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risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that |
a change in market interest rates would have a significant negative impact on the value of our investment portfolio except for reduced |
income in a low interest rate environment. At June 30, 2022, we had cash, cash equivalents and short-term bank deposits of approximately |
$ 7,074,000 . The weighted average annual interest rate related to our cash and cash equivalents for the three and six months ended June |
30, 2022, exclusive of funds at US banks that earn no interest, was approximately .17 % and .34 %, respectively. The primary objective of our investment activities |
is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we |
invest our excess cash in short-term bank deposits and money market funds that may invest in high quality debt instruments. Note 7 - Subsequent Events (i) Approximately $533,000 was collected through the Company’s DSPP program during the period July 1 through August 8, 2022. (ii) Options to purchase 25,000 shares of Common Stock to one board member at an exercise price of $0.235 per share. The options vested upon grant and are exercisable through August 1, 2032. The fair value of the options at the date of grant amounted to approximately $5,875. 33 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD |
BE READ IN CONJUNCTION WITH OUR UNAUDITED INTERIM FINANCIAL STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS FORM |
10-Q. SOME OF OUR DISCUSSION IS FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING RISK FACTORS THAT COULD |
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO THE DISCUSSION OF RISK FACTORS IN THE “DESCRIPTION OF BUSINESS” SECTION |
OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2021, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. Forward-Looking Statements Certain statements made in |
this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. |
These statements may materially differ from actual results. Forward-looking statements |
can be identified by terminology such as “may”, “should”, “expects”, “intends”, “anticipates”, |
“believes”, “estimates”, “predicts”, or “continue” or the negative of these terms or other |
comparable terminology and include, without limitation, statements regardin ● The going concern qualification in our consolidated financial statements; ● our liquidity and our ability to raise capital to finance our overall exploration and development activities within our license area; ● our ability to continue meeting the requisite continued listing requirements by OTCQX; ● the outcome of the current SEC investigation against us; ● business interruptions from the COVID-19 pandemic; ● our ability to obtain new license areas to continue our petroleum exploration program; ● interruptions, increased consolidated financial costs and other adverse impacts of the coronavirus pandemic on the drilling and testing of our MJ#2 well and our capital raising efforts; ● our ability to explore for and develop natural gas and oil resources successfully and economically within our license area; ● our ability to maintain the exploration license rights to continue our petroleum exploration program; ● the availability of equipment, such as seismic equipment, drilling rigs, and production equipment as well as access to qualified personnel; ● the impact of governmental regulations, permitting and other legal requirements in Israel relating to onshore exploratory drilling; ● our estimates of the time frame within which future exploratory activities will be undertaken; ● changes in our exploration plans and related budgets; ● the quality of existing and future license areas with regard to, among other things, the existence of reserves in economic quantities; ● anticipated trends in our business; 34 ● our future results of operations; ● our capital expenditure program; ● future market conditions in the oil and gas industry; ● the demand for oil and natural gas, both locally in Israel and globally; and ● The impact of fluctuating oil and gas prices on our exploration efforts Overview Zion Oil and Gas, Inc., a |
Delaware corporation, is an oil and gas exploration company with a history of 22 years of oil and gas exploration in Israel. We were incorporated |
in Florida on April 6, 2000 and reincorporated in Delaware on July 9, 2003. We completed our initial public offering in January 2007. |
Our common stock, par value $0.01 per share (the “Common Stock”) currently trades on the OTCQX Market under the symbol “ZNOG” |
and our Common Stock warrant under the symbol “ZNOGW.” The Company currently holds one active petroleum exploration license |
onshore Israel, the New Megiddo License 428 (“NML 428”), comprising approximately 99,000 acres. The NML 428 was awarded |
on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. On April 29, 2021, Zion submitted |
a request to the Ministry of Energy for a six-month extension to December 2, 2021. 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. On July 25, 2022, Zion submitted a request to the Ministry of Energy for a six-month extension to February 1, 2023. On July 31, |
