Item 1A Risk Factors 13
Item 1B Unresolved Staff Comments 23
Item 2 Properties 23
Item 3 Legal Proceedings 24
Item 4 Mine Safety Disclosures 25
PART II
Item 6 Reserved 26
Item 7A Quantitative and Qualitative Disclosures about Market Risk 41
Item 8 Financial Statements and Supplementary Data 41
Item 9A Controls and Procedures 42
Item 9B Other Information 42
Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Disclosure 42
PART III
Item 10 Directors, Executives Officers and Corporate Governance 43
Item 11 Executive Compensation 43
Item 14 Principal Accountant Fees and Services 43
PART IV
Item 15 Exhibits, Financial Statement Schedules 44
i
FORWARD
LOOKING STATEMENTS
This
Annual Report on Form 10-K (herein, “Annual Report”) and the documents included or incorporated by reference in this Annual
Report contain statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995. You generally can identify our forward-looking statements
by the words “anticipate,” “believe,” “budgeted,” “continue,” “could,” “estimate,”
“expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,”
“potential,” “predict,” “projection,” “scheduled,” “should,” “will”
or other similar words. These forward-looking statements include, among others, statements regarding:
● The going concern qualification in our consolidated financial statements;
● the outcome of the current SEC investigation against us;
● business interruptions from COVID-19 pandemic;
● changes in our exploration plans and related budgets;
● anticipated trends in our business;
● 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
ii
More
specifically, our forward-looking statements may include, among others, statements relating to our schedule, business plan, targets,
estimates or results of our applications for new exploration rights and future exploration plans, including the number, timing and results
of wells, the timing and risk involved in drilling follow-up wells, planned expenditures, prospects budgeted and other future capital
expenditures, risk profile of oil and gas exploration, acquisition and interpretation of seismic data (including number, timing and size
of projects), planned evaluation of prospects, probability of prospects having oil and natural gas, expected production or reserves,
acreage, working capital requirements, hedging activities, the availability of expected sources of liquidity to implement our business
strategy, future hiring, future exploration activity, production rates, all and any other statements regarding future operations, consolidated
financial results, business plans and cash needs and other statements that are not historical fact.
Such
statements involve risks and uncertainties, including, but not limited to, those relating to the uncertainties inherent in exploratory
drilling activities, the volatility of oil and natural gas prices, operating risks of oil and natural gas operations, our dependence
on our key personnel, factors that affect our ability to manage our growth and achieve our business strategy, risks relating to our limited
operating history, technological changes, our significant capital requirements, the potential impact of government regulations, adverse
regulatory determinations, litigation, competition, the uncertainty of reserve information and future net revenue estimates, property
acquisition risks, industry partner issues, availability of equipment, weather and other factors detailed herein and in our other filings
with the Securities and Exchange Commission (the “SEC”).
We
have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management
at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future
events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially
from those expressed or implied by our forward-looking statements.
Some
of the factors that could cause actual results to differ from those expressed or implied in forward-looking statements are described
under “Risk Factors” in this Annual Report and in our other periodic reports filed with the SEC. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those
indicated. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on our forward-looking
statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no duty to update
any forward-looking statement.
iii
PART
I
ITEM
1. BUSINESS
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. 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 years ended December 31, 2021,
and 2020, 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.
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.
1
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. Zion is presently in the planning and procurement phases of extensive well testing, and
this is expected to take several months.
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.
Company
Background
In
1983, during a visit to Israel, John M. Brown (our CEO, Founder and Chairman of the Board of Directors) became inspired and dedicated
to finding oil and gas in Israel. During the next 17 years he made several trips each year to Israel, hired oil and gas consultants in
Israel and Texas, met with Israeli government officials, made direct investments with local exploration companies, and assisted Israeli
exploration companies in raising money for oil and gas exploration in Israel. This activity led Mr. Brown to form Zion Oil & Gas,
Inc. in April 2000, in order to receive the award of a small onshore petroleum license from the Israeli government.
