General
Zion’s mission is to explore for and find oil and gas in Israel. Zion’s principal assets are petroleum rights issued by the Ministry of National Infrastructures of the State of Israel. Currently, Zion has three onshore exploration licenses covering approximately 218,000 acres (the Asher-Menashe, Joseph, and Jordan Valley Licenses). Zion’s licenses are located north of Tel-Aviv and south of Haifa and extend from the Mediterranean eastward to the Sea of Galilee and Jordan River (see the map below). We refer to the project to explore the Asher-Menashe and Joseph Licenses as the “Joseph Project.”
We hold 100% of the working interest in our licenses, which means we are responsible for 100% of the costs of exploration and, if established, production. Our net revenue interest is 81.5%, which means we would receive 81.5% of the gross proceeds from the sale of oil and gas produced from lands subject to the licenses (and any leases granted following a declaration of a discovery thereon), if there is any commercial production. The 18.5% we don’t receive is due to a 12.5% royalty reserved by the State of Israel and a 6.0% royalty to charitable foundations that we established. Other than its 12.5% royalty, the government has no right of participation in any portion of our project. No royalty would be payable to any landowner with respect to production from our license areas as the State of Israel owns all the mineral rights.
Background
In 1983, during a visit to Israel, John M. Brown (our founder and chairman) became inspired by Scripture (1 Kings 8:41-43) and dedicated himself to finding oil and gas in Israel, starting the process that would eventually lead to the Joseph Project. During the next 17 years he made numerous trips 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 to receive the award of a small 28,800 acre onshore petroleum license (the “Ma’anit License”) from the Israeli government. Upon Zion’s formation, Mr. Brown and a group of 25 persons who had assisted him in the initial stages of the Joseph Project contributed to Zion all of the technical, economic, legal and financial data they had accumulated over the years relating to Israeli oil and gas exploration.
Following the award of our first petroleum right in May 2000, the Israeli government has given us access to most of its data with respect to previous exploration in the areas of the several petroleum rights we received over the years, including the Joseph and Asher Permits and the Ma’anit, Ma’anit-Joseph and Asher-Menashe Licenses. The data received from the government has included 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 activities from a variety of publicly accessible sources.
Joseph Project Summary
Licenses
The Joseph Project is comprised of two of our three exploration licenses (the Asher-Menashe and Joseph Licenses), covering approximately 162,000 acres onshore in Israel between Netanya in the south and Haifa in the north. The areas have been subject to a series of exploration permits and licenses that have been granted to and held by us under the Israeli Petroleum Law, 5712-1952 (the “Petroleum Law”). To date, we have drilled one exploratory well in the Asher-Menashe License area and three exploratory wells in the Joseph License area.
The Asher-Menashe and Joseph License areas are geographically contiguous and within a similar geologic environment (see the map below). They are located on a relatively continuous regional structural high that runs almost parallel to the current coast of Israel primarily onshore, from just off of Haifa to south of Tel Aviv. In the event of a discovery, Zion will be entitled to convert the relevant portions of its licenses to 30-year production leases, extendable to 50 years, subject to compliance with a field development work program and production.
Newly Submitted License and Permit Applications
In August 2009, Zion was awarded a preliminary petroleum exploration permit with priority rights on approximately 165,000 acres onshore Israel. The permit area was adjacent to and to the east of Zion’s Asher-Menashe license area and was in the area that was formerly within Issachar’s and Zebulun’s ancient Biblical tribal areas. Consequently, Zion named the area the Issachar-Zebulun Permit Area.
In February 2011, we submitted to the Israeli Petroleum Commissioner applications for two additional exploration licenses and an application for a preliminary exploration permit. One of the license applications and the application for the preliminary exploration permit cover substantially all of the area covered by our prior Issachar-Zebulun Permit, which expired on February 23, 2011. We named this license application the Jordan Valley License Application and we named the preliminary exploration permit the Zebulun Permit Application. On April 13, 2011, Israel’s Petroleum Commissioner granted our Jordan Valley License.
