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As most of the Texas energy complex appears to have ducked the harsh winds of Hurricane Rita, many refiners and consumers are breathing a sigh of relief.

Although the devastation of the latest major hurricane to hit the Gulf Coast is widespread along the coast near the Texas-Louisiana border, it could have been much worse. Original predictions that the storm could tag the Texas coast near the energy-rich center between Houston and Galveston had many

prognosticators fearing the worse


Instead, the storm took a northeasterly route and made landfall Saturday morning near Port Arthur, Texas, and Lake Charles, La. While still rich with energy infrastructure, less dense refining capacity combined with a weaker-than-feared storm (a Category 3 is still major, just not cataclysmic as the Category 5 storm many thought would make landfall) made for much less drama and damage than first feared.

The reaction of commodity traders provided a glimpse of how lucky many think Texas was. In a rare Sunday session at the NYMEX, which opened to allow traders to react to Rita news before the workweek began, crude was down over $1.50 a barrel to $62.65. Heating oil and gasoline were also trading lower, a sign traders believe the refining impact of Rita will be small, especially compared to its evil sister Katrina.

All that said, there is still plenty of work to do and several concerns to address when oilmen return to work Monday morning.

Production Challenges

With Rita in the rearview mirror, Monday's focus will shift to clean-up and recovery, both onshore and offshore. There will be a particular focus on oil-and-gas fields in the Gulf of Mexico that have been completely evacuated twice in the last month for two unique 50-year storms.

The recovery task in the Gulf will be monumental. According to the U.S. Minerals Management Service, or MMS, Gulf of Mexico hydrocarbon production is at a standstill. As of Sunday afternoon, 1.5 million barrels of oil and over 8 billion cubic feet of natural gas were "shut-in" as a result of Rita and the lingering impact of Katrina. That represents all of the crude production and over 80% of natural gas production in the Gulf of Mexico. In addition, a significant amount of onshore Gulf Coast production is also shut-in as a result of the two storms.

Over the past month, over 33 million barrels of oil -- or about two days of U.S. consumption -- has been shut-in. Natural gas producers have been unable to produce about 156 Bcf, equivalent to about three days of domestic demand.

Given the quick and complete evacuation of the Gulf of Mexico ahead of Rita and the fact that nearly 50% of oil and one-third of all natural gas production in the Gulf of Mexico is still offline because of Katrina, it is likely Rita will exacerbate the challenges of returning Gulf of Mexico production to normal. In fact, there were a handful of repair and workover crews still working on recovery efforts related to last year's Hurricane Ivan when Katrina hit. At least anecdotally, that provides a glimpse into the challenges that Gulf of Mexico oil and natural gas producers will face as they work to return to pre-Katrina and Rita production levels.

The first task will be returning workers to platforms and rigs and completing an assessment of any damage as a result of the two Category 5 storms passing over parts of the producing fields within a single month. The logistics of returning personnel are complex. With helicopters and boats in short supply, it may be weeks before the Gulf's infrastructure is completely repopulated. Companies like

Offshore Logistics

( OLG) and

Petroleum Helicopters

( PHEL) will certainly benefit from the additional work.

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Then the inspection work begins. A complete review of platform and well stability and rig readiness will also take days, if not weeks. Companies with inspection crews, such as

Oceaneering International

(OII) - Get Oceaneering International Inc. Report



( CDIS) and

Tetra Technologies

(TTI) - Get Tetra Technologies Inc. Report

will benefit in that regard, and companies with lift boats and work boats such as


(TDW) - Get Tidewater Inc. Report


Superior Energy Services


will also benefit from additional transportation and logistics work.

The real issue becomes the level of damage on two fronts.

