Item 1A Risk Factors 12
Item 1B Unresolved Staff Comments 23
Item 1C Cyber Security 23
Item 2 Properties 23
Item 3 Legal Proceedings 24
Item 4 Mine Safety Disclosures 24
PART II
Item 6 Reserved 25
Item 7A Quantitative and Qualitative Disclosures about Market Risk 42
Item 8 Financial Statements and Supplementary Data 42
Item 9A Controls and Procedures 42
Item 9B Other Information 43
Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 43
PART III
Item 10 Directors, Executives Officers and Corporate Governance 44
Item 11 Executive Compensation 44
Item 14 Principal Accountant Fees and Services 44
PART IV
Item 15 Exhibits, Financial Statement Schedules 45
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;
● Our ability to obtain new license areas to continue our exploration program;
● 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 24 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 OTCQB marketplace of OTC Markets, Inc. under the symbol “ZNOG” and
our Common Stock warrant under the symbol “ZNOGW.”
The New Megiddo License 428
(“NML 428”) was initially awarded on December 3, 2020 for a six-month term and was extended several times before expiring
on February 1, 2023. 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.
On September 14, 2023, the
Israel Ministry of Energy approved a new Megiddo Valleys License 434 (“NMVL 434”), allowing for oil and gas exploration on
approximately 75,000 acres or 302 square kilometers. This Exploration License 434 is valid for three years until September 13, 2026 with
four potential 1-year extensions for a total of seven years until September 13, 2030. This NMVL 434 effectively supersedes our previous
NML 428.
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. As previously announced,
Zion is deploying new technologies and stimulation methods for its planned re-entry into the MJ-01 well, with the objective of potentially
unlocking hydrocarbon flows in several identified key zones. Zion has begun tendering service contractors and ancillary items required
for efficient operations.
On December 6, 2023, the Israeli
Ministry of Energy formally approved a detailed, industry-specific operational framework for the planned re-entry, production tests, and
recompletion of the MJ-01 well. The submission of this work plan is a requirement under Israeli law. With the work plan approved, Zion
was able to proceed with convening the required Supervisory Committee meeting. This Committee, consisting of a fifteen-member panel, is
tasked with reviewing and endorsing the work plan. It also ensures that our planned operations have sufficiently mitigated potential impacts
on the land, local roads, surrounding land uses, available water resources, and addressed other environmental and safety concerns. Under
Israeli law, the Supervisory Committee is comprised of representatives from the Ministries of Energy, Water, and Environment, and representatives
from the local Spring Valley County Council, as well as from the surrounding kibbutzim of Sde Eliyahu (where the rig site is located)
and Tirat Zvi (adjacent to Zion’s rig site). Due to the ongoing war between Israel and Hamas, scheduling a meeting with such a large
Committee became more complex, as it required finding a date and time suitable for all members.
On February 21, 2024, members of the Supervisory
Committee visited our rig site. During this visit, they interacted with staff from Zion Oil & Gas, and our consultants and potential
service providers. Some of these interactions occurred at Kibbutz Sde Eliyahu, while others were conducted through video conferencing
with participants from the United States, Europe and the Middle East. Following these discussions, the Committee has officially accepted
our work plan for the MJ-01 project. This acceptance allows us to sign agreements and secure mobilization dates with our service providers
required to commence and complete the project.
During the year ended December
31, 2023, the Company did not record any non-cash impairment charge to its unproved oil and gas properties. During 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, 2023, the Company recorded a non-cash post-impairment charge to its unproved oil and gas properties of $135,000. During the year ended
December 31, 2022, the Company did not record any post-impairment charges.
1
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 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.
2
ZION’S NEW MEGIDDO VALLEYS 434 LICENSE
AREA
The New Megiddo License 428
(“NML 428”) was initially awarded on December 3, 2020 for a six-month term and was extended several times before expiring
on February 1, 2023. 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.
On September 14, 2023, the
Israel Ministry of Energy approved a new Megiddo Valleys License 434 (“NMVL 434”), allowing for oil and gas exploration on
approximately 75,000 acres or 302 square kilometers. This Exploration License 434 is valid for three years until September 13, 2026 with
four potential 1-year extensions for a total of seven years until September 13, 2030. This NMVL 434 effectively supersedes our previous
NML 428.