We named the second license application the Dead Sea License Application as it covers areas within the vicinity of the Dead Sea. The Dead Sea License Application is comprised of approximately 75,000 acres of land within the vicinity of the Dead Sea. Hydrocarbons in the Dead Sea area have been mentioned throughout recorded history and since Biblical times. After earthquakes, asphalt can be found floating on the Dead Sea and asphalt seeps are well known in the area. Our geologists have identified the Dead Sea area as one worthy of exploration.
On June 13, 2011, Zion submitted an application to the Israeli Petroleum Commissioner’s Office, requesting the grant of a new petroleum exploration permit area adjacent to Zion’s Joseph License area. Zion has named the new permit application the Asher-Joseph Permit Application. The Asher-Joseph Permit Application area covers approximately 80,000 acres of land and is to the west and south of Zion’s Joseph License area. It is onshore Israel and traverses a section of land, adjacent to the coastline, between Haifa and Tel Aviv.
At this time, no assurance can be provided that our pending applications (or any part of them) will ultimately be granted.
The map below shows the outline of all of our currently existing and applied for (pending) licenses and permits. See the “Summary of Exploration and Drilling Activities to Date” section for details regarding drilling and exploration operations under our license and permit areas.
Geology and Geophysics
Zion’s vision, as exemplified by its Founder and Chairman, 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. See the Map of the 12 Tribes in Canaan below. While John Brown provides the broad vision and goals for our company, the actions taken by the Zion 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. In a phrase, Zion geoscientists seek to “demonstrate that the geology helps to confirm the theology.”
In 2009, major natural gas discoveries were found in the Mediterranean Sea offshore Israel and in April 2010, the United States Geological Survey (USGS) issued a report that estimates the ‘Levant Basin’ contains an estimated mean of 1.7 Billion barrels of recoverable oil and 122 Trillion cubic feet of recoverable gas. Zion’s exploration area falls completely within the Levant Basin (USGS report – PDF)
Upon the award of our first petroleum right (Ma’anit License No. 298) in May 2000, the Israeli government gave 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. The Israeli government itself conducted most of the seismic surveys during the 1970s and 1980s to provide data to encourage oil companies to invest in exploratory drilling. Private and public Israeli, American and international companies conducted additional seismic surveys and drilled most of the wells in the period since 1980. We have also acquired and processed additional 2-D seismic lines as recently as 2010 in each of the license areas in an effort to identify and mature potential drilling prospects.
Summary of Exploration and Drilling Activities to Date
Joseph License Area
To date, we have drilled three exploratory wells in the Joseph License area. The first exploratory well, named the Ma’anit #1 well, was drilled to a depth of 15,842 feet (4,829 meters) to Triassic-age formations with encouraging but inconclusive results. Ultimately, due to the mechanical condition of the wellbore, we determined that the well was incapable of producing hydrocarbons in commercial quantities and we abandoned the well in June of 2007.
In 2009, we drilled the Ma’anit-Rehoboth #2 (MR-2) well ‘directionally’ to a depth of 17,913 feet (5,460 meters). The purpose of the MR-2 well was both to appraise the apparent findings of the Ma’anit #1 in the Triassic-age formations (at a depth of between approximately 12,000 and 15,400 feet) and to test the deeper Permian-age horizons at a depth of approximately 16,000 to 18,000 feet. The well penetrated a number of geologic formations that were preliminarily deemed to have hydrocarbon potential and, during well operations, a small quantity of crude oil was retrieved. However, in April 2010, following the completion of testing procedures, we determined that commercial quantities of hydrocarbons were not present in the well and we suspended operations.
As the MR-2 well did not reach the Permian-age geological formation beneath the Joseph License area, we decided to drill the Ma’anit-Joseph #3 (MJ #3) well, at a nearby location (about 1 km south of the MR-2 well). The MJ #3 well was commenced in August 2010. We announced in June of 2011 that the well reached its target depth of approximately 19,357 feet (5,900 meters) and drilled into the Permian geologic layer in Northern Israel. After conducting the open-hole logging operations and analyzing the results, we concluded that the MJ #3 was not commercially viable, but we learned a great deal about the geology and are now integrating that information into our scientific database.