Zion’s
vision, as guided by John Brown, of finding oil and/or natural gas in Israel, is biblically inspired. The vision is based, in part, on
biblical references alluding to the presence of oil and/or natural gas in territories within the State of Israel that were formerly within
certain ancient biblical tribal areas. While John Brown provides the broad vision and goals for our company, the actions taken by the
Zion Board of Directors and management team as it actively explores for oil and gas in Israel, are based on modern science and good business
practice. Zion’s oil and gas exploration activities are supported by appropriate geological, geophysical and other science-based
studies and surveys typically carried out by companies engaged in oil and gas exploration activities.
Upon
the award of our first petroleum right in May 2000, the Israeli government provided us access to most of its data with respect to
previous exploration in the area, including geologic reports, seismic records and profiles, drilling reports, well files, gravity surveys,
geochemical surveys and regional maps. We also gathered information concerning prior and ongoing geological, geophysical and drilling
activity relevant to our planned activities from a variety of publicly accessible sources. Subsequently, we have acquired additional
studies on our own such as seismic and other geophysical and geological surveys.
ZION’S
CURRENT EXPLORATION LICENSE AREA
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
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.
The NML 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.
2
Map
1. Zion’s New Megiddo License as of December 31, 2021.
3
Summary
of Current and Former Company License Areas
Megiddo-Jezreel
Petroleum License
The Megiddo-Jezreel License
401 was awarded on December 3, 2013 for a three-year primary term through December 2, 2016 with the possibility of additional one-year
extensions up to a maximum of seven years. The Megiddo-Jezreel License 401 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. In November 2016, the State of Israel’s Petroleum Commission officially approved
Zion’s drilling date and license extension request to December 2, 2017. 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 MJL 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 years ended December 31, 2021,
and 2020, the Company did not record any post-impairment charges.
On
January 31, 2019, Zion submitted its Application for Extension of Continued Work Program Due Date on the Megiddo-Jezreel License 401. The additional time was necessary to finalize the work program. On February 3, 2019 Israel’s Petroleum Commissioner granted Zion’s
work program report extension to February 28, 2019, as shown below:
Number Activity Description Execution by:
1 Submit program for continuation of work under license 28 February 2019
On
February 24, 2019 and thereafter on February 26, 2019 Zion submitted its proposed 2019 Work Program on the Megiddo-Jezreel License 401.
On
February 28, 2019 Israel’s Petroleum Commissioner officially approved the revised and updated Work Program on the Megiddo-Jezreel
License 401 as shown below:
Number Activity description Execution by:
4 Submit interpretation report 20 February 2020
On
April 30, 2019 Zion submitted its Application for Extension of Continued Work Program Due Date on the Megiddo-Jezreel License 401. The
additional time was necessary for Zion to conduct a 3-D survey in an area of approximately 72 square kilometers. This required, among
others, extensive permitting activities with relevant local landowners, the Israel Land Authority (“ILA”), certain authorities
and others, and the seismic survey might not conclude prior to the beginning of the rainy season in Israel. This in turn would result
in additional delay, as rain and mud are not conducive to the performance of a seismic survey which includes extensive use of vibrators.
Zion
proposed new timelines and activity descriptions are shown below:
Number Activity description Execution by:
4 Submit interpretation report 15 November, 2020
4
On
May 1, 2019, Israel’s Petroleum Commissioner granted Zion’s work program report extension.
Zion
fulfilled all of its commitments and activities per the new timelines shown above.
On March 12, 2020, Zion entered
into a Purchase and Sale Agreement with Central European Drilling kft (“CED”), 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.
As
previously disclosed, the Company required authorization from the ILA, the formal lessor of the land to Kibbutz Sde Eliyahu, on whose
property the drilling pad is currently situated, to access and utilize the drill site (“surface use agreement”). The Company
received this authorization on July 4, 2016. This was preceded by the Company’s May 15, 2016 signed agreement with the kibbutz.
