Item 1A Risk Factors 13
Item 1B Unresolved Staff Comments 24
Item 2 Properties 24
Item 3 Legal Proceedings 26
Item 4 Mine Safety Disclosures 26
PART II
Item 6 Reserved 27
Item 7A Quantitative and Qualitative Disclosures about Market Risk 46
Item 8 Financial Statements and Supplementary Data 46
Item 9A Controls and Procedures 47
Item 9B Other Information 47
Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 47
PART III
Item 10 Directors, Executives Officers and Corporate Governance 48
Item 11 Executive Compensation 48
Item 14 Principal Accountant Fees and Services 48
PART IV
Item 15 Exhibits, Financial Statement Schedules 49
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.
All
references in this Annual Report to the “Company”, “Zion”, “we”, “us”, or “our”,
are to Zion Oil and Gas, Inc., a Delaware corporation, and its wholly-owned subsidiaries,
Zion Drilling, Inc. and Zion Drilling Services, Inc. described below.
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 23 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 marketplace of OTC Markets,
Inc. under the symbol “ZNOG” and our Common Stock warrant under the symbol “ZNOGW.”
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 up to four one-year
extensions up to a maximum of seven years to December 3, 2020.
The Megiddo Jezreel #1 (“MJ-01”,
“MJ-1” or “MJ #1”) pad 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.
While the MJ #1 well was not
commercially viable, Zion learned a great deal from the drilling and testing of this well. We believed 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 Megiddo Jezreel #2 (“MJ-02”,
“MJ-2” or “MJ #2”) 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 New Megiddo License 428 (“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 NML 428 expired on February 1, 2023, but the Company
applied for a replacement license prior to such expiration. At the time of the filing of this Annual Report, this replacement license
is pending.
The MJ-2 drilling plan had
been 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 encouraging zones of interest.
1
During the third quarter of
2022, Zion perforated and stimulated two deep zones.
On October 3, 2022, Zion sent a database email update to its supporters
announcing the following: (1) We were encouraged by the results of our recent testing operations, especially the lower zone (approximately
20 meters in thickness), which was our primary zone of interest, (2) we were facing a downhole obstacle in the form of heavy water influx
from the upper zone inhibiting the potential flow of hydrocarbons from the lower zone and (3) after consultation with outside experts,
we planned to isolate and neutralize the heavy water influx by procuring a 4.5” packer and installing it below the heavy water zone
and above our primary zone.
Zion suspended its operations
at the MJ-02 pad site during October 2022 due to several Jewish holidays during the month. Beginning in early November 2022, Zion resumed
its testing operations after procuring the necessary equipment and personnel.
On December 9, 2022, Zion sent
a database email update to its supporters announcing the following: (1) after a thorough analysis of the results by Zion and third party
experts, Zion determined that the well will not currently produce hydrocarbons in commercial quantities, (2) although logs strongly indicate
the presence of hydrocarbons, we have determined the zone does not have sufficient permeability to be productive, (3) we will set a temporary
plug in the wellbore to preserve its integrity and the opportunity to make future use of it, should circumstances and technological innovations
warrant that, (4) based on what we learned about the characteristics of this deep Mohilla zone in the MJ-2 well, we are aggressively re-analyzing
our logs and other data from the MJ-1 well, which was drilled on the same pad site. Knowing this zone is structurally higher than the
equivalent zone in MJ-2, we are diligently evaluating whether this zone was adequately tested in the MJ-1 well, (5) once we have completed
that analysis, we may re-enter the MJ-1 wellbore, which is cased to the bottom, and attempt a re-completion in the Mohilla zones, and
(6) we will continue to explore the Megiddo-Jezreel license area as we are confident that we are in an active petroleum system.
As a result, in the year ended
December 31, 2022, the Company recorded a non-cash impairment charge to its unproved oil and gas properties of $45,615,000. During the
year ended December 31, 2021, the Company did not record any non-cash impairment charge.
