Mineral Resources: BLM Needs to Improve Controls Over Oil and Gas Lease
Acreage Limitation (Letter Report, 12/29/94, GAO/RCED-95-56).

The Bureau of Land Management's (BLM) internal controls cannot guarantee
that federal oil and gas leases are not issued to parties who have
exceeded the Mineral Leasing Act's acreage limitation.  BLM allows oil
and gas lessees to self-certify that they have not exceeded the acreage
limitation, and although the agency has procedures for auditing
compliance with the requirement, BLM has not done a compliance audit
since 1993 because it considers it a low priority.  Even when audits
were done, BLM's strategy for selecting lessees was ineffective because
it did not target parties for approaching or appearing to exceed the
acreage limitation.  Finally, BLM has allowed companies that share the
same officers, directors, or major stockholders to be considered
separate leaseholders under the acreage limitation.  GAO discovered one
lessee who had exceeded the limitation by more than 190,000 acres in
Wyoming and by nearly 27,000 acres in Nevada.  Similarly, by presuming
that companies are affiliated when they share the same officers,
directors, or major stockholders, GAO identified five firms whose
aggregate acreage exceeded the limit by more than 800,000 acres in
Wyoming, 435,000 acres in New Mexico, and 86,000 acres in Nevada.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-95-56
     TITLE:  Mineral Resources: BLM Needs to Improve Controls Over Oil 
             and Gas Lease Acreage Limitation
      DATE:  12/29/94
   SUBJECT:  Natural resources
             Oil leases
             Public lands
             Gas leases
             Auditing procedures
             Compliance
             Land management
             Land use law
             Mineral bearing lands

             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Energy and Mineral Resources,
Committee on Natural Resources, House of Representatives

December 1994

MINERAL RESOURCES - BLM NEEDS TO
IMPROVE CONTROLS OVER OIL AND GAS
LEASE ACREAGE LIMITATION

GAO/RCED-95-56

Improving Controls Over Oil and Gas Leases


Abbreviations
=============================================================== ABBREV

  BLM -
  GAO -

Letter
=============================================================== LETTER


B-259216

December 29, 1994

The Honorable Richard Lehman
Chairman, Subcommittee on Energy and
 Mineral Resources
Committee on Natural Resources
House of Representatives

Dear Mr.  Chairman: 

The Mineral Leasing Act of 1920, as amended, (30 U.S.C.  181 et seq.)
regulates the development of oil, gas, and coal on public domain
lands.\1 For oil and gas leases, the act limits the acreage that one
party may control in any one state to 246,080 acres, reflecting
congressional concern about the potential for monopolistic control of
federal oil and gas resources.\2 The act authorizes the Secretary of
the Interior, through the Bureau of Land Management (BLM), to issue
and administer onshore oil and gas leases, as well as coal leases, on
federal lands.  Currently, BLM administers over 51,000 producing and
nonproducing oil and gas leases on about 37 million acres of federal
lands.  You asked us to determine the adequacy of BLM's controls
intended to ensure that federal oil and gas leases are not issued to
parties who have exceeded the acreage limitation. 


--------------------
\1 Public domain lands are, principally, lands owned by the federal
government that have never been in private or state ownership. 

\2 In Alaska, the aggregate limit is 600,000 acres. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

BLM's internal controls are not adequate to ensure that federal oil
and gas leases are issued only to parties who have not exceeded the
Mineral Leasing Act's acreage limitation.  BLM allows oil and gas
lessees to self-certify that they have not exceeded the acreage
limitation, and the agency does have procedures for auditing
compliance with the requirement.  However, since 1993, BLM has not
performed these compliance audits because it views this
responsibility as having a low priority relative to other work and
duties.  In addition, when these audits were performed, BLM's
strategy for selecting lessees was ineffective because it did not
target parties approaching or appearing to exceed the acreage
limitation.  Instead, BLM used a stratified sampling methodology. 
Finally, in some cases, BLM has allowed companies that share the same
officers, directors, or major stockholders (some of whom are also
members of the same family) to be considered separate leaseholders
under the acreage limitation. 

