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Note 1 - Nature of Operations and Going Concern
12 Months Ended
Dec. 31, 2024
Notes to Financial Statements  
Nature of Operations [Text Block]

Note 1 - Nature of Operations and Going Concern

 

A. Nature of Operations

 

Zion Oil & Gas, Inc., a Delaware corporation (“we,” “our,” “Zion” or the “Company”) is an oil and gas exploration company with a history of 25 years of oil & gas exploration in Israel. As of December 31, 2024, the Company has no revenues from its oil and gas operations.

 

Zion maintains its corporate headquarters in Dallas, Texas. The Company also has branch offices in Caesarea, Israel and Geneva, Switzerland. The purpose of the Israel branch is to support the Company’s operations in Israel, and the purpose of the Switzerland branch is to operate a foreign treasury center for the Company.

 

On January 24, 2020, Zion incorporated a wholly owned subsidiary, Zion Drilling, Inc., a Delaware corporation, for the purpose of owning a drilling rig, 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.

 

Exploration Rights/Exploration Activities  

 

New Megiddo Valleys License 434 (NMVL 434)

 

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.

 

On February 21, 2024, members of the Supervisory Committee visited our rig site. During this visit, they interacted with staff from Zion Oil & Gas, 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 officially accepted our work plan for the MJ-01 re-completion project. This acceptance allowed us to sign agreements and secure mobilization dates with our service providers to commence and complete the project.

 

The initial phase of our recompletion project consisted of a category three inspection of the drilling rig, rigging down from MJ-02 and moving and rigging up over the MJ-01 well.

 

Stage two of the operation involved drilling out both the steel plugs along with 625 meters (about 2,050 feet) of cement plugs and re-conditioning the wellbore to allow unhindered access to the selected zones for testing.

 

After six years of inactivity in a well over three miles deep, the MJ-01 wellbore presents a challenging environment. The wellbore appears to have experienced elastic and partial collapse of the casing in some areas. This led to the bottom hole assembly (“BHA”) becoming stuck over 4,000 meters from surface. Attempts to overpull the BHA were unsuccessful, and the crew completed a backoff operation which left over 500 meters of the BHA remaining downhole. This is not an uncommon occurrence with oil and gas drilling operations and the crew was unsuccessful in retrieving the remaining BHA with the tools that were on location.

 

Another delay arose out of the logistical challenges we face. The conflict in the region during 2024 has impacted shipping routes, the timely arrival of necessary equipment, and created travel difficulties for our rig crews. Our operations require specialized rig crews who are not available in Israel.

 

An even further delay has been created by many of our rig crew members reaching the limit of their work visas. This requires us to reset visas, which is not a simple process, and it adds another layer of delay and complexity. Moreover, the recent changes to visa eligibility have further complicated the process, as Israel, in just the last few months, has changed their 90-day visa renewals from resetting at the end of the year to resetting after six months after expiration. We are working with the Ministry of Interior on this issue. As a side note, the crew had to enter Israel under 90-day visas and not six month or 12-month visas in order to comply with the labor law requirements in place at the time the operation commenced.

 

In light of the combination of downhole, logistical, and crew challenges, as well as holidays, and the one-year remembrance of October 7, we temporarily paused active operations during Q4 2024. This was a necessary step to ensure the safety of our personnel and to ensure proper engineering and tools are brought to location to avoid lengthy delays waiting for additional tools should any be required once the job resumes. We anticipate that once we have the necessary tools and renewed visas for our crews, we can resume operations in Q1 2025. This is, of course, subject to the realities of the present geopolitical environment. The conflict in Israel, while not directly impacting our operations on a daily basis, creates uncertainties that could affect our schedule at any time.

 

Zion’s rig crew arrived in Israel in February 2025, and has commenced critical maintenance and preparatory work. The rig, which was safely “warm stacked” in September 2024, is undergoing necessary checks for maintenance, including fluid changes, lubrication and greasing, and mechanical, electrical, and safety audits to ensure peak functionality. Following maintenance, the team will begin drilling out the temporary plug at approximately 1,100 meters. This phase is expected to take 2-3 weeks, paving the way for the subsequent well completion and testing operations. Once the plug is removed, Zion will proceed with setting a permanent plug at the deeper part of the well, allowing for isolating targeted zones of interest for testing.

 

Zion has successfully navigated complex logistical challenges to ensure the timely delivery of essential equipment. Resources are currently on route to Israel from across the globe, including India, Romania, Germany, the Netherlands, the UAE, the United States, and Tanzania. This unprecedented international cooperation underscores the dedication and perseverance of Zion’s team and partners. Furthermore, Zion has maintained continuous security at the MJ-01 site, ensuring a stable and secure operational environment. Additionally, commercial air travel into Israel has steadily resumed, further supporting logistical operations.

