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THE JOURNAL OF ENERGY

AND DEVELOPMENT

Chad R. Miller and Joel F. Bolton,


“Economic Development Strategies for
Fracking: The Case of the
Tuscaloosa Marine Shale Play,”
Volume 41, Number 2

Copyright 2016
ECONOMIC DEVELOPMENT STRATEGIES FOR
FRACKING: THE CASE OF THE TUSCALOOSA
MARINE SHALE PLAY

Chad R. Miller and Joel F. Bolton*

Introduction

T echnological advances in oil and gas extraction have increased welfare for
consumers and producers by $48 billion per year, but the environmental and
societal costs are not well understood.1 Improved drilling and hydraulic fracturing
(fracking) techniques have opened up new energy reserves in places like the
Bakken Basin in North Dakota, the Marcellus Shale area of upper Appalachia, and
the Barnett Shale and the Eagle Ford Shale plays in Texas. These communities
have experienced economic booms in the last 10 years and, more recently, busts as
world oil prices have declined. Stories abound in these communities of fast food

*Chad R. Miller is an Associate Professor and Graduate Coordinator of the Master’s of Science
of Economic Development program in The University of Southern Mississippi College of Business.
He teaches in the economic development program and coordinates the International Economic
Development Council (IEDC)-accredited True South basic economic development course. He has
a Ph.D. from the Virginia Tech Center for Public Administration & Policy, a M.B.A. from Boston
University, and a B.A. in Government from the College of William & Mary. The author’s articles
have appeared in such publications as Public Works Management & Policy, Regional Science Policy
& Practice, State and Local Government Review, Administration Theory & Praxis, and Adminis-
tration & Society. This research was supported through funding from the National Center for Freight
and Infrastructure Research and Education (CFIRE) consortium.
Joel F. Bolton is an Assistant Professor in the Department of Management and International
Business at The University of Southern Mississippi. He earned a Ph.D. at Oklahoma State
University, a M.B.A. at Sam Houston State University, and a B.A. at Texas A&M University. His
research areas are corporate governance, managerial cognition, and the external environment of
business. His articles have appeared in publications such as the Journal of Management Studies.

The Journal of Energy and Development, Vol. 41, Nos. 1 and 2


Copyright Ó 2016 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.
201
202 THE JOURNAL OF ENERGY AND DEVELOPMENT

restaurants like Burger King offering $5,000 employee retention bonuses and
truck drivers earning over $100,000.2 However, all the new money flowing into
these regions has led to inflation in the cost of living, housing shortages, and
increased crime rates.3 There are also indications of environmental consequences
such as contaminated water, oil spills, and earthquakes. This has led to challenges
for public administrators in these regions as they work to make the shale revo-
lution a blessing and not a curse.
Fracking is not a new technique, but recent refinements, along with increases in
oil prices to over $100 per barrel, have allowed previously unattainable reserves of
fossil fuels to be exploited. Wells can now be drilled thousands of feet down and
then drilled thousands of feet horizontally to reach the desired rock layer. Then
millions of gallons of water, sand, and chemicals are pumped underground to
break apart the rock and release the fossil fuels. In some plays such as the Mar-
cellus basin, this is mostly natural gas and in other regions (e.g., the Bakkens) the
output is mostly oil. Once the fracking is done, a typical well producing crude oil
generates around 2,000 barrels per day (about the capacity of a tanker truck per
day) with the yield declining slightly for a 20 year period.4 Each well needs
hundreds of trucks to bring in equipment, chemicals, water (if piping is not fea-
sible) and frac sand, much of which comes from Wisconsin. The so-called “salt
water” used to fracture the wells needs to be transported for disposal. The oil and
gas then needs to be trucked or piped to refineries. This creates tremendous strain
on the transportation system as exemplified by the regular rail tanker car accidents
and damage to the roads.
Numerous aspects of state and local public administration are responsible for
oil and gas production and its externalities. There is typically a state agency re-
sponsible for overall stewardship of natural resource extraction such as the
Railroad Commission of Texas or the Mississippi State Oil & Gas Board. Envi-
ronmental agencies and water authorities are involved with monitoring and per-
mitting. Transportation and public works departments become involved with
infrastructure issues. Planners get involved with land use. Revenue services collect
oil and gas severance taxes, royalties, etc. Local government administrators have
to deal with many of the problems from fracking (e.g., noise nuisance, traffic
hazards, impacts on property values), but are not seeing revenue increases to
match their additional costs.5 There are a plethora of public administration con-
cerns with fracking, but this research will focus on economic developers. These
are the state, regional, and local organizations involved with creating and retaining
jobs, increasing the tax base, and improving the quality-of-life of a region.6
The economic development profession has been trying to sort out how they can
create sustainable economic development from the shale energy industry and
avoid the boom-bust cycle. Generally, economic developers understand that direct
local job creation from shale gas and oil extraction will be modest, as most jobs
come from processing and manufacturing to serve the industry.7 Thus, there is
ECONOMIC DEVELOPMENT STRATEGIES & FRACKING 203