Zion Oil & Gas, Inc. filed an amended application
with the Israel Ministry of Energy for a new exploratory license on January 24, 2023 covering the same area as its License No. 428, which
expired on February 1, 2023. However, its original application to replace License No. 428 was filed on May 11, 2022, and a revised application
was filed on August 29, 2022.
With a third parliamentary election in Israel since
March 2, 2020, on November 1, 2022, review of Zion’s new license application was delayed. After the election, an ongoing transition
period has taken place. A new Minister of Energy took office on January 1, 2023 and appointed a new Director General of the Ministry.
As previously reported, Zion
has re-examined the logs and other data from its MJ-01 well in preparation for a planned re-entry. Zion’s license application was
therefore amended to address the planned re-entry, requiring a change in the workplan portion of the application, and then re-submitted
on January 24, 2023.
Since May of 2022, Zion has worked closely with
all the necessary Ministry officials to address questions and resolve any issues raised by its application. Zion therefore believes it
has met all of the preliminary license requirements. Although no assurances can be made, Zion anticipates its license application will
be favorably considered by the Ministry and other necessary regulatory agencies.
In the interim, Zion plans to leave its I-35 drilling
rig and all related components on its current pad site and perform necessary rig maintenance, engineering and design for the planned re-entry.
2
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 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 PROSPECTIVE LICENSE AREA
The Company held one active
petroleum exploration license onshore Israel, the NML 428, comprising approximately 99,000 acres – See Map 1. Under Israeli
law, Zion had an exclusive right to oil and gas exploration in our license area in that no other company may drill there. In the event
we drilled 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. 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 NML 428 expired on February 1, 2023, but Zion applied for a replacement license prior to such expiration, which
is pending.
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.
3
Map 1. Zion’s New Megiddo License as of
December 31, 2022.
4
Zion Oil & Gas, Inc. filed an amended application
with the Israel Ministry of Energy for a new exploratory license on January 24, 2023 covering the same area as its License No. 428, which
expired on February 1, 2023. However, its original application to replace License No. 428 was filed on May 11, 2022, and a revised application
was filed on August 29, 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.
With a third parliamentary election in Israel since
March 2, 2020, on November 1, 2022, review of Zion’s new license application was delayed. After the election, an ongoing transition
period has taken place. A new Minister of Energy took office on January 1, 2023 and appointed a new Director General of the Ministry.
As previously reported, Zion
has re-examined the logs and other data from its MJ-01 well in preparation for a planned re-entry. Zion’s license application was
therefore amended to address the planned re-entry, requiring a change in the workplan portion of the application, and then re-submitted
on January 24, 2023.
Since May of 2022, Zion has worked closely with
all the necessary Ministry officials to address questions and resolve any issues raised by its application. Zion therefore believes it
has met all of the preliminary license requirements. Although no assurances can be made, Zion anticipates its license application will
be favorably considered by the Ministry and other necessary regulatory agencies.
In the interim, Zion plans to leave its I-35 drilling
rig and all related components on its current pad site and perform necessary rig maintenance, engineering and design for the planned re-entry.
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
Asset Disposals for Self-Consumption - (247 ) - (247 )
Asset Disposals for Self-Consumption - (202 ) - (202 )
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.
Exploration Expenditures
The following table summarizes
the amounts we expended on our exploration efforts between 2021 and 2022:
I-35 Drilling Rig & Associated Equipment 400 182
Megiddo License 428:
Equipment and inventory purchases 1,205 2,580
Environmental, geological & geophysical operations 1,294 2,082
Location construction and maintenance 1,061 1,122
6
Employees
& Contractors
As of December 31, 2022, we
had 23 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 23 total headcount, 17 work out of our Dallas office and 6 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. Israeli law conveys an exclusive exploration right to license holders such that no additional companies may compete in that 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.
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.
7
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, 2022 and 2021, 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 cessation of drilling activities.
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.
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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. With ongoing operations by Iran, Syria, 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
and producing 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
convey or transfer 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.
