HONG KONG — A Hong Kong-listed Chinese oil company has disclosed that it lost the bulk of its oil and gas rights in the U.S., with the announcement coming years after the contracts were terminated.
CHK Oil released a statement via the Hong Kong Exchange late on Thursday, revealing that it no longer holds three of its four leases to an oil and gas field in the state of Utah. The announcement said the Bureau of Land Management under the U.S. Department of Interior had issued written orders on Nov. 14, 2022, stating that the three leases had been terminated as far back as mid-2020.
CHK Chairman Yu Jiyuan said in the disclosure that the receipt of the written orders had not been shared with the board “until recently.” The board became aware of the issue last Thursday, according to the filing.
The company said it is seeking advice from its legal advisers in Utah, to assess the implications and the possibility of legal action.
While CHK pledged to “look further into the cause of the delay in the reporting,” the case raises several questions: how U.S. government orders concerning arguably the company’s most important assets could have gone unnoticed by the board for almost two years; under what circumstances the orders suddenly surfaced last week; and what legal or administrative consequences might arise.
As recently as late April, in the company’s latest annual report, Yu wrote in his chairman’s statement that “we maintained basic operational levels in our natural gas and liquefied petroleum gas fields in Utah throughout the year.”
In the same paragraph, he acknowledged the sensitivity of a Chinese company operating such projects on American soil. “[U]nder the current geopolitical climate, there is significant uncertainty in U.S.-China relations, leading to a layer of political risk that cannot be ignored,” he wrote.
These comments were included in this key investor document despite three of the four leases having been terminated long before the 2023 reporting period.
Nikkei Asia’s request for an explanation from CHK Oil remained unanswered as of publication time.
A public relations officer at the Hong Kong Exchange told Nikkei Asia that it is unable to comment on a specific listed company.
The media office at the Bureau of Land Management in the U.S. and its Utah branch did not immediately respond to emailed questions, likely due to the significant time difference with Asia.
The assets in question are at the Utah Oil and Gas Field. CHK’s management said in April that it was in the middle of its “well overhaul schedule” and that this was “expected to be prolonged” due to various uncertainties, such as turnover of workers, a tight construction schedule, and increased difficulties in the purchase and transportation of equipment.
Citing changes in the “international political landscape and the growing tensions in Sino-American relations,” the company pledged at the time to “continue to evaluate the situation” surrounding the assets in the southwestern state but to “steadily push forward works, and promptly adjust our development direction and strategy in line with changes in the situation.”
The company did say in April that it had not undertaken any further exploration and development in the Utah fields in 2023. Maintenance costs of approximately 1.2 million Hong Kong dollars ($155,000) were accrued during the year.
An impairment loss of HK$46.5 million on the Utah properties and intangible assets was realized last year, primarily attributed to lower natural gas and oil prices. Consequently, the carrying amount of the intangible assets related to the Utah oil and gas processing rights decreased to HK$292.37 million as of the end of last year.
The rights in question were acquired in 2010 for a total of $225 million. Back then, the company was under a different controlling shareholder and named Pearl Oriental Innovation, which became Pearl Oriental Oil the following year. The acquisition of the Utah rights was approved by the Committee of Foreign Investment of the United States, or CFIUS, according to the disclosure at the time.
Pearl Oriental Oil ran into financial difficulties in 2017 and “exhausted all other alternative fundraising methods,” according to its 2019 annual report. A new strategic investor, Xin Hua Petroleum (Hong Kong), swooped in and became the controlling shareholder, while its English name was changed to CHK Oil in February 2020.
Xin Hua owns 68.91% of the company, according to the latest annual report. Xin Hua, in turn, is held by three individuals, including Yu Zhibo and Chen Junyan, who own 46.28% and 34.92%, respectively.
Yu Zhibo is the father of CHK Chairman Yu Jiyuan, and doubles as the vice chairman of CHK and a director of Xin Hua. The elder Yu has been in the petrochemical industry in mainland China for over a decade, according to a profile provided in the annual report.
Although the Utah properties were the only oil and gas assets under the company’s control, the board claimed in Thursday night’s disclosure that the termination “would not have a material adverse impact on the business operation” as the company “has been strategically increasing its focus on the trading of oil, oil-related products and other products business.”
The latest available financial results, for 2023, show that annual revenue dropped 55% year on year to HK$161.49 million, while the company’s net loss ballooned by more than 40 times on the year to HK$49.55 million.
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