By targeting parties whose lease holdings are approaching or appear
to have exceeded the acreage limitation, our review identified a
lessee who had exceeded the limitation by over 190,000 acres in
Wyoming and by almost 27,000 acres in Nevada.  By presuming that
companies are affiliated when they share the same officers,
directors, or major stockholders, our review identified five
companies, including the one above, whose aggregate acreage exceeded
the limit by over 800,000 acres in Wyoming, 435,000 acres in New
Mexico, and 86,000 acres in Nevada. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Mineral Leasing Act, as amended, serves to prevent the
concentration of control over federal oil and gas resources in a few
companies or individuals.  Under the act, once a party reaches the
statutory acreage limitation, it is prohibited from controlling
additional acreage in that state.  The Secretary of the Interior has
the authority to compel a party whose acreage is in excess of the
statutory limitation to divest excess acreage and forfeit the leases
on this acreage.  Acreage to which a party holds the record of title,
has an option for future ownership, or owns the operating rights must
be counted against the limit.  Certain holdings are excluded from the
acreage computation, however, including those in unit agreements or
development contracts.\3

When issuing oil and gas leases, BLM relies primarily on bidders'
self-certification; that is, bidders certify that they have met the
qualification requirements of the act by signing the lease
application form.  In signing the form, bidders establish a legal
responsibility for the accuracy of the statements made.  Knowingly
making false statements is a violation of 18 U.S.C.  1001, which
provides for up to a $10,000 fine or up to 5 years in prison or both. 

In addition to self-certification, BLM has developed internal
controls to help ensure that federal oil and gas leases are not
issued to parties who have already exceeded the acreage limitation. 
Specifically, it has developed an audit strategy to verify
compliance.  For states with more than 500,000 acres of lands under
lease, BLM first stratifies lessees by the number of acres leased. 
The first group includes (1) about 400 lessees with more than 50,000
acres of lands under lease that may be counted against the acreage
limitation and (2) parties who BLM personnel or others suspect may
exceed the limit; from this group, BLM randomly selects 51 lessees
for audit.  The second group includes about 11,000 lessees
controlling 50,000 acres or less, and from this group BLM randomly
selects another 33 for audit.  From the 51 lessees selected from the
first group, those controlling more than 200,000 acres are required
to submit to BLM an accounting of all acreage that may be counted
against the acreage limitation.  Those with fewer than 200,000 but
more than 50,000 acres are audited only if BLM identifies, through
publications that identify corporate affiliations, related companies
whose aggregate acreage exceeds 200,000 acres. 

If a selected lessee appears to have exceeded the acreage limitation,
the information is sent to the appropriate BLM state office for a
more thorough audit.  The responsible state office reconciles the
lease holdings reported by the lessee with BLM's records, which
include the records of title, options for future ownership, and
ownership of the operating rights. 


--------------------
\3 Unit agreements combine separate lease interests into a single
operating entity to develop a geographical area in the most efficient
and economic manner, without regard to separate ownership rights. 
Development contracts are intended to allow oil and gas lease
operators and pipeline companies to contract with a sufficient number
of lessees to economically justify large-scale drilling operations
for the production and transportation of oil and gas. 


   BLM'S INTERNAL CONTROLS DO NOT
   IDENTIFY UNQUALIFIED BIDDERS
------------------------------------------------------------ Letter :3

BLM's internal controls are not adequate to ensure that federal oil
and gas leases are not issued to parties who have exceeded the
acreage limitation.  As a result, companies have been able to compete
for and obtain lease acreage beyond the acreage limitation, and other
parties who wish to participate in developing federal oil and gas
resources may be precluded from obtaining such leases. 

Although self-certification establishes bidders' legal responsibility
for the accuracy of the statements made on the lease application
form, it does not ensure that the bidders have actually complied with
the acreage limitation.  To provide additional assurance, BLM
established procedures for auditing selected lessees' acreage
holdings.  However, because of limited resources, BLM stopped
performing these audits after 1992. 


      COMPLIANCE AUDITS WERE NOT
      PERFORMED AFTER 1992
---------------------------------------------------------- Letter :3.1

Since 1993, BLM has not verified compliance with the acreage
limitation because it views this responsibility as having a lower
priority than other work and duties.  For fiscal years 1990 through
1992, BLM's Central Audit Office, located in Cheyenne, Wyoming,
performed the audits required under BLM's audit strategy.  However,
after requesting that BLM headquarters assign the audit
responsibility to another state office with a lighter workload and
receiving no response, the Central Audit Office stopped performing
the audits.  According to a Central Audit Office official, as of
October 1994, BLM headquarters still had not responded to the request
or to the Office's failure to perform the required audits. 


      BLM'S AUDIT STRATEGY IS
      INEFFECTIVE
---------------------------------------------------------- Letter :3.2

Through 1992, when it did attempt to verify compliance with the
acreage limitation, BLM employed an audit strategy that proved
ineffective.  Specifically, under BLM's strategy, a sample of, rather
than all, lessees with 200,000 acres or more was audited.  In our
review, we identified all parties with acreage holdings in excess of
200,000 acres and found that one company exceeded the acreage
limitation by over 190,000 acres in Wyoming and by almost 27,000
acres in Nevada.  Under BLM's method, the company that we identified
as exceeding the acreage limitation in both Wyoming and Nevada stood
about 1 chance in 8 of being selected for audit.  On the basis of our
review, BLM has initiated an acreage audit of the company we
identified as exceeding the limit. 

