The Energy Information Administration (EIA) in its Annual Energy Outlook 2011 projects that natural gas demand in the United States could be 26.55 trillion cubic feet (Tcf) by the year 2035, an increase of 16% over 2009 levels. For comparison, overall energy consumption in the U.S. is expected to increase by 20%. With demand in emerging markets growing and an increase in environment regulations for cleaner burning fuel, natural gas usage is expected to increase alongside annual energy demand which itself is forecasted to increase by 0.7% per year over the next 26 years.

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Natural Gas Demand
The EIA forecasts that residential energy demand will increase 6% between 2009 and 2035. This should help increase natural gas prices as residential natural gas demand accounts for 21% of all natural gas consumption in the U.S. This is in part due to the changing demographics of the U.S. population. In recent years, there has been an increase in population movement to the Southern and Western states. As these areas are warmer, there will be an increase in demand for air conditioning, resulting in an increase in demand for electricity which natural gas is increasingly supplying. Other reasons for an increase in residential demand include energy efficiency regulations. As natural gas loses very little of its energy when it reaches the end user, it is a very efficient fuel source. So, as a result of more strict regulations regarding energy efficiency, this may make natural gas a more desirable fuel for residential use.

Furthermore, industrial energy demand and electricity energy demand are forecasted to increase annually by 0.9 and 1% respectively. As environmental concerns are becoming more prevalent and more stringent emissions regulations are being implemented, natural gas will be adopted at an increasing rate because it is the cleanest burning fossil fuel. (For related reading, see 5 Common Trading Multiples Used In Oil And Gas Valuation.)

Natural Gas Supply
It is important to note that analysts use different methodologies and classification systems when coming to their estimates of natural gas reserves. The most recent report by the National Petroleum Council released in September 2011, states that "North America has a large, economically accessible natural gas resource base ... this resource base could supply over 100 years of demand at today's consumption rates." It goes on to say that the U.S. is the number one natural gas producer in the world and along with Canada produces over 25% of the global production. Furthermore, the latest reports of supply by the EIA indicate that the U.S. has over 2,200 Tcf of recoverable natural gas reserves, up from their estimate of about 1,500 Tcf in 2000, with estimates increasing every year as new technologies become available and more investment is made in exploration and development.

Although there is a large supply of natural gas in North America, oil and gas firms continue to expect gas prices to increase, with the increase in merger and acquisition activity in the sector. After its purchase of XTO Energy for $41 billion last year, ExxonMobil (NYSE:XOM) is looking for more shale acquisitions to expand its already large gas holdings. This would follow its $695 million purchase of Ellora Energy Inc. in July 2010, and the $1.69 billion transaction for Phillips Resources Inc. and TWP Inc. Earlier in 2011, Chevron (NYSE:CVX) acquired Atlas for $3.58 billion, giving it access to 622,000 acres in the Marcellus Shale.

And just recently, French oil group Total (NYSE:TOT) has announced that it is putting $2.3 billion into the development of U.S. shale gas reserves in Eastern Ohio. With its joint venture with Chesapeake Energy Corp (NYSE:CHK), the second biggest U.S. producer of natural gas, Total will take a 25% interest in the development of the Utica Shale. Under the terms of the deal, Chesapeake will receive $610 million under and expects $1.42 billion by the end of 2014. (For related reading, see Oil And Gas Industry Primer.)

Natural Gas Pricing
After hitting $13 per million British thermal units (MMBtu) in 2008, natural gas prices have fallen to around $3/MMBtu as a glut of natural gas has hit the market. However, as the reasons stated above, demand should outstrip supply moving into the future. If investors want exposure to the price of natural gas, instead of purchasing shares in an oil and gas producers, investors may choose to look at exchange-traded funds (ETFs) such as the United States Natural Gas Fund (ARCA:UNG) which tracks the price of natural gas futures.

The Bottom Line
Investors have plenty of choices if they want exposure to natural gas. They may choose to invest in natural gas plays such as Encana (NYSE:ECA), invest in ETFs that deal with natural gas or diversify by investing in full-fledged oil and gas company such as BP (NYSE:BP), ExxonMobil, Chesapeake among others. One thing is for certain, natural gas is going to play a larger role in the energy world going into 2012 and beyond.

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At the time of writing, Chris Dumont did not own shares in any of the companies mentioned in this article.

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