Dear Shareholder and/or Friend of Zion…

On Sunday, January 24, 2010, the Jerusalem Post ran an article on William “Tex” Moncrief, a Texas billionaire wildcatter. In particular, one quote from “Tex” Moncrief caught my eye:

“Sometimes, when you don’t find what you’re looking for, you have to just keep on going.”

No argument from me, as that’s just what Zion Oil & Gas is about. However, I do believe that we are now beginning to find what we are looking for.

The past week has been eventful, both for the rig crew and support staff at the rig site and the administrative staff at Zion’s offices.

As you can read below, we have almost concluded (successfully, we hope and believe) the fishing operation at the Elijah #3 site, seen more crude oil at the Ma’anit-Rehoboth #2 well site, agreed to terms for the field seismic acquisition on the Issachar-Zebulun Permit area.

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Here is this week’s operations update.

Drilling Operations at the Elijah #3 Well

The Elijah #3 site

In last week’s update, I noted that we had drilled the Elijah #3 to a depth of approximately 10,938 feet (3,334 meters) and that the drill string was stuck within the Asher Volcanics section of the hole.

I also explained that, in order to free the pipe, we had implemented a fishing procedure with specially constructed tools suited to our specific requirements.

Last week, we had initial success with a ‘back off’ operation (unscrewing the stuck pipe with a ‘string shot’ – an explosive cord) and then, this past week, we ran ‘wash pipe’ (large diameter pipe) in order to ‘wash over’ the remaining fish in the hole.

At the current rate of penetration through the Asher Volcanics, we expect that, very early next week, we will be able to access the fish and begin its retrieval from the hole, so we are now ‘cautiously optimistic’ that, next week, we will be able to resume drilling towards our target depths.

I am reminded of a phrase that I heard many years ago: “Success is defined by how high you bounce, when you hit the bottom.”

Our drill pipe became stuck near the bottom of the well, but we are working through the problem and expect to resume drilling… hopefully to the success that we believe will come… in G-d’s good time. (Ecclesiastes 3:1)

The Ma’anit-Rehoboth #2 Well

The Ma’anit-Rehoboth #2 Well Site, showing the well head

Left to Right: Dr. Eli Tannenbaum, Dr. Eliezer Kashai (Zion’s Vice President – Israeli Exploration), Stephen Pierce (Zion’s Exploration Manager)

The Ma’anit-Rehoboth #2 well was drilled to a depth of 17,913 feet (5,460 meters). The well penetrated a number of geologic formations that have been preliminarily deemed to have hydrocarbon potential and we retrieved a small quantity of crude oil.

As you can see in the photograph above, Dr. Eli Tennenbaum met with our senior geologists and delivered the preliminary analysis of the samples recovered at the Ma’anit-Rehoboth #2 well. The samples were confirmed to be crude oil.

The chemical composition of the oil indicated that it was not, as we expected, oil from the Triassic geological period, but from the Cretaceous geological period and similar in nature to that recovered by others in the Dead Sea area.

Our geologists are now working on their analysis of the possible alternatives for the migration of the Cretaceous oil from Cretaceous source rocks into Triassic reservoir rocks.

The good news is that Israel has a very large extent of late Cretaceous source rock, so this is positive for the potential quantities of oil that may be hidden underneath Israel’s continental shelf.

The current working hypothesis of our geologists is that the oil matured offshore Israel and migrated both horizontally and vertically to structurally higher but older Triassic rock, onshore Israel. As both oil and gas are lighter than water, they always migrate vertically, but in our license area, the oil seems to have also migrated horizontally.

As I mentioned last week, since we completed drilling the well, we periodically open a surface valve to release pressure that builds up in the well. This past week one of our staff opened a surface valve and (again) found that there was crude oil and possible condensate.

To repeat, we are unsure as to whether we have made a discovery of any hydrocarbon reservoir or, if such a reservoir exists, whether it would be commercially viable, but this well does give us constant cause for optimism.

The Issachar-Zebulun Permit Area

Left to Right: Dr. Eliezer Kashai (Zion’s Vice President – Israeli Exploration), Stephen Pierce (Zion’s Exploration Manager), Dr. Uri Frieslander (GII), Gerald Brounstein (Zion’s outside counsel)

On Sunday, January 24, 2010, we held a meeting with Dr. Uri Frieslander of the Geophysical Institute of Israel (GII), in order to agree the remaining details regarding our planned field seismic acquisition of approximately 30 kilometers of field seismic, in the Issachar-Zebulun Permit area.

Due to GII’s schedule, the field work is now scheduled to begin in mid-April 2010 and last until mid-May 2010.

We have agreed the contract details and I have signed the contract. I am now waiting for GII’s authorized signatory to sign on GII’s behalf. I have been told by GII that he will sign the contract on Sunday, January 31, 2010.