Replies to post #51423 on Zion Oil & Gas Inc (ZNOG)

[KyOil]

There are at least two aspects to consider in evaluating the PR:

1. Whether the news is good, bad, or not discernible.
2. Timeliness and proper scope of the news.

I will go into aspect #1 in detail in a follow-up post, but in general battling water issues in a test zone of an exploration well is not uncommon, nor is it automatically the death sentence.

Aspect #2 is very encouraging in regards to Zion's effort to improve communications with investors. Dunn had stated there was a stretch goal of completing testing in 3Q, and the first business day after the end of 3Q there is an update; this is very timely which is an improvement for Zion. They also provided the info that there is a current unsolved problem - water. This is also an improvement for Zion as investors should have current info on both opportunity and risks. More detail on progress could have been provided such as the order of zone flow testing (top to bottom, or bottom to top) and how many zones have been tested. But, all things considered this is an improvement in communication from Zion.

[KyOil]

Details on whether the news was good, bad, or indiscernible.

In one sense, its always bad news to learn there is an unsolved problem. But, that is what life in the oil patch is like (and in many other industries too). The key question is whether the problem can be solved or not: first, is it an industry solvable problem, and if so, is Zion management competent enough to use industry best-practices to solve it.

The oil and gas exploration industry is accustomed to encountering water problems and has developed many techniques for solving them. So, I would initially think this problem has a solution since water is coming from a zone other than the zone of interest (its tough to solve too high a water cut from the zone of interest). And, given Zion's exceptional performance in solving the unstable formation while drilling, I would assume they can solve this problem if there is an industry solution. So, I'm speculating there is a solution that Zion will implement. But, the solution may not be a home run hit in terms of making MJ02 a gusher.

The role of MJ02 has to be kept in proper perspective in order to judge its success or failure. MJ02 is an exploration well drilled in close proximity to a non-commercial well in order to use an existing pad to save time and capital. It had a target that was interesting per the 3D interpretation, but it may or may not have been the best target location per the 3D. I'm guessing the MJ02 target was not the most interesting target reveled by the 3D due to proximity or other restrictions.

So what is the goal of MJ02? For me, the goal of MJ02 is to calibrate the 3D interpretation so that it can be discerned by a 3rd party whether a reservoir exists of xxx recoverable barrels. The 3D says a reservoir is there, but is it really? Flow testing will answer that question. As I've stated in many posts, its not about how many barrels of oil per day that MJ02 produces, its about verification of a reservoir. The reservoir size will sustain Zion and drive the stock price.

The issue at hand is stopping the water flow from an upper zone so that a more promising lower zone can be flow tested. This issue implies that testing is not complete - the lower zone flow testing is not complete, hence overall testing is not complete. Therefore, Zion could not make a commercial declaration and more time is needed. This is disappointing, of course.

Installing a packer to stop water from flowing into a zone to be tested/produced is very common in the industry. One known issue that makes it tough in MJ02 is the very high temperature which cuts the life of the packer substantially. Hence the consultation with experts perhaps. Another technique is to install a smaller pipe inside the 4-1/2" pipe to isolate the water producing zone with cement and steel. I suspect Zion will do this if the packer enabled test shows the well is commercial since a packer is not likely a reliable production solution given the high temperature. And, of course, when MJ03 is drilled the water zone will be isolated behind casing. Learning is captured from each well which makes the next well easier to drill and require less testing; all with a higher probability of success.

Summary of my speculation:

1. Water problem will be solved to allow testing of the lower zone(s). But, it will take some time and capital.

2. Testing of the lower zone will validate the presence of a reservoir as suggested by the 3D. Recent testing was done on the lowest zone (20 meter thick) which was stated to be encouraging. I suspect the unwanted water from the upper zone slowed down the oil flow from the zone of interest and added a high water cut; both are killers for obtaining a good test.

3. MJ02 will not be a gusher, and the reservoir will not be gigantic. MJ02 will have enough oil flow to be commercial, and the reservoir will be adequate to propel Zion on its quest.

4. It will be interesting to see how Zion solves the funding issue as the last 10Q said funding was expected to last through Nov, and it does not appear like positive news can be announced before then.