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jurisdictions (international, national, state and local) where we have operations, restricted travel and required workforces to work from |
home. As of the date of this report, the Company has adopted a hybrid model whereby many of our employees are working from a corporate |
office two to three days per week and then working remotely the other two to three days per week. While there are various uncertainties |
to navigate, the Company’s business activities are continuing. The full extent of COVID-19’s impact on |
our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and |
spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the severity of |
the virus, its spread to other regions as well as the actions taken to contain it, among others. D. Environmental and Onshore |
Licensing Regulatory Matters The Company is engaged in oil and gas exploration |
and production and may become subject to certain liabilities as they relate to environmental clean-up of well sites or other environmental |
restoration procedures and other obligations as they relate to the drilling of oil and gas wells or the operation thereof. Various guidelines |
have been published in Israel by the State of Israel’s Petroleum Commissioner and Energy and Environmental Ministries as it pertains |
to oil and gas activities. Mention of these older guidelines was included in previous Zion filings. The Company believes that these regulations will |
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 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. As of September 30, 2022, and December 31, 2021, |
the Company accrued $ nil and $ nil for license regulatory matters. 33 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 6 - Commitments and Contingencies (cont’d) E. Bank Guarantees As of September 30, 2022, the Company provided |
Israeli-required bank guarantees to various governmental bodies (approximately $ 1,218,000 ) and others (approximately $ 63,000 ) with respect |
to its drilling operation in an aggregate amount of approximately $ 1,281,000 . The (cash) funds backing these guarantees are held in restricted |
interest-bearing accounts and are reported on the Company’s balance sheets as fixed short-term bank deposits – restricted. F. Risks Market risk is a broad term for the risk of economic |
loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including |
interest rates, foreign exchange rates, commodity prices and/or equity prices. In the normal course of doing business, we are exposed |
to the risks associated with foreign currency exchange rates and changes in interest rates. Foreign Currency Exchange Rate Risks. A |
portion of our expenses, primarily labor expenses and certain supplier contracts, are denominated in New Israeli Shekels (“NIS”). |
As a result, we have significant exposure to the risk of fluctuating exchange rates with the U.S. Dollar (“USD”), our primary |
reporting currency. During the period January 1, 2022 through September 30, 2022, the USD has fluctuated by approximately 13.9% against |
the NIS (the USD strengthened relative to the NIS). By contrast, during the period January 1, 2021 through December 31, 2021, the USD |
fluctuated by approximately 3.3% against the NIS (the USD weakened relative to the NIS). Continued strengthening of the US dollar against |
the NIS will result in lower operating costs from NIS denominated expenses. To date, we have not hedged any of our currency exchange rate |
risks, but we may do so in the future. Interest Rate Risk. Our exposure to market |
risk relates to our cash and investments. We maintain an investment portfolio of short-term bank deposits and money market funds. The |
securities in our investment portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate |
risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that |
a change in market interest rates would have a significant negative impact on the value of our investment portfolio except for reduced |
income in a low interest rate environment. At September 30, 2022, we had cash, cash equivalents and short-term bank deposits of approximately |
$ 4,373,000 . The weighted average annual interest rate related to our cash and cash equivalents for the three and nine months ended September |
30, 2022, exclusive of funds at US banks that earn no interest, was approximately . 85 % and . 45 %, respectively. The primary objective of our investment activities |
is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we |
invest our excess cash in short-term bank deposits and money market funds that may invest in high quality debt instruments. Note 7 - Subsequent Events (i) Approximately $2,235,000 was collected through the Company’s |
DSPP program during the period October 1 through November 9, 2022. 34 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS |
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD |
BE READ IN CONJUNCTION WITH OUR UNAUDITED INTERIM FINANCIAL STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS FORM |
10-Q. SOME OF OUR DISCUSSION IS FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING RISK FACTORS THAT COULD |
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO THE DISCUSSION OF RISK FACTORS IN THE “DESCRIPTION OF BUSINESS” SECTION |
OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2021, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. Forward-Looking Statements Certain statements made in |
this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. |
These statements may materially differ from actual results. Forward-looking statements |
can be identified by terminology such as “may”, “should”, “expects”, “intends”, “anticipates”, |
“believes”, “estimates”, “predicts”, or “continue” or the negative of these terms or other |
