The U.S. Securities and Exchange Commission’s new rules and regulations for disclosure of oil and gas reserves take effect January 1. The change-up appears to offer advantages for the oil and gas industry, possibly in A&D activity.

Companies will be able to report probable and possible reserves, in addition to proved. The SEC has also established a five-year rule to book proved reserves based on reasonable plans of development. Perhaps most important for shale players is a change to the definition of oil and gas producing activities. They now include nontraditional and unconventional sources, such as bitumen from oil sands and oil and gas extracted from coal and shales.

These enhancements will help give investors a better idea of a company’s long-term potential.

Speaking at Oil and Gas Investor and A&D Watch’s recent A&D Strategies and Opportunities conference, held in Dallas, Scott Rees, chairman and chief executive of Dallas-based Netherland, Sewell & Associates Inc., said the new rules will grant “more liberal definitions of reserves.”

“This should make reserves reporting more transparent. It should also make transactions easier for the A&D market,” he said.

“Because the disclosure documents now include probable and possible, it will drive acquisition prices to full values. It will also make it easier to hedge the upside of assets.”

According to Mark Roach, senior vice president, technical resources, with The Oil & Gas Asset Clearinghouse, access to additional information may allow certain deals to occur faster than in the past.

“Petroleum engineers will typically use the time that is available to them,” said Roach. “You’ll see some transactions and portfolio management occur earlier than in the past.”

Other aspects of the new rules include an allowance for data from wells other than direct offsets; a “reasonable time frame” of five years to production; and allowance for boosted production from enhanced-oil-recovery projects and horizontal wells.

“You can also book data from wells drilled to prove up a concept of probable and possible upsides,” said Rees. “You can look at property maturity, old core holes and daily test data.”

Companies will also be able to report on reserves found in previously bypassed areas such as farmland, ranches or lakes, which can be developed using horizontal drilling from nearby leases.

These new rules will be most beneficial to independents, particularly U.S.-based E&Ps. The larger, international E&Ps won’t see major changes to their reporting, because most other countries have consistently allowed the inclusion of probable and possible reserves in their regulations, said Rees. For the supermajors, the new rules just mean more work, he added.

Also significant: Oil and gas reserves will now be reported using an average commodity price based on the prior 12-month period, rather than year-end prices. This will be most helpful during times of price swings, allowing investors to better compare metrics from various companies.

There are also some drawbacks to the new rules. Investors should be leery of vague information in reports. According to Geoff Roberts, Clearinghouse senior vice president for negotiated transactions, the definition of proved undeveloped producing reserves (PUDs) is now less strict.

“Purchasers are going to have their hands full in sorting through these PUDs,” he said.

“PUDs from new technology…I think you’re going to see companies now trying to book entire trends. A year from now, it will be interesting to see how the subjective process works,” Roberts added.

When will the new rules begin to affect deal transactions? The current economic downturn is preventing many major deals from materializing, but Roach says there will be some tangible effects of the rule change in 2009. The effect on transaction values may be overshadowed, but this will change.

Shale players will benefit from probable and possible reserves gaining more legitimacy. The industry could see a rush to jump into the unconventional plays while gas prices remain low.

There will probably be fewer instances of buyer’s remorse, because buyers can better assess actual quality of reserves before making an acquisition. But buyers will have to be wary of seller misuse of the rules to inflate reserves.

All in all, the renovated rules could be just the shot in the arm the industry needs to pull itself out of the recession-caused funk.