First, damage to platforms and rigs will have to be repaired before production or drilling can return to pre-storm workloads. On the platform front, marine construction companies like

Gulf Island Fabrication

(GIFI) - Get Gulf Island Fabrication Inc. Report


Global Industries


are likely to stay busy for months to come. On the rig side, companies like

National Oilwell Varco

(NOV) - Get NOV Inc. Report




) LeTourneau division and even


( HYDL) may find extra work if rig components are needed.

Remember, when Rita hit, the lasting impact of Katrina to the Gulf of Mexico infrastructure was still being assessed. Although it appears Rita may not have the impact of Katrina, at best it slowed the process of damage assessment and recovery to the Gulf's energy infrastructure. And while my optimistic side wants to dominate this discussion, it is likely that Rita has additional impact on the ability of the Gulf production to bounce back quickly.

More Than the Gulf

Not only did Rita provide only a glancing blow to the heart of the Texas coast energy infrastructure, it also skirted most of the major inland production as it moved quickly into Arkansas, avoiding the heart of Texas and Oklahoma production. While rig counts in East Texas, Louisiana, Southeastern Oklahoma and Arkansas may be down this week as they recover from flooding and wind, it could have been a lot worse.

That said, my sources tell me that much of the production in the South Texas, South Louisiana and the Permian Basin is challenged by mid-steam bottlenecks (pipelines and storage) as a result of the twin storms impairing the ability to transport, process and store natural gas and oil. While it appears early to determine companies that might feel the impact, it is a story that deserves scrutiny as it appears the combination of Katrina and Rita may have ramifications well beyond the production zones that took a direct hit.

Ahead of the storms, investors did flock to land-based natural gas producers such as

XTO Energy

( XTO),

Chesapeake Energy

(CHK) - Get Chesapeake Energy Corporation Report



(ECA) - Get Encana Corporation Report


EOG Resources

(EOG) - Get EOG Resources Inc. Report


Burlington Resources

(BR) - Get Broadridge Financial Solutions Inc. Report

and others with the thought that land-based producers may benefit from a lack of offshore resources ahead of winter. As the next several days provide evidence of the lasting impact on Gulf of Mexico production as well as any residual effects of the storms to land-based producers, it will be important for investors to take note because this trade is likely to either be pressed or unwound.

If nothing else, Katrina and Rita have awakened consumers and investors to the serious fragility of our domestic energy production infrastructure.

Refining the Plan

The same is true with this country's refining and transportation infrastructure. Although Rita's calling card was not felt by the brunt of Texas refineries, the threat alone should have been enough to reveal a key weakness in this nation's refining strategy: There is simply too much concentration of petroleum and petrochemical infrastructure along the Gulf of Mexico coast.

Sure, it was expedient and much easier than attempting to build energy infrastructure in the Northeast and along the California coast. The citizens of Texas and Louisiana accept it; those in Massachusetts and California do not. Yet it is the people of California and Massachusetts who will scream the loudest when a natural disaster takes a bite out of their energy supplies or pushes prices to an uncomfortable level.

The recent debate of the location of new liquefied natural gas (LNG) import terminals has only increased the NIMBY (not in my back yard) rhetoric to a point where the only new LNG terminals likely to be built are along the Gulf coast or, moreover, in the middle of the Gulf of Mexico.

Maybe the sister hurricanes will create a sense of urgency to move policy makers at both the federal and local levels to reconsider this concentration of assets and loosen up restrictions on new refiners and other energy assets.

And while they're at it, it's also time to rethink the prohibitions against drilling on the Outer Continental Shelf (OCS) along the Atlantic and Pacific coasts. Drilling and exploration has made great environmental strides in the last 30 years to a point where both pollution and the footprint from such exploration is well within tolerable ranges, especially for those looking for cheaper ways to drive and heat and cool their homes.

Not only did Katrina and Rita pack a strong punch, they also packed a strong message, one that Congress and state leaders should listen to very carefully if they want to avoid an energy storm of a much greater magnitude in the years to come.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider PHEL and GIFI to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Christopher S. Edmonds is partner and managing director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback;

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