a particular interest in creating a resurgence in downstream manufacturing where


natural gas is a major feedstock or can be substituted as a feedstock.8 In fracking
regions, economic developers are attempting to improve their local economies
through business attraction, retention, and small business development related to
the oil and gas economy, but a clear picture of how to do this has not yet emerged.
In order to shed light on what the shale economy means for economic develop-
ment, Mark Barbash, Executive Vice President, Strategic Initiatives, Finance Fund
held a series of conversations with economic professionals.9 From those discussions,
he developed a list of important lessons learned. These lessons include the following:
1. Incentives are not necessary. The profits are in the sale of oil and gas so
drilling is going to occur regardless of whether incentives are offered or not.
2. Productivity is increasing because of technological advances making fracking
more attractive in many new areas.
3. There is a need for work force training programs to help local workers.
4. Fracking creates a strain on local services (e.g., roads and fire protection) so
economic developers need to address this impact on the community.
5. Generally, tax revenues do not match the increased public expenses.
6. There is limited direct job creation from drilling and many of the jobs are
indirect.
7. Economic developers need to diversify the energy supply chain and continue
to seek out companies not dependent on the energy industry.
8. Economic developers need to monitor the environmental impact of shale gas
drilling.
This research will empirically examine these lessons using the case of the
Tuscaloosa Marine Shale (TMS) region of Mississippi, which was in the early
stages of being economically developed. First, we will review the literature related
to oil and gas economic impact and discuss the mixed findings. Next, Barbash’s
lessons will be presented as a framework.10 This will be followed by the TMS case
study and the application of lessons from the conversations with economic pro-
fessionals. Last, we will recommend that economic development scholars adopt an
approach that aligns with the business-cycle management literature as it provides
a helpful framework for researching questions related to fracking and related
activities.

Literature on the Local and Regional Economic Development and Fracking

There are contested findings with regard to the economic development con-
sequences related to local economies involved in fracking shale plays. Significant
anecdotal information indicates that fracking creates jobs and wealth, but it also
causes environmental damage. The social science research on the implications is
204 THE JOURNAL OF ENERGY AND DEVELOPMENT

less clear.11 Although we present a framework for addressing these concerns,


numerous studies, often funded by oil and gas concerns, are panegyric about the
economic development impact with claims of thousands of jobs being created.
Whereas, other studies questions these job creation claims and are critical of the
methodology and assumptions of many of the economic impact studies.12 The
actual economic development implications are not well understood and likely
could depend on the particular shale play. Additionally, assumptions about the
effectiveness of particular economic ideologies as well as beliefs about the like-
lihood of certain future events have a considerable impact on the interpretation of
various economic data. This may help to partially explain the mixed findings
within the economic development literature with regard to fracking and related
activities.
There are studies that examine the economic development numbers and per-
ception and find that economic development does result from fracking.13 Surveys
of local leaders in various shale regions reported a positive impact on the job
market and local employment rates.14 A number of studies found that the Marcellus
shale play has a significant positive economic impact on the region.15 Whereas,
other researcher questions these studies of the Marcellus play and project negative
economic impacts.16 A 2013 Federal Reserve Bank of Minneapolis study of the
Bakken region found strong employment and wage growth, but the positive eco-
nomic impact was limited to the region within 100 miles of the Bakkens.17 S. Deller
and A. Schreiber found that regions that supplied frac sand experienced no em-
ployment growth, but these regions did experience increased per-capita income.18
Thus, broad economic development implications are being debated, so it is useful to
break down the components of fracking-driven economic development to better
understand the role of the economic developer.
Economic development is about sustainably bringing in new money into a re-
gion and keeping it circulating rather than leaking out.19 The metaphor of a leaky
bucket is commonly applied. In order to understand how economic development
occurs because of fracking, the flows of money caused by the oil and gas ex-
traction need to be understood. However, the mechanisms that bring and keep new
money derived from regional shale extraction are not well understood. First of all,
royalties and lease payments are some ways that fracking brings new money into
a region. L. Scott and J. Huang found that the Haynesville shale play generated
$3.2 billion in mineral lease and royalty payments and royalties.20 When and
where the monetary inflows are spent is a major concern for understanding the
impact.21 According to T. Kelsey and colleagues, over half (55 percent) of royalties/
lease proceeds are not spent in the local economy.22 Further, relatively few of the
residents of fracking regions ever receive any such payments.23 Royalties and lease
payments could be an important economic driver, but it is not typically considered
the purview of economic developers who are focused on attracting, expanding, and
developing businesses rather than induced economic activities.
ECONOMIC DEVELOPMENT STRATEGIES & FRACKING 205