The probability that this company would have been selected would have
increased significantly if BLM had audited all lessees whose lease
holdings were approaching or appeared to have exceeded the acreage
limitation.  One alternative would be to reduce the universe from
which BLM selects parties for audit to include only lessees with more
than 200,000 acres of federal lands under lease that may be counted
against the acreage limitation rather than the current threshold of
50,000 acres.  BLM's data that we reviewed showed that, in Wyoming,
five lessees had more than 200,000 acres under lease.  BLM could
audit this small number of lessees instead of randomly selecting from
a larger universe, thereby auditing all lessees that are approaching
the limit.  BLM could then randomly select for audit other lessees
from the universe of those controlling 200,000 acres or less to
ensure audit coverage. 


      BLM HAS ALLOWED AFFILIATED
      COMPANIES TO EXCEED THE
      ACREAGE LIMITATION
---------------------------------------------------------- Letter :3.3

In addition to not targeting lessees near the acreage limitation,
BLM's audits did not identify five companies that, in our opinion,
are affiliated and whose aggregate acreage exceeded the acreage
limitation in three states.  We identified these companies as
affiliates because they share officers, directors, and major
stockholders (some of whom are also members of the same family). 
BLM's regulations and the lease application form state that lessees
are accountable for all acreage that they control directly and
indirectly.  However, BLM bases its decisions on whether leased
acreage will count against the acreage limitation strictly on the
relationships that appear in publications identifying corporate
affiliates.\4 The companies we identified as affiliates did not
appear in these publications, and because BLM does not define the
circumstances under which companies are considered affiliates, the
agency allowed them to account for their acreage holdings separately. 

In contrast, Interior's Minerals Management Service and Office of
Surface Mining Reclamation and Enforcement\5 both presume that
companies are under common control when they share the same
directors, have family ties, or share stockholders who own 50 percent
or more of the stock.  The latter office also considers that being an
officer of an entity constitutes control.  When the presumption of
control exists, both offices place the burden of proof on the
companies to show that they are not related. 

By presuming that companies are affiliated when they share officers,
directors, or major stockholders, our review of September 1994 data
identified five companies whose aggregate acreage exceeded the
limitation by over 800,000 acres in Wyoming, 435,000 acres in New
Mexico, and 86,000 acres in Nevada.  On the basis of the results of
our review, BLM has agreed to review its policies on the aggregate
acreage of companies that appear to be under common control. 


--------------------
\4 BLM's manual identifies the National Register Publishing Company's
Directory of Corporate Affiliations, Who Owns Whom and the Standard
and Poor's Corporation's Standard and Poor's Corporation Records as
the publications the agency uses to identify corporate affiliates. 

\5 The Minerals Management Service is responsible for collecting,
accounting for, auditing, and distributing revenues from federal and
most Indian mineral leases.  The Office of Surface Mining Reclamation
and Enforcement oversees surface coal mining and the reclamation of
mined lands. 


   CONCLUSIONS
------------------------------------------------------------ Letter :4

BLM's controls are not adequate to ensure that federal oil and gas
leases are issued only to parties who have not exceeded the Mineral
Leasing Act's acreage limitation.  In addition, we believe that BLM's
policies do not adequately define circumstances under which companies
are considered to be under common control. 

We are aware that federal land management agencies' staff are being
asked to assume increasing responsibilities and to perform more
duties and that trade-offs are being made among important yet
competing work priorities.\6 However, if BLM does not verify
compliance with the acreage limitation in the Mineral Leasing Act, it
cannot ensure that lessees will not obtain monopolistic control over
federal oil and gas resources.  In addition, other eligible parties
may be precluded from obtaining such leases. 


--------------------
\6 See, for example, Natural Resources Management Issues
(GAO/OCG-93-17TR, Dec.  1992), Natural Resources Management:  Issues
to Be Considered by the Congress and the Administration
(GAO/T-RCED-93-5, Feb.  2, 1993), and Forest Service Management: 
Issues to Be Considered in Developing a New Stewardship Strategy
(GAO/T-RCED-94-116, Feb.  1, 1994). 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :5

To ensure that oil and gas lessees do not exceed the acreage
limitation, we recommend that the Secretary of the Interior direct
the Director of BLM to

revise BLM's audit strategy to better target parties whose lease
holdings are approaching or exceeding the acreage limitation;

adopt a policy similar to the policies of the Minerals Management
Service and the Office of Surface Mining and Reclamation Enforcement
on the affiliations between parties when determining whether
companies are under common control; and

perform audits of lessees' compliance with the acreage limitation. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

Although we did not obtain written agency comments on a draft of this
report, we discussed the results of our work with the Fluid Minerals
Division Chief and the Leasing Qualifications Program Lead at BLM
headquarters in Washington, D.C.; with the Acting Chief, Fluid
Minerals Branch of the Mineral Resources Division, and the
Supervisory Land Law Examiner in the Central Audit Office in
Cheyenne, Wyoming; and with a representative of the Department of the
Interior's Solicitor's Office in Washington, D.C.  These officials
generally agreed with the findings, conclusions, and recommendations
in this report. 