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. As previously announced, Zion is deploying new technologies and stimulation methods for its planned re-entry into the MJ-01
well, with the objective of potentially unlocking hydrocarbon flows in several identified key zones. Zion has begun tendering service
contractors and ancillary items required for efficient operations.
On December 6, 2023, the Israeli
Ministry of Energy formally approved a detailed, industry-specific operational framework for the planned re-entry, production tests, and
recompletion of the MJ-01 well. The submission of this work plan is a requirement under Israeli law. With the work plan approved, Zion
was able to proceed with convening the required Supervisory Committee meeting. This Committee, consisting of a fifteen-member panel, is
tasked with reviewing and endorsing the work plan. It also ensures that our planned operations have sufficiently mitigated potential impacts
on the land, local roads, surrounding land uses, available water resources, and addressed other environmental and safety concerns. Under
Israeli law, the Supervisory Committee is comprised of representatives from the Ministries of Energy, Water, and Environment, and representatives
from the local Spring Valley County Council, as well as from the surrounding kibbutzim of Sde Eliyahu (where the rig site is located)
and Tirat Zvi (adjacent to Zion’s rig site). Due to the ongoing war between Israel and Hamas, scheduling a meeting with such a large
Committee became more complex, as it required finding a date and time suitable for all members.
On February 21, 2024, members of the Supervisory
Committee visited our rig site. During this visit, they interacted with staff from Zion Oil & Gas, and our consultants and potential
service providers. Some of these interactions occurred at Kibbutz Sde Eliyahu, while others were conducted through video conferencing
with participants from the United States, Europe and the Middle East. Following these discussions, the Committee has officially accepted
our work plan for the MJ-01 project. This acceptance allows us to sign agreements and secure mobilization dates with our service providers
required to commence and complete the project.
ISRAEL-HAMAS WAR
On October 7, 2023, Hamas,
a militant terrorist organization in Gaza, infiltrated southern Israel, killing and injuring at least one thousand Israeli citizens. Roughly
250 Israeli hostages were then taken back to Gaza. This unprovoked attack led the nation of Israel to declare war on Hamas approximately
one week later. As of the date of this report, Israel remains at war and there are daily battles inside the Gaza strip. Israel’s
stated goals are to completely dismantle the terror infrastructure of Gaza, including its extensive tunnel network and to bring back safely
all of the hostages.
There is uncertainty as to how long the war inside
the Gaza strip will last. While we acknowledge that uncertainty, the Company is moving forward with its planning and logistics activities.
We are working with our international service providers on projected availability timelines and other details. All of these key vendors
have expressed willingness to assist Zion in its exploration activities. It is important to note that Zion’s license area is not
located near any current combat zones.
3
Map
1. Zion’s New Megiddo Valleys 434 License as of December 31, 2023.
4
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.
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 - (202 ) - (202 )
Asset Additions - - - -
Asset Disposals for Self-Consumption - (11 ) - (11 )
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 2022 and 2023:
I-35 Drilling Rig & Associated Equipment - 400
Megiddo License 428:
Exploratory drilling operations 327 10,994
Equipment and inventory purchases 97 1,205
Environmental, geological & geophysical operations 8 1,294
Location construction and maintenance 450 1,061
5
Employees
& Contractors
As of December 31, 2023, we
had 22 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 22 total headcount, 16 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.
6
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, 2023 and 2022, 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.
7
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.
8
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:
● the Israel-Hamas war and any other 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.
9
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.
On October 7, 2023, Hamas,
a militant terrorist organization in Gaza, infiltrated southern Israel, killing and injuring at least one thousand Israeli citizens. Roughly
250 Israeli hostages were then taken back to Gaza. This unprovoked attack led the nation of Israel to declare war on Hamas approximately
one week later. As of the date of this report, Israel remains at war and there are daily battles inside the Gaza strip. Israel’s
stated goals are to completely dismantle the terror infrastructure of Gaza, including its extensive tunnel network and to bring back safely
all of the hostages.