Second, operators need to hire people to drill and produce from the well. This
can bring in money to the community if the workers spend their money locally.
J. Jacquet found that fracking can provide thousands of short-term and long-term
jobs, but without work force training for locals, much of the benefit of these new
employment arrangements will leak out of the community to outsiders who come
in to work on the rigs and then leave the community to spend the money.24 Tra-
ditionally, the goals and work efforts of economic developers and work force
administrators have not been aligned, but the linkages between the two fields are
becoming stronger.25 Developing the workers who do the fracking, encouraging
operators to hire locally, and getting these workers to spend money locally is an
economic development responsibility.
There are indirect economic benefits from the suppliers and services and inputs
for fracking if these are sourced locally. This supplier activity creates more sup-
plier activity and induced activity. B. Weinstein and T. Clower estimate that 2,000
wells generate $7.6 billion in supplier activity for the state of New York.26
J. Phillips found that maintenance and repair construction of non-residential
structures, architectural, and engineering were the main local suppliers to oil and
gas operations in Mississippi.27 Input/output (I/O) tables show the linkages and
production and what industries supply oil and gas extraction. These tables are the
basis for most industrial attraction targeting.28
Table 1 shows the I/O table suppliers related to the fracking activities in the
TMS region of Wilkinson County, Amite County, and Pike County, which are all
in Mississippi. It includes all local purchases that create economic activity and the
percentages of purchases from outside the region. Economic developers use these
I/O tables to determine what industries they should target for attraction or de-
velopment. The local supply chain for fracking is a major economic development
focus, but many of these companies are already firmly established in traditional oil
and gas regions such as Houston.
The major attraction for economic developers from shale plays is the potential
to recruit energy-based manufacturing that utilize the oil and gas as a major input.
Manufacturing is often energy intensive and natural gas is commonly used as
a fuel and a feedstock. The cost of energy to manufacturing industries averages
about 4 percent of production costs, but around 15 percent for energy-based
manufacturers such as metals, chemicals, and pulp and paper, and even higher for
industries such as cement and fertilizers.29 A PricewaterhouseCoopers report
found that manufacturing could hire a million more workers and may reduce
energy expenses by as much as $11.6 billion annually because of shale gas.30 This
could mean 930,000 new manufacturing jobs by 2030 and 1.41 million by 2040.31
The chemical industry has projected 225 new chemical plants by 2023 because of
shale gas with $138 billion in investment and 383,000 new jobs.32 Louisiana has
been particularly successful at attracting energy-based manufacturing including
Sasol’s announcement of a $14-billion gas-to-liquids project and CF Industries’
206 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 1
INDUSTRY SUPPLY CHAIN FOR OIL & GAS EXTRACTION IN TUSCALOOSA
MARINE SHALE REGION

In Out of
NAICS Industry Amount Region Region

213112 Support activities for oil and gas operations $188,892 18.80% 81.20%
541110 Offices of lawyers $108,951 13.00% 87.00%
486210 Pipeline transportation of natural gas $97,921 0.00% 100.00%
324110 Petroleum refineries $82,547 0.00% 100.00%
331110 Iron and steel mills and ferroalloy manufacturing $67,248 0.10% 99.90%
533110 Lessors of nonfinancial intangible assets $62,160 0.00% 100.00%
333132 Oil and gas field machinery manufacturing $58,977 0.00% 100.00%
532412 Equipment rental and leasing $50,629 11.30% 88.70%
541512 Computer systems design services $46,281 2.20% 97.80%
522110 Commercial banking $43,127 32.60% 67.40%
532490 Other equipment rental and leasing $42,462 19.30% 80.70%
541330 Engineering services $35,247 5.40% 94.60%
333515 Machine tool accessory manufacturing $32,678 0.00% 100.00%
486110 Pipeline transportation of crude oil $31,725 0.00% 100.00%
221210 Natural gas distribution $30,937 0.00% 100.00%
425120 Wholesale trade agents and brokers $23,244 7.30% 92.70%
238220 Plumbing, heating, and AC contractors $22,745 34.30% 65.70%
332912 Fluid power valve and hose fitting manufacturing $22,058 0.00% 100.00%
238210 Electrical contractors $20,951 22.10% 77.90%
541511 Custom computer programming services $20,522 2.00% 98.00%

Source: Economic Modeling Systems, Inc., “EMSI Developer,” available at http://www.


economicmodeling.com.