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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 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.
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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
$55,077,000 for the year ended December 31, 2022, and $10,721,000 for the year ended December 31, 2021. 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
that may be available. Because of the current absence of any oil and natural gas reserves and revenues in our license areas, there can
be no assurance that our capital will be available on commercially acceptable terms (or at all) and if it is not, we may be forced to
substantially curtail or cease exploration expenditures which could lead to our inability to meet all of our commitments.
Currently, we are substantially reliant on the proceeds of sales of
our common stock under the Dividend Reinvestment and Stock Purchase Plan. During the past two completed fiscal years, we have financed
our operations primarily from the proceeds of sales of our stock under the Dividend Reinvestment and Stock Purchase Plan. For the years
ended December 31, 2022 and 2021, we raised approximately $19,129,000 and $26,219,000, respectively, under the Plan. Of the amounts raised,
approximately 77% of the amounts raised in 2022 were attributable to two participants and 67% of the amounts raised in 2021 were attributable
to two participants. The cessation of funding from these participants may result in adverse consequences to our business, such as a delay
in our testing efforts, until we locate alternate sources for this funding.
Our independent registered
public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our
audited consolidated financial statements included in this prospectus. Our audited consolidated financial statements at December 31, 2022
and 2021 and for the years then ended were prepared assuming that we will continue as a going concern.
Such an opinion could materially
limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Our ability to continue
as a going concern is contingent upon, among other factors, the sale of the shares of our common stock in this offering or obtaining alternate
financing. We cannot provide any assurance that we will be able to raise additional capital.
We
may not be able to maintain the listing of our common stock on the OTCQX Market, which could adversely affect our liquidity and the trading
volume and market price of our common stock, and decrease your investment.
Effective September 3, 2020,
our common stock began trading, and is currently listed, on the OTCQX Market. The maintenance requirements for listing are to maintain
a minimum bid price of $0.10 per share as of the close of business for at least one of every 30 consecutive calendar days, a market capitalization
of at least $5 million for at least one of every 30 consecutive calendar days, and at least two Market Makers publish priced quotations
on OTC Link ATS within 90 days of the Company joining OTCQX. In the event that the Company’s bid price, the market capitalization,
or the number of Market Makers fall below the minimum criteria, a cure period of 180 calendar days to regain compliance shall begin, during
which time the applicable criteria must be met for 10 consecutive trading days.
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On January 11, 2023, OTC Markets
emailed a letter to Zion advising that its bid price has closed below $.10 for more than 30 consecutive calendar days and no longer meets
the Standards for Continued Qualification for the OTCQX U.S. tier per the OTC Rules for U.S. Companies. In the event that the Company’s
bid price, the Market Capitalization, or the number of Market Makers fall below the minimum criteria established in Section 3.2(b), a
cure period of 180 calendar days to regain compliance shall begin, during which the applicable criteria must be met for ten consecutive
trading days.
The 180-calendar day cure
period expires July 10, 2023. If at that time the Company’s bid price has not stayed at or above the $.10 minimum for ten consecutive
trading days, then the security will be moved from OTCQX to the OTC Pink market unless Zion requests that it be moved to the OTCQB market.
No assurance can be provided
that we will be able to maintain continued listing on OTCQX. Moving from the OTCQX Market may have an adverse effect on our ability to
raise the capital needed to continue our oil and gas exploration efforts and maintain operations.
We
are involved in an ongoing government investigation by the United States Securities and Exchange Commission, the results of which may
have a material adverse effect on our consolidated financial condition and business.
On June 21, 2018, the Fort
Worth Regional Office of the SEC informed Zion that it was conducting a formal, non-public investigation and asked that we provide certain
information and documents in connection with its investigation. Since that date, we have fully cooperated with the SEC on an on-going
basis in connection with its investigation. Investigations of this nature are inherently uncertain and their results cannot be predicted
with certainty. Regardless of the outcome, an SEC investigation could have an adverse impact on us because of legal costs, diversion of