On January 11, 2017, an agreement was signed by the Company and the ILA by which the surface usage agreement was extended through December
3, 2017. On December 31, 2017, an agreement was signed by the Company and the ILA by which the surface usage agreement was extended through
December 3, 2019. On July 1, 2019, an agreement was signed by the Company and the ILA by which the surface usage agreement was extended
through December 3, 2020.
The MJ-02 drilling plan was
approved by the Ministry of Energy on July 29, 2020. 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.
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. Zion is presently in the planning and procurement phases of extensive well
testing, and this is expected to take several months.
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.
5
I-35
Drilling Rig & Associated Equipment
I-35 Drilling Rig Rig Spare Parts Other Drilling Assets Total
US$ thousands US$ thousands US$ thousands US$ thousands
Restricted Cash as Holdback in Escrow (1) 500 500 - 1,000
Purchase Price Allocations (88 ) 40 48 -
Asset Disposals - - - -
Asset Disposals for Self-Consumption - (247 ) - (247 )
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 on January 8, 2021.
As
mentioned previously, the MJ-02 drilling plan was approved by the Ministry of Energy on July 29, 2020. 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 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.
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.
6
Exploration
Expenditures
The
following table summarizes the amounts we expended on our exploration efforts between 2020 and 2021:
I-35 Drilling Rig & Associated Equipment 182 7,568
Megiddo License 428:
Exploratory drilling operations 25,640 649
Equipment and inventory purchases 2,580 1,241
Environmental, geological & geophysical operations 2,082 762
Location construction and maintenance 1,122 236
Joseph License (expired on October 10, 2013) plug & abandonment operations - 13
Employees
& Contractors
As
of December 31, 2021, we had 24 employees and contractors of whom all but two are on a full-time basis. Included in this number are certain
contractors who provide services to Zion on an ongoing basis. Of the 24 total headcount, 17 work out of our Dallas office and 7 work
out of the Caesarea, Israel office. None of our current employees or contractors are subject to any collective bargaining agreements,
and there have been no strikes.
We
regularly utilize independent consultants and contractors to perform various professional services, particularly for services connected
to drilling operations, such as specialized drilling, health and safety, engineering, logging, cementing and well-testing.
Competition
and Markets
The
oil and gas exploration industry in Israel currently consists of a number of exploration companies. These include relatively small local
or foreign companies (such as Zion Oil & Gas, Givot Olam, and Globe Exploration), as well as larger consortia of local Israeli and
foreign participants (Noble Energy Inc./Delek Group Ltd.). Most groups are engaged primarily in offshore activities, which is not an
area in which we are currently active. So long as we hold our current license, Israeli law conveys an exclusive exploration right to
Zion such that no additional companies may compete in our license area.
Historically,
Israel (particularly onshore) has not been an area of interest for international integrated or large or mid-size independent oil and
gas exploration companies for various reasons, one of which is likely geopolitical. Since the announcement of the Tamar and Leviathan
discoveries during 2009 and 2010, this situation has changed somewhat. Limited availability in Israel of oil field service companies,
equipment and personnel continues to present obstacles, especially during periods of decreased activity and risk aversion in the current
market. We attempt to enhance our position by developing and maintaining good professional relations with oil field service providers
and by demonstrating a high level of credibility in making and meeting commercial commitments.
The
oil and gas industry is cyclical, and from time to time there is a shortage of drilling rigs, equipment, supplies and qualified personnel.
During these periods, the costs and delivery times of rigs, equipment and supplies can vary greatly. If the unavailability or high cost
of drilling and completion rigs, equipment, supplies or qualified personnel was particularly severe in the areas where we operate, we
could be materially and adversely affected. We will continue to monitor the market and build service provider relationships in order
to help mitigate concentration risk.
