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Exploration and Operation Efforts Megiddo-Jezreel
Petroleum License The
Company currently holds one active petroleum exploration license onshore Israel, the New Megiddo License 428 (“NML 428”),
comprising approximately 99,000 acres – See Map 1. Under Israeli law, Zion has an exclusive right to oil and gas exploration
in our license area in that no other company may drill there. In the event we drill an oil or gas discovery in our license area, current
Israeli law entitles us to convert the relevant portions of our license to a 30-year production lease, extendable to 50 years, subject
to compliance with a field development work program and production. 35 The
New Megiddo License 428 was awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension.
On May 30, 2021, the Ministry of Energy approved our request for extension to December 2, 2021. On November 29, 2021, the Ministry of
Energy approved our request for extension to August 1, 2022. The New Megiddo License 428 area is the same area as the Megiddo-Jezreel
License 401 area and lies onshore, south and west of the Sea of Galilee and we continue our exploration focus here based on our studies
as it appears to possess the key geologic ingredients of an active petroleum system with significant exploration potential. The MJ-02 drilling plan was approved by the Ministry of Energy on July
29, 2020. On
January 6, 2021, Zion officially spudded its MJ-02 exploratory well. On November 23, 2021, Zion announced via a press release that it
completed drilling the MJ-02 well to a total depth of 5,531 meters (~18,141 feet) with a 6-inch open hole at that depth. A
full set of detailed and comprehensive tests including neutron-density, sonic, gamma, and resistivity logs were acquired in December
2021, as a result of which we identified an encouraging zone of interest. All of the well testing equipment and personnel are secured
for the MJ-02 well. We have re-entered our MJ-02 wellbore and are progressing to production testing. This work is expected to take several
weeks. I-35
Drilling Rig & Associated Equipment Three-month
period ended March 31, 2022 I-35 Drilling Rig Rig Spare Parts Other Drilling Assets Total US$
thousands US$
thousands US$
thousands US$
thousands December
31, 2021 5,859 643 332 6,834 Asset
Additions - 5 117 122 Asset
Depreciation (159 ) - (25 ) (184 ) Asset
Disposals for Self-Consumption - (13 ) - (13 ) March
31, 2022 5,700 635 424 6,759 36 Zion’s
ability to fully undertake all of these aforementioned activities is subject to its raising the needed capital from its continuing offerings,
of which no assurance can be provided. Map
1. Zion’s New Megiddo License 428 as of March 31, 2022. Zion’s
Former Joseph License Zion
has plugged all of its exploratory wells on its former Joseph License area, and the reserve pits have been evacuated, but acknowledges
its obligation to complete the abandonment of these well sites in accordance with guidance from the Energy Ministry, Environmental Ministry
and local officials. 37 Onshore
Licensing, Oil and Gas Exploration and Environmental Guidelines The
Company is engaged in oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental
cleanup of well sites or other environmental restoration procedures and other obligations as they relate to the drilling of oil and gas
wells or the operation thereof. Various guidelines have been published in Israel by the State of Israel’s Petroleum Commissioner,
the Energy Ministry, and the Environmental Ministry in recent years as it pertains to oil and gas activities. Mention of these guidelines
was included in previous Zion Oil & Gas filings. We
acknowledge that these new regulations are likely to increase the expenditures associated with obtaining new exploration rights and drilling
new wells. The Company expects that additional financial burdens could occur as a result of the Ministry requiring cash reserves that
could otherwise be used for operational purposes. Capital
Resources Highlights We
need to raise significant funds to finance the continued exploration efforts and maintain orderly operations. To date, we have funded
our operations through the issuance of our securities and convertible debt. We will need to continue to raise funds through the issuance
of equity and/or debt securities (or securities convertible into or exchangeable for equity securities). No assurance can be provided
that we will be successful in raising the needed capital on terms favorable to us (or at all). The
Dividend Reinvestment and Stock Purchase Plan On
March 13, 2014 Zion filed a registration statement on Form S-3 that is part of a replacement registration statement that was filed with
the SEC using a “shelf” registration process. The registration statement was declared effective by the SEC on March 31, 2014.