There is uncertainty as to
how long the war inside the Gaza strip will last. While we acknowledge that uncertainty, the Company is moving forward with its planning
and logistics activities. We are working with our international service providers on projected availability timelines and other details.
All of these key vendors have expressed willingness to assist Zion in its exploration activities. It is important to note that Zion’s
license area is not located near any current combat zones.
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.
The Company has been submitting
to the Commissioner all royalty requests for both foundations and registering the overriding royalties with every new license.
10
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.
11
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 $7,957,000 for the year ended December 31, 2023, and $55,077,000 for the year ended December 31, 2022. 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, 2023 and 2022, we raised approximately $6,949,000 and $19,129,000, respectively, under
the Plan. Of the amounts raised, approximately 54% of the amounts raised in 2023 were attributable to one participant and 77% of the amounts
raised in 2022 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.
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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. Our audited consolidated financial statements at December 31, 2023 and 2022 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 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 OTCQB Market, which could adversely affect our liquidity and the trading volume and market
price of our common stock, and decrease your investment.
Effective
January 1, 2024, our common stock began trading on the OTCQB Market. The maintenance requirements for listing are to maintain a minimum
bid price of $0.01 per share as of the close of business for at least one of every 30 consecutive calendar days and market capitalization
of at least $2 million for at least one of every 30 consecutive calendar days. In the event that the Company’s bid price or the
market capitalization falls below the minimum criteria, a cure period of 90 calendar days to regain compliance shall begin, during which
time the applicable criteria must be met for 10 consecutive trading days.
We
were involved in an extensive government investigation by the United States Securities and Exchange Commission, the results of which
could have had 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 fully cooperated with the SEC and provided all requested
information and documents. On April 5, 2023, the Company received from the Fort Worth Regional Office of the SEC written notice concluding
its investigation as to the Company and advising that the SEC does “not intend to recommend an enforcement action by the Commission
against Zion.” Although not expected, if the SEC reopens its investigation and/or brings an enforcement action(s) against Zion,
that could result in reputational harm to Zion and may have a material adverse effect on Zion’s current and future business and
exploratory activities and its ability to raise capital to continue our oil and gas exploratory activities.
The
outbreak of Covid-19 in 2020, and the subsequent variants of Covid which continue today, may interrupt or delay our exploration activities
and could affect our capital raising efforts on which we rely to continue our exploration program and maintain our operations, thereby
adversely affecting our business.
We cannot predict the impact,
if any, that the outbreak of the coronavirus and subsequent variants, will have on our exploration activities. Worldwide, the coronavirus
is adversely affecting the global economy, global supply chain/manufacturing and resulting in, amongst other things, significant time
delays, unemployment and business shutdowns.
The extent to which the coronavirus
impacts our operations, specifically our capital raising efforts, as well as our ability to continue our exploratory efforts, will depend
on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new
information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact,
among others.
13
Our
ongoing exploration and development efforts are subject to many contingencies outside of our control, and any considerable delay in obtaining
all of the needed licenses, approvals and authorizations may severely impair our business.
After months of delay, we
received our New Megiddo Valleys License 434 on September 14, 2023 (see above) and our proposed Work Plan on December 6, 2023. On February
21, 2024 the Supervisory Committee approved the detailed work plan for our planned re-entry operations on the MJ-01 well. While we have
secured these approvals on prior wells we’ve drilled, we have no assurance we can obtain them for any future wells in a timely enough
manner to prevent disruption in the provision of necessary services, personnel and equipment from our vendors.
We
require significant capital to realize our business plan.
Our ongoing work program is
expensive. We believe that our current cash resources are sufficient to allow us to undertake exploratory activities through March 2024.
We estimate that, when we are not actively drilling a well, our monthly expenditure is approximately $600,000 per month. However, when
we are drilling, or testing, we estimate that there is an additional cost of approximately $2,000,000 - $3,000,000 per month. Additionally,
the newly enacted onshore licensing and environmental and safety related regulations promulgated by the various energy related ministries
in Israel during 2021-2023 are likely to render extending our existing license or obtaining new explorations licenses increasingly expensive.
For example, at the time of the award of any new exploration license, we will be required to submit performance bank guarantees in the