If
any exploratory well that we drill is commercially productive, we would install the appropriate production equipment which includes,
among other items, oil and gas separation facilities and storage tanks. Under the terms of the Petroleum Law, we may be required by the
Minister of Energy and Water Resources to offer first refusal for any oil and gas discovered to Israeli domestic purchasers at market
prices.
Since
Israel imports almost all of its crude oil needs and the market for crude oil in Israel is limited to two local oil refineries, no special
marketing strategy needs to be adopted initially with regard to any oil that we may ultimately discover. We believe that we would have
a ready local market for our oil at market prices in addition to having the option of exporting to the international market, if any of
our future exploratory wells are commercially productive.
7
Israel’s
Petroleum Law
Our
business in Israel is subject to regulation by the State of Israel under the Petroleum Law. The administration and implementation of
the Petroleum Law are vested in the Minister of Energy (“Energy Minister”), the Petroleum Commissioner and an advisory council. The
following discussion includes a brief summary of certain provisions of the Petroleum Law as currently in effect. This review is not complete,
and it should not be relied on as a definitive restatement of the law related to petroleum exploration and production activities in Israel.
Petroleum
resources are owned by the State of Israel, regardless of whether they are located on state lands or the offshore continental shelf.
No person is allowed to explore for or produce petroleum without being granted a specific right under the Petroleum Law. Israeli law
provides for three types of rights, two relevant to the exploration stage and the third for the production stage.
Preliminary
permit. The “preliminary permit” allows a prospector to conduct preliminary investigations, such as field geology, airborne
magnetometer surveys and seismic data acquisition, but does not allow test drilling. It may be granted for a period not to exceed 18
months. The holder of a preliminary permit is entitled to request a priority right on the permit area, which, if granted, prevents an
award of petroleum rights on the permit area to any other party. There are no restrictions as to size of the permit area or to the number
of permits that may be held by one prospector. However, Israeli policy is to award an area no larger than that for which the applicant
has a reasonable plan of operation and has shown evidence of the necessary financial resources to execute the plan.
License.
The next level of petroleum right is the “license,” bestowing an exclusive right for further exploration work and requiring
the drilling of one or more test wells. The initial term of a license is up to three years, and it may be extended for up to an additional
four years (in one-year increments). In the event of a discovery, the license may be extended for an additional two years. A license
area may not exceed 400,000 dunams (approximately 98,842 acres). One dunam is equal to 1,000 square meters (approximately 0.24711 of
an acre). No one entity may hold more than 12 licenses or hold more than a total of four million dunam in aggregate license area.
Production
lease. Upon discovery of petroleum in commercial quantities, a licensee has a statutory “right” to receive a production
“lease.” The initial lease term is 30 years, extendable for an additional 20 years (up to a maximum period of 50 years).
A lease confers upon the lessee the exclusive right to explore for and produce petroleum in the lease area and requires the lessee to
produce petroleum in commercial quantities (and pursue test and development drilling). The lessee is entitled to transport and market
the petroleum produced, subject, however, to the right of the government to require the lessee to supply local needs first, at market
price.
Petroleum
rights fees. The holders of licenses and leases are required to pay fees to the government of Israel to maintain the rights. The
fees vary according to the nature of the right, the size and location (onshore or offshore) of the right, acreage subject to the right
and, in the case of a license, the period during which the license has been maintained.
Requirements
and entitlements of holders of petroleum rights. The holder of a petroleum right (license or lease) is required to conduct its operations
in accordance with a work program set as part of the petroleum right, with due diligence and in accordance with the accepted practice
in the petroleum industry. The holder is required to submit progress and final reports; provided, however, the information disclosed
in such reports remains confidential for as long as the holder owns a petroleum right on the area concerned.
If
the holder of a petroleum right does not comply with the work program provided by the terms of the right, the Petroleum Commissioner
may issue a notice requiring that the holder cure the default within 60 days of the giving of the notice, together with a warning that
failure to comply within the 60-day cure period may entail cancellation of the right. If the petroleum right is cancelled following such
notice, the holder of the right may, within 30 days of the date of notice of the Commissioner’s decision, appeal such cancellation
to the Energy Minister. No petroleum right shall be cancelled until the Energy Minister has ruled on the appeal.