2022, the Ministry of Energy approved our request for extension to February 1, 2023. The ML 428 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 Megiddo Jezreel #1 (“MJ |
#1”) site was completed in early March 2017, after which the drilling rig and associated equipment were mobilized to the site. Performance |
and endurance tests were completed, and the MJ #1 exploratory well was spud on June 5, 2017 and drilled to a total depth (“TD”) |
of 5,060 meters (approximately 16,600 feet). Thereafter, the Company obtained three open-hole wireline log suites (including a formation |
image log), and the well was successfully cased and cemented. The Ministry of Energy approved the well testing protocol on April 29, 2018. During the fourth quarter |
of 2018, the Company testing protocol was concluded at the MJ #1 well. The test results confirmed that the MJ #1 well did not contain |
hydrocarbons in commercial quantities in the zones tested. As a result, in the year ended December 31, 2018, the Company recorded a non-cash |
impairment charge to its unproved oil and gas properties of $30,906,000. During the three and six months ended June 30, 2022 and 2021, |
respectively, the Company did not record any post-impairment charges. While the well was not commercially |
viable, Zion learned a great deal from the drilling and testing of this well. We believe that the drilling and testing of this well carried |
out the testing objectives which would support further evaluation and potential further exploration efforts within our License area. Zion |
believed it was prudent and consistent with good industry practice to examine further these questions with a focused 3-D seismic imaging |
shoot of approximately 72 square kilometers surrounding the MJ#1 well. Zion completed all of the acquisition, processing and interpretation |
of the 3-D data and incorporated its expanded knowledge base into the drilling of our current MJ-02 exploratory well. On March 12, 2020, Zion entered |
into a Purchase and Sale Agreement with Central European Drilling kft, a Hungarian corporation, to purchase an onshore oil and gas drilling |
rig, drilling pipe, related equipment and spare parts for a purchase price of $5.6 million in cash, subject to acceptance testing and |
potential downward adjustment. We remitted to the Seller $250,000 on February 6, 2020 as earnest money towards the Purchase Price. The |
Closing anticipated by the Agreement took place on March 12, 2020 by the Seller’s execution and delivery of a Bill of Sale to us. |
On March 13, 2020, the Seller retained the earnest money deposit, and the Company remitted $4,350,000 to the seller towards the purchase |
price, and $1,000,000 (the “Holdback Amount”) was deposited in escrow with American Stock Transfer and Trust Company LLC. |
On January 6, 2021, Zion completed its acceptance testing of the I-35 drilling rig and the Holdback Amount was remitted to Central European |
Drilling. 35 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. Extensive well testing operations are continuing for the MJ-02 well. At present, we have no revenues |
or operating income. Our ability to generate future revenues and operating cash flow will depend on the successful exploration and exploitation |
of our current and any future petroleum rights or the acquisition of oil and/or gas producing properties, and the volume and timing of |
such production. In addition, even if we are successful in producing oil and gas in commercial quantities, our results will depend upon |
commodity prices for oil and gas, as well as operating expenses including taxes and royalties. Our executive offices are |
located at 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243, and our telephone number is (214) 221-4610. Our branch office’s |
address in Israel is 9 Halamish Street, North Industrial Park, Caesarea 3088900, and the telephone number is +972-4-623-8500. Our website |
address is: www.zionoil.com . Current 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. 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. On July 25, 2022, |
Zion submitted a request to the Ministry of Energy for a six-month extension to February 1, 2023. On July 31, 2022, the Ministry of Energy |
approved our request for extension to February 1, 2023. 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. Extensive well testing operations are continuing for the MJ-02 well. I-35 Drilling Rig & Associated Equipment Six-month period ended June 30, 2022 I-35 Drilling Rig Rig Spare Parts Other Drilling Assets Total US$ thousands US$ thousands US$ thousands US$ thousands December 31, 2021 5,859 642 333 6,834 Asset Additions - 135 211 346 Asset Depreciation (317 ) - (54 ) (371 ) Asset Disposals for Self-Consumption - (171 ) - (171 ) June 30, 2022 5,542 606 490 6,638 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. 36 Map 1. Zion’s New Megiddo License 428 |
as of June 30, 2022. 37 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. 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 |
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