comparable terminology and include, without limitation, statements regardin ● The going concern qualification in our consolidated financial statements; ● our liquidity and our ability to raise capital to finance our overall exploration and development activities within our license area; ● our ability to continue meeting the requisite continued listing requirements by OTCQX; ● the outcome of the current SEC investigation against us; ● business interruptions from the COVID-19 pandemic; ● our ability to obtain new license areas to continue our petroleum exploration program; ● interruptions, increased consolidated financial costs and other adverse impacts of the coronavirus pandemic on the drilling and testing of our MJ#2 well and our capital raising efforts; ● our ability to explore for and develop natural gas and oil resources successfully and economically within our license area; ● our ability to maintain the exploration license rights to continue our petroleum exploration program; ● the availability of equipment, such as seismic equipment, drilling rigs, and production equipment as well as access to qualified personnel; ● the impact of governmental regulations, permitting and other legal requirements in Israel relating to onshore exploratory drilling; ● our estimates of the time frame within which future exploratory activities will be undertaken; ● changes in our exploration plans and related budgets; ● the quality of existing and future license areas with regard to, among other things, the existence of reserves in economic quantities; ● anticipated trends in our business; 35 ● our future results of operations; ● our capital expenditure program; ● future market conditions in the oil and gas industry; ● the demand for oil and natural gas, both locally in Israel and globally; and ● The impact of fluctuating oil and gas prices on our exploration efforts Overview Zion Oil and Gas, Inc., a |
Delaware corporation, is an oil and gas exploration company with a history of 22 years of oil and gas exploration in Israel. We were incorporated |
in Florida on April 6, 2000 and reincorporated in Delaware on July 9, 2003. We completed our initial public offering in January 2007. |
Our common stock, par value $0.01 per share (the “Common Stock”) currently trades on the OTCQX Market under the symbol “ZNOG” |
and our Common Stock warrant under the symbol “ZNOGW.” The Company currently holds one active petroleum exploration license |
onshore Israel, the New Megiddo License 428 (“NML 428”), comprising approximately 99,000 acres. The NML 428 was awarded |
on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. On April 29, 2021, Zion submitted |
a request to the Ministry of Energy for a six-month extension to December 2, 2021. On May 30, 2021, the Ministry of Energy approved our |
request for extension to December 2, 2021. On November 29, 2021, the Ministry of Energy approved our request for extension to August 1, |
2022. On July 25, 2022, Zion submitted a request to the Ministry of Energy for a six-month extension to February 1, 2023. On July 31, |
2022, the Ministry of Energy approved our request for extension to February 1, 2023. The ML 428 lies onshore, south and west of |
the Sea of Galilee, and we continue our exploration focus here based on our studies as it appears to possess the key geologic ingredients |
of an active petroleum system with significant exploration potential. The Megiddo Jezreel #1 (“MJ #1”) site was completed in |
early March 2017, after which a rented drilling rig and associated equipment were mobilized to the site. Performance and endurance tests |
were completed, and the MJ #1 exploratory well was spud on June 5, 2017 and drilled to a total depth (“TD”) of 5,060 meters |
(approximately 16,600 feet). Thereafter, the Company obtained three open-hole wireline log suites (including a formation image log), and |
the well was successfully cased and cemented. The Ministry of Energy approved the well testing protocol on April 29, 2018. During the fourth quarter |
of 2018, the Company testing protocol was concluded at the MJ #1 well. The test results confirmed that the MJ #1 well did not contain |
hydrocarbons in commercial quantities in the zones tested. As a result, in the year ended December 31, 2018, the Company recorded a non-cash |
impairment charge to its unproved oil and gas properties of $30,906,000. During the three and nine months ended September 30, 2022 and |
2021, respectively, the Company did not record any post-impairment charges. While the well was not commercially |
viable, Zion learned a great deal from the drilling and testing of this well. We believe that the drilling and testing of this well carried |
out the testing objectives which would support further evaluation and potential further exploration efforts within our License area. Zion |
believed it was prudent and consistent with good industry practice to examine further these questions with a focused 3-D seismic imaging |
shoot of approximately 72 square kilometers surrounding the MJ#1 well. Zion completed all of the acquisition, processing and interpretation |
of the 3-D data and incorporated its expanded knowledge base into the drilling of our current MJ-02 exploratory well. On March 12, 2020, Zion entered |
into a Purchase and Sale Agreement with Central European Drilling kft, a Hungarian corporation, to purchase an onshore oil and gas drilling |
rig, drilling pipe, related equipment and spare parts for a purchase price of $5.6 million in cash, subject to acceptance testing and |
potential downward adjustment. We remitted to the Seller $250,000 on February 6, 2020 as earnest money towards the Purchase Price. The |
Closing anticipated by the Agreement took place on March 12, 2020 by the Seller’s execution and delivery of a Bill of Sale to us. |
On March 13, 2020, the Seller retained the earnest money deposit, and the Company remitted $4,350,000 to the seller towards the purchase |
price, and $1,000,000 (the “Holdback Amount”) was deposited in escrow with American Stock Transfer and Trust Company LLC. |
On January 6, 2021, Zion completed its acceptance testing of the I-35 drilling rig and the Holdback Amount was remitted to Central European |
Drilling. 36 The MJ-02 drilling plan was |
approved by the Ministry of Energy on July 29, 2020. On January 6, 2021, Zion officially spudded its MJ-02 exploratory well on the same |
pad site as the MJ#1 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. 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 followin (1) We are encouraged by the results of our recent testing operations, |
especially the lower zone (approximately 20 meters in thickness), which is our primary zone of interest, (2) We are currently 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 plan 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. At present, we have no revenues |
or operating income. Our ability to generate future revenues and operating cash flow will depend on the successful exploration and exploitation |
of our current and any future petroleum rights or the acquisition of oil and/or gas producing properties, and the volume and timing of |
such production. In addition, even if we are successful in producing oil and gas in commercial quantities, our results will depend upon |