) until production begins. If your bonus bid was more than $2 per acre, the full amount plus the first year's $1.50 acre advance rental is due immediately following the sale. The bid amount above $2 must be paid within 10 days of the sale.

Once a lease is producing, a 12.5% royalty is charged on the removed or sold production.

In the past two years, the BLM has experienced a sharp increase in demand for natural gas drilling permits and expects that demand to continue.

The American Petroleum Institute contracted with Ernst & Young LLP to prepare an analysis of the oil industry's historical investment trends and other uses of cash flow. Over the 11-year period, 1996 through 2007, the five major companies (BP (NYSE: BP, Stock Forum), Chevron (NYSE: CVX, Stock Forum), ConocoPhillips (NYSE: COP, Stock Forum), Exxon Mobil (NYSE: XOM, Stock Forum), and Royal Dutch Shell (OTO: RYDAF, Stock Forum)) had $712 billion in new investment. Over the same period, these companies had a net income of $705 billion, and cash flow from operations of $1.18 trillion.

New investment exceeded net income every year between 1996 and 2007. The increased demand for energy occurs at a time that the U.S. oil companies are facing significant constraints as to where they can explore in the world and must comply with ever-increasing constraints imposed by the host country, and face increasing geopolitical risks.

The U.S. oil and gas industry is also facing environmental expenditures. Since 1990, the industry has invested more than $160 billion toward improving the environmental performance of its products, facilities, and operations. In 2006, the industry spent $11.3 billion implementing new technologies, creating cleaner fuels, and funding environmental initiatives.

America's oil and natural gas industry is one of the world's most capital-intensive. Companies that participate routinely invest billions of dollars each quarter into exploration, research, development, and technology. A single offshore platform in the Gulf of Mexico, designed to operate in thousands of feet of water can cost more than a $1 billion to develop. In recent years, companies like Exxon Mobil are reporting record quarterly earnings. For the second quarter of 2008, Exxon Mobil reported record quarterly earnings of $11.97 billion on total revenues of $138 billion. Exxon Mobil returned to their shareholders in the second quarter $10.1 billion through $2.1 billion in dividends and share re-purchases.

The earnings are immense but not out of line based on what other industries earn. A review of first-quarter earnings by industry, according to the U.S. Census Bureau and Oil Daily, indicates that the oil and natural gas industry earnings were 7.4% of sales. Pharmaceutical and medicines reported earning of 25.9% compared to sales. All manufacturers, not including autos, reported earnings of 8.6% compared to sales.

A strong oil industry is good for the United States. Imagine what the consequence would be if our oil companies were encumbered with a weak financial structure like our auto industry, which once dominated world production and sales.

Big oil is good for America.