We
are obligated, according to the Petroleum Law, to pay royalties to the Government of Israel on the gross production of oil and gas from
the oil and gas properties of Zion located in Israel (excluding those reserves serving to operate the wells and related equipment and
facilities). The royalty rate stated in the Petroleum Law is 12.5% of the produced reserves. At December 31, 2021 and 2020, the
Company did not have any outstanding obligation with respect to royalty payments, since it is in the development stage and, to this date,
no proved reserves have been found.
8
In
March 2011, the Israeli parliament enacted the Petroleum Profits Taxation Law, 2011, which imposes a new levy on oil and gas production.
Under the new tax regime, the Israeli Government repealed the percentage depletion deduction and imposed a levy at an initial rate
of 20% on profits from oil and gas which will gradually rise to 45.52% for 2016 onwards, depending on the levy coefficient (the R-Factor).
The R-Factor refers to the percentage of the amount invested in the exploration, the development and the establishment of the project,
so that the 20% rate will be imposed only after a recovery of 150% of the amount invested (R-Factor of 1.5) and will range linearly up
to 45.52% after a recovery of 230% of the amount invested (R-Factor of 2.3). For purposes of the levy rate calculation, the minimal gas
sale price that will be accepted by the State is the bi-annual average local price. The present 12.5% royalty imposed on oil revenues
remains unchanged.
The
grant of a petroleum right does not automatically entitle its holder to enter upon the land to which the right applies or to carry out
exploration and production work thereon. Entry requires the consent of the private or public holders of the surface rights and of other
public regulatory bodies (e.g. planning and building authorities, Nature Reserves Authority, municipal and security authorities, etc.).
The holder of a petroleum right may request the government to acquire, on its behalf, land needed for petroleum purposes. The petroleum
right holder is required to obtain all other necessary approvals.
Petroleum
Taxation. Our activities in Israel will be subject to taxation both in Israel and in the United States. Under the U.S. Internal Revenue
Code, we will be entitled to claim either a deduction or a foreign tax credit with respect to Israeli income taxes paid or incurred on
our Israeli source oil and gas income. As a general rule, we anticipate that it will be more advantageous for us to claim a credit rather
than a deduction for applicable Israeli income taxes on our U.S tax return. A tax treaty exists between the U.S. and Israel that would
provide opportunity to use the tax credit.
Exploration
and development expenses. Under current US and Israeli tax laws, exploration and development expenses incurred by a holder of a petroleum
right can, at the option of such holder, either be expensed in the year incurred or capitalized and expensed (or amortized) over a period
of years. Most of our expenses to date have been expensed for both U.S. and Israeli income tax purposes.
Depletion
allowances. Until 2011, the holder of an interest in a petroleum license or lease was allowed a deduction for income tax purposes
on account of the depletion of the petroleum reserve relating to such interest. This may have been by way of percentage depletion or
cost depletion, whichever is greater. In 2010, the Finance Minister of Israel established an advisory committee to study the country’s
fiscal policy as it relates to the upstream oil and natural gas sector, as well as various options, including an increase in royalties
or cancellation of tax incentives. In January 2011, the Finance Ministry advisory committee issued its final recommendations which included
cancellation of currently existing tax incentives, including the depletion allowance. In 2011, the depletion allowance was abolished.
Corporate
tax. Under current Israeli tax laws, whether a company is registered in Israel or is a foreign company operating in Israel through
a branch, it is subject to Israeli Companies Tax on its taxable income (including capital gains) from Israeli sources at a flat rate
of 23%, effective January 1, 2019.
