Interior Department Acting Inspector General Mary L. Kendall has recommended stricter controls on the Bureau of Land Management (BLM) auction process and tougher requirements for bidders to avoid a repeat of the scene last December where a bad-faith bidder disrupted a Utah auction to protest the impact of drilling on the environment (see NGI, Dec. 22, 2008).
"The occurrence of bad-faith bidders has been rare, with only two known cases in the last five years. However, there is growing concern that lease auctions may become a forum for future protests due to the publicity of the Utah incident," Kendall said in a recent letter accompanying a report on proposed auctions improvements to BLM Director Robert V. Abbey.
"The possibility for increased bad-faith participants in BLM's lease auction process may be affected by the outcome of the pending prosecution of the individual in Utah. If the individual is convicted, the severity of the penalties associated with that conviction will be crucial to reinforcing the implemented measures and serve as a major deterrent to future bad-faith bidders. If he is acquitted, the absence of consequences for such action may encourage similar incidents such as the one in Utah and require BLM to [further] reassess its controls," Kendall said.
The bad-faith bidder, a 27-year-old University of Utah economics student, bid on 13 natural gas and oil leases in December during the BLM auction in Utah -- with no intention of paying for them. He faces up to 10 years in prison and hefty fines after being indicted in April on two felony counts (see NGI, April 6).
"We found that BLM took swift action" to improve its auction process following the disruption of the Utah sale, Kendall said. And "although the new measures should reduce the risks associated with bad-faith bidders, we are recommending additional steps [to those proposed by BLM) to further minimize the risks of fraudulent bidders and improve the lease auction process."
Following the Utah sale last December, the BLM's Division of Fluid Minerals drafted an instruction memorandum (IM) that requires:
State BLM offices were directed to immediately implement the provisions.
"Although the...actions should reduce the risks associated with bid-walkers, the IM did not emphasize the criminal penalties associated with bad-faith bidding by specifically citing imprisonment and fines," or include statutory language in the bidder registration form and the notice of competitive oil and gas lease sale that makes "it unlawful to organize or participate in any scheme to defeat provisions of the mineral leasing regulations." Violators can face up to $500,000 in fines, up to five years in prison, or both, Kendall said. "Also the IM did not contain provisions for banning repetitive bid-walkers.
The state of Wyoming, she noted, bans a bid-walker from auction participation for one year. And if the party participates after one year, the state requires full payment with certified funds on the day of the sale. The states of New Mexico and Colorado also require full payment on the day of a sale.
The disruption of the Utah auction occurred in part because the BLM failed to publicize that there were criminal and civil penalties associated with fraudulent bidding; did not require verification of identification for lease bidders; and did not have a formalized billing and collection process in place for bid-walkers, according to Kendall.
BLM will pilot its first Internet auction in Colorado this month, which she says will present new risks. "This method allows for potential anonymous participation in the auction process, increasing the risk of fraudulent bidding. Even though a credit card will be required for bidders to preregister in order to verify identity, it would not preclude an individual from using a stolen or unauthorized credit card," Kendall said.
"The Internet leasing auction is a promising prospect for BLM in the evolution of its oil and gas leasing process. For BLM to fully implement the Internet leasing auction concept [beyond the pilot stage], however, Congress will need to amend the [Mineral Leasing Act] to eliminate the requirement for oral auctions."
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