 

With all necessary equipment expected to be on-site by mid- March, Zion anticipates progressing through the well completion and testing operations in Q2 2025.

 

During the year ended December 31, 2024, the Company recorded $ nil in non-cash post-impairment charge to its unproved oil and gas properties. 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 (see Note 4).

 

Note 1 - Nature of Operations and Going Concern (cont’d)

 

Zions Former Asher-Menashe License

 

Zion plugged the exploratory well on its former Asher-Menashe License area, the reserve pit has been evacuated, and during the year 2019, Zion completed the abandonment of this well site in accordance with guidance from the Energy Ministry, Environmental Ministry and local officials (see Note 9C).

 

Zions 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 (see Note 9C).

 

Uncertainty Due to the Russia Ukraine War

 

Due to Russia’s invasion of Ukraine, which began in February 2022, and the resulting sanctions and other actions against Russia and Belarus, there has been uncertainty and disruption in the global economy. Although the Russian war against Ukraine did not have a material adverse impact on the Company’s financial results for the year ended December 31, 2024, at this time the Company is unable to fully assess the aggregate impact the Russian war against Ukraine will have on its business due to various uncertainties, which include, but are not limited to, the duration of the war, the war’s effect on the global economy, future energy pricing, its impact to the businesses of the Company’s, and actions that may be taken by governmental authorities related to the war.

 

Israel-Hamas War

 

The nation of Israel declared war on Hamas following the October 7, 2023 invasion by Hamas into many southern Israeli communities, killing and injuring thousands and taking of over 200 Israeli hostages into Gaza.  Israel formed a war time emergency government with its primary focus on defending its homeland.  As part of the war effort, Israel activated a large number of reservists.  Our geologist in Israel, Nadav Navon, was called into service for a month or two in late 2023.  In 2024, he was called up again to serve for a period of months.  He has since returned back to work. As a result of Nadav’s absence, his workload was handled by our US based geologist Lee Russell.  We have been able to keep up with the geological workload without any issues.

 

Our operations in Israel take place at the wellsite in north central Israel, away from the primary location of the war in southern Israel.  Our drilling rig, pad site, employees and service providers were safe throughout 2024. 

 

Throughout 2024, there were daily battles occurring in the Gaza Strip.  Israel was largely successful in winning the battles, including taking operational control of nearly all areas of Gaza and killing many top leaders of Hamas.

 

On or about January 19, 2025, Israel and Hamas agreed to a ceasefire.  On that day, three hostages were released to Israel’s care and there is a plan to release more hostages over time.

 

Israel-Hezbollah War and Wider Hostilities

 

Throughout the first 4-6 months of 2024, the IDF and Hezbollah (a terrorist organization based in Lebanon) exchanged near daily missile and rocket fire at Israel’s northern border.  During Q3 2024, the IDF carried out multiple strikes against the Hezbollah leadership and was very successful.

 

On October 1, 2024, Israel invaded Lebanon to attack Hezbollah directly.  Israel and the IDF were successful and killed much of the top leadership of Hezbollah. 

 

On November 27, 2024, Israel and Hezbollah signed a ceasefire agreement.

 

COVID-19 Update

 

The continuing COVID-19 global pandemic has caused significant disruption to the economy and financial markets globally, and the full extent of the potential impacts of COVID-19 are not yet fully known. Circumstances caused by the COVID-19 pandemic are complex, and uncertain. The impact of COVID-19 has not been significant to the Company’s results of operations, financial condition, and liquidity and capital resources. Although no material impairment or other effects have been identified to date, there is substantial uncertainty in the nature and degree of its continued effects over time. That uncertainty affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information become known. The Company will continue to consider the potential impact of the COVID-19 pandemic on its business operations.

 

B. Going Concern

 

The Company incurs cash outflows from operations, and all exploration activities and overhead expenses to date have been financed by way of equity or debt financing. The recoverability of the costs incurred to date is uncertain and dependent upon achieving significant commercial production of hydrocarbons. 

 

The Company’s ability to continue as a going concern is dependent upon obtaining the necessary financing to undertake further exploration and development activities and ultimately generating profitable operations from its oil and natural gas interests in the future. The Company’s current operations are dependent upon the adequacy of its current assets to meet its current expenditure requirements and the accuracy of management’s estimates of those requirements. Should those estimates be materially incorrect, the Company’s ability to continue as a going concern may be in doubt. The consolidated financial statements have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. During the year ended December 31, 2024, the Company incurred a net loss of approximately $7.3 million and had an accumulated deficit of approximately $293.9 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date the financials were issued.

 

To carry out planned operations, the Company must raise additional funds through additional equity and/or debt issuances or through profitable operations. There can be no assurance that this capital or positive operational income will be available to the Company, and if it is not, the Company may be forced to curtail or cease exploration and development activities. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty (see also Note 11).