Import
duties. Insofar as similar items are not available in Israel, the Petroleum Law provides that the owner of a petroleum right may
import into Israel, free of most customs, purchase taxes and other import duties, all machinery, equipment, installations, fuel, structures,
transport facilities, etc. (apart from consumer goods and private cars and similar vehicles) that are required for the petroleum exploration
and production purposes, subject to the requirement that security be provided to ensure that the equipment is exported out of Israel
within the agreed upon time frame.
Israeli
Energy Related Regulations
Our
operations are subject to legal and regulatory oversight by energy-related ministries or other agencies of Israel, each having jurisdiction
over certain relevant energy or hydrocarbons laws.
The
Onshore Petroleum Exploration Permitting Process in Israel
The
permitting process in Israel with respect to petroleum exploration continues to undergo significant modification, the result of which
is to considerably increase the complexity, time period, and expenditures needed to obtain the necessary permits to undertake exploratory
drilling once a drilling prospect has been identified. Applications for new exploration licenses need to comply with more demanding requirements
relating to a license applicant’s financial capability, experience and access to experienced personnel. Various guidelines have
been published in Israel by the State of Israel’s Petroleum Commissioner and Energy and Environmental Ministries since 2012 as
it pertains to oil and gas activities. Mention of these guidelines was included in previous Zion Oil & Gas filings.
9
On
June 2, 2020, the Energy Ministry issued a guidance document titled “Commissioner for Petroleum Affairs Guidelines: Extraordinary
Incidences Report.” These guidelines describe the reporting procedure regarding incidences that are out of the ordinary during
pre-drilling, drilling and production activities including incidences that cause bodily injury or damage to property or environment or
incidences that are a cause of delay or abort of drilling activities.
On
September 15, 2020, the Energy Ministry issued a guidance document titled “Principles for Submission of an Application for a Preliminary
Permit with Priority Rights.” Pursuant to this document, applicants for a Preliminary Permit need to comply with more demanding
requirements relating to a preliminary permit applicant’s financial capability, experience and access to experienced personnel.
The
Company believes that these new regulations are likely to result in an increase in the expenditures associated with obtaining new exploration
rights and drilling new wells. The Company expects that an additional financial burden could occur as a result of requiring cash reserves
that could otherwise be used for operational purposes. In addition, these new regulations are likely to continue to increase the time
needed to obtain all of the necessary authorizations and approvals to drill and production test exploration wells.
Environmental & Safety / Planning & Building
Oil
and gas drilling operations could potentially harm the environment if there are polluting spills caused by the loss of well control.
The Petroleum Law and regulations provide that the conduct of petroleum exploration and drilling operations be pursued in compliance
with “good oil field practices” and that measures of due care be taken to avoid seepage of oil, gas and well fluids into
the ground and from one geologic formation to another. The Petroleum Law and regulations also require that, upon the abandonment of a
well, it be adequately plugged and marked. Recently, as a condition for issuing the required permit for the construction of a drilling
site, the planning commissions have required the submission of a site remediation plan, subject to approval of the environmental authorities.
Our operations are also subject to claims for personal injury and property damage caused by the release of chemicals or petroleum substances
by us or others in connection with the conduct of petroleum operations on our behalf. Various guidelines have been published in Israel
by the State of Israel’s Petroleum Commissioner and Energy and Environmental Ministries since 2012 as it pertains to oil and gas
activities. Mention of these guidelines was included in previous Zion Oil& Gas filings.
We
do not know and cannot predict whether any new legislation in this area will be enacted and, if so, in what form and which of its provisions,
if any, will relate to and affect our activities, how and to what extent or what impact, if any, it might have on our financial statements.
There are no known proceedings instituted by governmental authorities, pending or known to be contemplated against us under any environmental
laws. We are not aware of any events of noncompliance in our operations in connection with any environmental laws or regulations. However,
we cannot predict whether any new or amended environmental laws or regulations introduced in the future will have a material adverse
effect on our future business.
The
Company believes that these new and/or revised regulations will significantly increase the complexity, time, and expenditures associated
with obtaining new exploration rights, drilling, and plugging/abandoning new wells, coupled with the heavy financial burden of “locking
away” significant amounts of cash that could otherwise be used for operational purposes.