---------------------------------------------------------- Letter :6.1

In conducting our review, we examined the relevant laws and
regulations governing oil and gas lessees' qualifications, as well as
pertinent documents at BLM.  We also interviewed BLM officials at all
organizational levels who are responsible for managing federal oil
and gas leasing; these officials are in the Washington, D.C.  office;
in state, district, and resource area offices; and in the Denver
Service Center.  We obtained and analyzed data from BLM on mineral
leases.  We contacted officials in various states to obtain
information on certain companies' corporate structures.  We discussed
common control with officials from the Minerals Management Service
and the Office of Surface Mining Reclamation and Enforcement. 
Appendix I contains the details of our scope and methodology. 

We performed our review between March and November 1994 in accordance
with generally accepted government auditing standards. 

We are sending copies of this report to the Secretary of the Interior
and the Director, Bureau of Land Management.  Copies are available to
others upon request. 

Please contact me on (202) 512-7756 if you have any questions about
this report.  Major contributors to this report are listed in
appendix II. 

Sincerely yours,

James Duffus III
Director, Natural Resources
 Management Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

In April 1993, the Chairman, Subcommittee on Energy and Mineral
Resources, House Committee on Natural Resources, asked us to assess
the adequacy of the Bureau of Land Management's (BLM) controls
intended to ensure that oil and gas leases are not issued to parties
who have exceeded the acreage limitation. 

We interviewed BLM officials responsible for managing federal oil and
gas lessees' qualifications, including officials in Washington, D.C.,
and in six of BLM's state offices--Colorado, Nevada, New Mexico,
Montana, Wyoming, and Utah.  We selected these states because they
have the greatest number of leased acres under BLM's management; all
have more than 1 million acres of federal onshore leases. 

We examined the relevant laws and regulations governing oil and gas
lessees' qualifications.  We also reviewed BLM documents, including
pertinent acreage-audit and other case files in the agency's Central
Audit Office located in Cheyenne, Wyoming, to (1) identify audit
procedures and results and (2) confirm the information on acreage for
certain leases.  We obtained and reviewed BLM's relevant
instructional memorandums, manuals, and reports.  We also attended
the August 1994 lease sale in Cheyenne, Wyoming, to identify BLM's
procedures for such sales.  We selected the Wyoming office because it
handles the most leasing and because it continued to lease acreage to
a lessee we identified as holding acreage in excess of the legal
limit. 

We obtained data from several sources.  From BLM's Service Center in
Denver, Colorado, we obtained acreage data for all existing federal
oil and gas leases in each of the six states, as of September 1994. 
We also obtained data on the actions taken on these leases since
their inception. 

We identified and calculated the acreage chargeable to each lessee in
each of the six states and summarized the data to identify which
lessees had exceeded or were approaching the acreage limit in any
state.  We calculated the amount of chargeable acreage by multiplying
each lessee's percentage of interest in a lease by the total acreage
leased.  We excluded some holdings that do not apply toward the
limit.  For example, if a lease was in a unit agreement or
development contract, we did not count the affected acreage because
it is not chargeable against the limit. 

We then sorted the data by lessees' name and address to identify
potentially related entities that have, for example, different names
but the same address.  Also, because BLM does not assign a unique
identifier to each lessee, variations in names occur within the data;
we combined entities' holdings in such instances.  On the basis of
this initial identification of possibly linked corporations, we
contacted state officials in Wyoming, Montana, Utah, New Mexico,
Colorado, and Texas to obtain information on the identity of
corporate officers and directors.  We also interviewed officials at
the Minerals Management Service and at the Office of Surface Mining
Reclamation and Enforcement to determine how these offices'
regulations and policies address common control over companies. 

We discussed the contents of the draft report with responsible BLM
officials, and they generally agreed with the contents of the report. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II


   NATURAL RESOURCES MANAGEMENT
   ISSUES
-------------------------------------------------------- Appendix II:1

Sue E.  Naiberk, Assistant Director
Jennifer L.  Duncan, Evaluator-in-Charge
Felicia A.  Turner, Senior Computer Specialist
Alan J.  Wernz, Evaluator

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