On February 23, 2017, the Company filed a Form S-3 with the SEC (Registration No. 333-216191) as a replacement for the Form S-3 (Registration
No. 333-193336), for which the three year period ended March 31, 2017, along with the base Prospectus and Supplemental Prospectus. The
Form S-3, as amended, and the new base Prospectus became effective on March 10, 2017, along with the Prospectus Supplement that was filed
and became effective on March 10, 2017. The Prospectus Supplement under Registration No. 333-216191 describes the terms of the DSPP and
replaces the prior Prospectus Supplement, as amended, under the prior Registration No. 333-193336. On
March 27, 2014, we launched our Dividend Reinvestment and Stock Purchase Plan (the “DSPP”) pursuant to which stockholders
and interested investors can purchase shares of the Company’s Common Stock as well as units of the Company’s securities directly
from the Company. The terms of the DSPP are described in the Prospectus Supplement originally filed on March 31, 2014 (the “Original
Prospectus Supplement”) with the Securities and Exchange Commission (“SEC”) under the Company’s effective registration
Statement on Form S-3, as thereafter amended. Please
see Footnote 3F (“Dividend Reinvestment and Stock Purchase Plan (“DSPP”)), which is a part of this Form 10-Q filing,
for details about specific unit programs, dates, and filings during the years 2016 through 2022. For
the three months ended March 31, 2022, and 2021, approximately $11,427,000, and $2,849,000 were raised under the DSPP program, respectively. 38 The
warrants balances at December 31, 2021 and transactions since January 1, 2022 are shown in the table be Warrants Exercise Price Warrant Termination Date Outstanding
Balance, 12/31/2021 Warrants Issued Warrants Exercised Warrants Expired Outstanding
Balance, 03/31/2022 ZNWAA $ 2.00 01/31/2023 1,498,804 - - - 1,498,804 ZNWAD $ 1.00 05/02/2023 243,853 - - - 243,853 ZNWAE $ 1.00 05/01/2023 2,144,099 - - - 2,144,099 ZNWAF $ 1.00 08/14/2023 359,435 - - - 359,435 ZNWAG $ 1.00 01/08/2023 240,068 - - - 240,068 ZNWAH $ 5.00 04/19/2023 372,400 - - - 372,400 ZNWAI $ 3.00 06/29/2023 640,730 - - - 640,730 ZNWAJ $ 1.00 10/29/2023 545,900 - - - 545,900 ZNWAK $ 0.01 02/25/2023 431,655 - (1,750 ) - 429,905 ZNWAL $ 2.00 08/26/2023 517,875 - - - 517,875 ZNWAM $ 1.00 07/15/2023 4,376,000 - - - 4,376,000 ZNWAN $ 1.00 05/16/2023 267,660 - - - 267,660 ZNWAO $ 0.25 06/12/2023 174,970 - - - 174,970 ZNWAP $ 0.25 06/02/2022 439,916 - - - 439,916 ZNWAR $ 0.25 06/23/2023 1,020,000 - - - 1,020,000 Outstanding
warrants 13,273,365 - (1,750 ) - 13,271,615 According
to the warrant table, the Company could potentially raise up to approximately $16,408,000 if all outstanding warrants were exercised
by its holders. 2018
Subscription Rights Offering Please
see Footnote 3G (“Subscription Rights Offering”), which is a part of this Form 10-Q filing, for a description of and details
about the Subscription Rights Offering. 39 Principal
Components of our Cost Structure Our
operating and other expenses primarily consist of the followin ● Impairment
of Unproved Oil and Gas Properti Impairment expense is recognized if a determination is made that a well will not be commercially
productive. The amounts include amounts paid in respect of the drilling operations as well as geological and geophysical costs and
various amounts that were paid to Israeli regulatory authorities. ● General
and Administrative Expens Overhead, including payroll and benefits for our corporate staff, costs of managing our exploratory
operations, audit and other professional fees, and legal compliance is included in general and administrative expenses. General and
administrative expenses also include non-cash stock-based compensation expense, investor relations related expenses, lease and insurance
and related expenses. ● Depreciation,
Depletion, Amortization and Accreti The systematic expensing of the capital costs incurred to explore for natural gas and oil
represents a principal component of our cost structure. As a full cost company, we capitalize all costs associated with our exploration,
and apportion these costs to each unit of production, if any, through depreciation, depletion and amortization expense. As we have
yet to have production, the costs of abandoned wells are written off immediately versus being included in this amortization pool. Going
Concern Basis Since
we have limited capital resources, no revenue to date and a loss from operations, our consolidated financial statements have been prepared
on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business.
The appropriateness of using the going concern basis is dependent upon our ability to obtain additional financing or equity capital and,
ultimately, to achieve profitable operations. Therefore, there is substantial doubt about our ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The
Impact of COVID-19 During
March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain
of coronavirus (“COVID-19”). The pandemic has significantly impacted the economic conditions in the United States and Israel,
as federal, state and local governments react to the public health crisis, creating significant uncertainties in the United States, Israel
and world economies. In the interest of public health and safety, jurisdictions (international, national, state and local) where we have