Political
Climate
We
are directly influenced by the political, economic and military conditions affecting Israel. Specifically, we could be adversely affected
by:
● any major hostilities involving Israel;
● a full or partial mobilization of the reserve forces of the Israeli army; and
● a significant downturn in the economic or financial condition of Israel.
10
Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors,
and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Any
ongoing or future violence between Israel and the Palestinians, armed conflicts, terrorist activities, tension along Israel’s borders,
or political instability in the region could possibly disrupt international trading activities in Israel and may materially and negatively
affect our business conditions and could harm our prospects and business.
Civil
unrest could spread throughout the region or grow in intensity, leading to more regime changes resulting in governments that are hostile
to the United States and Israel, civil wars, or regional conflict. More recently, Russia initiated significant and direct military
intervention in Syria consisting of air strikes against ISIS and other parties. With ongoing operations by Russia, the U.S. and other
countries in areas in close proximity to Israel, there is an increased risk of deliberate and/or inadvertent mishaps that could give
rise to grave military and political consequences.
We
cannot predict the effect, if any, on our business of renewed hostilities between Israel and its neighbors or any other changes in the
political climate in the area.
Foundations
If
we are successful in finding commercial quantities of hydrocarbons in Israel, 6% of our gross revenues from production will go to fund
two charitable foundations that we established with the purpose of donating to charities in Israel, the U.S. and elsewhere in the world.
For
charitable activities concerning Israel, the Bnei Joseph Foundation (R.A.) was established. On November 11, 2008, both the Articles
of Association and Incorporation Certificate were certified by the Registrar of Amutot (i.e. Charitable Foundations) in Israel.
For
the U.S. and worldwide charitable activities, the Abraham Foundation in Geneva, Switzerland was established. On June 20, 2008,
the Articles of Incorporation were executed and filed by the Swiss Notary in the Commercial Registrar in Geneva. On June 23, 2008, the
initial organizational meeting of the founding members was convened in Israel. Regulations for the Organization of the Abraham
Foundation, signed by the founding members, were then filed with the Registrar. On November 19, 2008, the Swiss Confederation approved
the Foundation as an international foundation under the supervision of the federal government. On December 8, 2008, the Republic
of Geneva and the Federal government of Switzerland issued a tax ruling providing complete tax exemption for the Foundation.
Our
shareholders, in a resolution passed at the 2002 Annual Meeting, gave authority to the Zion Board of Directors to transfer a 3% overriding
royalty interest to each of the two foundations with regard to the Joseph and Asher-Menashe licenses. In accordance with that resolution,
we took steps to legally donate a 3% overriding royalty interest to the Bnei Joseph Foundation (in Israel) and a 3% overriding royalty
interest to the Abraham Foundation (in Switzerland).
On
June 22, 2009, we received an official letter from the Commissioner informing us that the 3% overriding royalty interest to each of the
Bnei Joseph Foundation and the Abraham Foundation had been registered in the Israeli Oil Register with regard to the Joseph and Asher-Menashe
licenses. On November 9, 2011, we received an official letter from the Commissioner informing us that the 3% overriding royalty interest
to each of the Bnei Joseph Foundation and the Abraham Foundation had been registered in the Israeli Oil Register with regard to the Jordan
Valley License.
On
February 5, 2014, the Company submitted applications to the Petroleum Commissioner, requesting royalty interest transfers from the Megiddo-Jezreel
License 401 of 3% overriding royalties to the Bnei Joseph Amutot and the Abraham Foundation, respectively. On April 8, 2014, the transfers
were approved by the Petroleum Commissioner and duly registered.
On January 14, 2021, the Company
submitted applications to the Energy Ministry, Natural Resources Administration, requesting royalty interest transfers from the New Megiddo
License 428 of 3% overriding royalties to each of the Bnei Joseph Amutot and the Abraham Foundation, respectively. On March 1, 2021, the
Energy Ministry approved both transfers.