Asher-Menashe License Area
To date, we have partly completed one exploratory well in the Asher-Menashe License Area. In October 2009, we commenced drilling the Elijah #3 well toward the Triassic geological formation, which we estimated was below approximately 10,000 feet (3,048 meters). As of January 15, 2010, we had drilled to a depth of 10,938 feet (3,334 meters). In early February 2010, we temporarily suspended drilling operations in the well following our unsuccessful efforts to retrieve a stuck pipe, pending further analysis of the situation.
We subsequently acquired, processed and interpreted approximately 15 miles (25 kilometers) of 2-D seismic data in the Elijah #3 project area. Although the newly acquired seismic data is of very poor quality, analysis of the newly acquired data suggests that the Asher Volcanics section, where the well became stuck, is likely substantially greater (i.e., thicker and deeper) than originally predicted by the older, original data. Further work is needed to determine if the Elijah #3 well can be successfully re-drilled through this unexpectedly more extensive volcanic section.
Previous Issachar-Zebulun Permit
In August 2009, we were awarded a preliminary exclusive petroleum exploration permit on approximately 165,000 acres onshore Israel. The Issachar-Zebulun Permit allowed us to conduct, on an exclusive basis through February 23, 2011, preliminary investigations to ascertain the prospects for discovering petroleum in the area covered by the permit. Unlike a license area, where test drilling may take place, no test drilling is allowed on a permit area.
The Issachar-Zebulun Permit extended Zion’s petroleum rights from the Mediterranean Sea at Caesarea across the Carmel Mountains to Megiddo and through to the Jordan River immediately south of the Sea of Galilee. During their analysis of northern Israel, our geologists noted the possibility of hydrocarbon-bearing structures within the Jordan Valley area.
To help identify potential drilling prospects within the previous Issachar-Zebulun Permit area, in June 2010, Zion acquired, through the Geophysical Institute of Israel, an additional 2-D seismic line approximately 19 miles (30 kilometers) in length in the Jordan Valley region and the data was processed and integrated into our geological/geophysical database by our geologists. We identified several areas of potential for further exploration activity. As discussed above, in February 2011 we applied for both a license (Jordan Valley License) on part of the previous Issachar-Zebulun Permit area and a new permit (Zebulun Permit) for substantially the remainder of the area covered by the previous Issachar-Zebulun Permit.
Jordan River License Area
On April 13, 2011, Israel’s Petroleum Commissioner granted our Jordan Valley License.
To date, we continue to evaluate potential prospects to drill in this new license area. We have signed a contract with the Geophysical Institute of Israel to acquire additional seismic data (approximately 9 miles or 15 kilometers) in the Jordan River Valley and we have acquired both gravity and magnetic profiles in the area. We hope to acquire the new seismic data in the first quarter of 2012 and develop a drillable prospect soon thereafter.
Exploratory Drilling Plans Going Forward
We continue to evaluate each of our three existing license areas, seeking to develop drillable prospects. After a long period of negotiation with various oil & gas companies, Zion recently signed a non-binding Memorandum of Understanding (MOU) with a United States based (Oklahoma and Texas) company affiliated with an oil & gas exploration company with significant international operations. We plan that they will provide Zion with an onshore drilling rig with deep drilling capacity and certain other oilfield services for a minimum of three years and for at least three new wells that we plan to drill on our license areas. However, we will need to prepare, negotiate and execute legally binding documentation before we can begin our formal relationship.
We continue to work toward negotiating a drilling contract for a multi-well development program in onshore Israel. We remain optimistic that the day draws near when Zion Oil & Gas will achieve success with our exploration efforts and our decade of hard work will bear fruit, both for Zion’s stockholders and for Israel.