11
Subsidiaries
On
January 24, 2020, Zion incorporated a wholly owned subsidiary, Zion Drilling, Inc., a Delaware corporation, for the purpose of owning
a drilling rig and related equipment and spare parts, and on January 31, 2020, Zion incorporated another wholly owned subsidiary, Zion
Drilling Services, Inc., a Delaware corporation, to act as the contractor providing such drilling services. When Zion is not using the
rig for its own exploration activities, Zion Drilling Services may contract with other operators in Israel to provide drilling services
at market rates then in effect.
Zion
has the trademark “ZION DRILLING” filed with the United States Patent and Trademark Office. Zion has the trademark filed
with the World Intellectual Property Organization in Geneva, Switzerland, pursuant to the Madrid Agreement and Protocol. In addition,
Zion has the trademark filed with the Israeli Trademark Office in Israel.
Available
Information
Zion’s
internet website address is “www.zionoil.com.” We make available, free of charge, on our website, and on our Zion mobile
application, under “SEC Reports,” our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, Forms 3, 4 and 5 filed on behalf of directors and executive officers and amendments to those reports, as soon as reasonably practicable
after providing the SEC such reports.
Our
Corporate Governance Policy, the charters of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee,
and the Code of Ethics for directors, officers, employees and financial officers are also available on our website under “Corporate
Governance” and in print to any stockholder who provides a written request to the Corporate Secretary at Zion Oil & Gas, Inc.,
12655 North Central Expressway, Suite 1000, Dallas, Texas 75243, Attn: Corporate Secretary.
We
file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other documents with
the SEC under the Securities Exchange Act of 1934, as amended. The public may read and copy any materials that we file with the SEC at
the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an internet website that contains reports,
proxy and information statements, and other information regarding issuers, including Zion Oil & Gas, Inc., that file electronically
with the SEC. The public can obtain any document we file with the SEC at www.sec.gov. Information contained on or connected to our website
is not incorporated by reference into this Form 10-K and should not be considered part of this report or any other filing that we make
with the SEC.
12
ITEM
1A. RISK FACTORS
In
evaluating our company, the risk factors described below should be considered carefully. The occurrence of one or more of these events
could significantly and adversely affect our business, prospects, financial condition and results of operations.
Risks
Associated with our Company
We
are a company with no current source of revenue. Our ability to continue in business depends upon our continued ability to obtain significant
financing from external sources and the ultimate success of our petroleum exploration efforts in onshore Israel, none of which can be
assured.
We
were incorporated in April 2000, and we have incurred negative cash flows from our operations, and presently all exploration activities
and overhead expenses are financed solely by way of the issue and sale of equity securities or debt instruments. The recoverability of
the costs we have incurred to date is uncertain and is dependent upon achieving commercial production or sale, none of which can be assured. Our
operations are subject to all of the risks inherent in exploration companies with no revenues or operating income. Our potential for
success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection
with a new business, especially the oil and gas exploration business, and in particular the deep, wildcat exploratory wells in which
we are engaged in Israel. We cannot warrant or provide any assurance that our business objectives will be accomplished.
Our ability to continue in
business depends upon our continued ability to obtain the necessary financing from external sources to undertake further exploration and
development activities and generate profitable operations from oil and natural gas interests in the future. We incurred net losses of
$10,721,000 for the year ended December 31, 2021, and $6,996,000 for the year ended December 31, 2020. The audited consolidated financial
statements have contained a statement by the auditors that raises substantial doubt about us being able to continue as a “going
concern” unless we are able to raise additional capital.
We expect to incur substantial
expenditures in our exploration and development programs. Our existing cash balances will not be sufficient to satisfy our exploration
and development plans going forward. We are considering various alternatives to remedy any future shortfall in capital. We may
deem it necessary to raise capital through equity markets, debt markets or other financing arrangements, including participation arrangements