$2.1 billion fertilizer manufacturing facility. In addition to being massive capital


investments, these manufacturing concerns can create significant jobs and pay
good wages so are attractive targets for economic developers.
Economic developers are interested in the shale oil boom and how it can benefit
their efforts to create jobs, increase the tax base, and improve the quality-of-life of
their community. They tend to take an industry perspective, but like other policy
makers are aware that there could be potential costs and impacts on local services,
environment, and health.33 The science on all these issues, including economic
impact, is contested. Anecdotally, there are success stories, such as Louisiana and
Texas attracting energy-based manufacturing, but the overall picture for economic
developers is not clear from the literature. Professional conference presentations,
word-of-mouth, trade journals, and blogs and other web sites (e.g., LinkedIn) have
been the main sources of information for economic developers seeking to figure
out what they should be doing about the shale economy, so more tested in-
formation is needed to guide economic development.
ECONOMIC DEVELOPMENT STRATEGIES & FRACKING 207

Based on conversations with economic development professionals, Barbash


identified the aforementioned list of lessons on the shale economy for local/regional
economic developers.34 These informally gathered propositions have not been
empirically examined. There is considerable supporting literature on economic
impacts (although most of this research is not peer-reviewed), policy issues,
environmental and health concerns, and the geological science of fracking.
However, research on the practical day-to-day work of shale-based economic
development has not been explored with rigor. This research will begin to examine
the implications for economic developers and how economic developers can take
a strategic approach to the shale economy.

Methodology

This research will take a case study approach based on key informant in-
terviews, site visits, and examination of the secondary data. The TMS region of
Mississippi, which is centered on Wilkinson County, Amite County, and Pike
County in southwest Mississippi, was selected because of data availability and it is
a relatively new, large, emerging shale play. Because of rural distress, it is the
main focus of economic developers in the region. It is a region with a declining
population and one of the highest unemployment rates in Mississippi. (The re-
gional population has declined 2.4 percent from 2010-2015, and unemployment is
up to 9 percent in some counties.) Before the shale boom, large job losses were
experienced in the region’s main industries: sawmills and poultry processing. In
addition to energy production, the regional economic development organization is
now targeting food processing, call centers, metal fabrication, and plastics.35 As
a result of the poor employment opportunities, the working-age population is
abandoning the area to find employment. Given these trends and the fact that the
sparsely populated region is heavily forested with moderate livestock production,
it is certainly a region desperate for economic development.
The TMS play situated in the southwestern Mississippi and the eastern part of
Louisiana is one of the emerging shale plays in the United States. TMS is the
eastern edge of a geologic formation that parallels the Gulf of Mexico through
Texas, Louisiana, and Mississippi. This includes the established Eagle Ford Shale
play in Texas so the TMS is sometimes referred to as the Louisiana Eagle Ford.
According to a Louisiana State University study, the region contains more than
7 billion barrels of recoverable crude oil.36 This is more than the most recent Bakken
assessment. The most promising production zone in the TMS is at a depth of 10,000
to 15,000 feet (compared to depths of 5,000 to 7,000 feet for the Eagle Ford).
By all standards, the TMS play is still in its infancy. Leasing activities began in
earnest in the area only from 2011-2012. The first well excavation began at the end
of 2012. A few pioneering firms have moved into the area and began exploration.
208 THE JOURNAL OF ENERGY AND DEVELOPMENT

The business model of these pioneer operators seems to be to establish the prof-
itability of the play so that they can sell their leasehold to large integrated energy
companies (e.g., Chevron). Thus, the investments of these firms could be con-
sidered as mainly “demonstrative” and aimed at showing the value of the play.
Most of the efforts in the area are geared toward finding the right formulas leading
to maximum production and durability of the play. The initial wells dug in the area
have begun to show results demonstrating that the shale play is essentially an oil
play with production ranging from 92 to 98 percent of oil. The output is coupled
with “wet gas” having a high concentration of propane and other natural gas liquids
(NGLs) that are desired by producers.
The Mississippi Oil and Gas Board recently reported that 40 wells had been
drilled in the Mississippi portion of the TMS.37 Operators expect their wells will
produce 600,000 to 800,000 barrels of oil over a 40-year production life. The total
production in the Mississippi portion of the TMS since 2011, when the first well began
to produce, is about 2.4 million barrels, but production is expected to drop off in 2016
once the operators’ hedges expire due to lower oil prices. According to the operators,
the test wells have shown that the oil can be extracted and the challenges overcome.
The primary challenge is geological, which leads to expensive well costs and
the need to find ways to optimize production. The operators have learned tech-
niques for effectively drilling in the TMS, but they need to ensure this codified and
tacit knowledge is not lost as rigs are laid down. Schlumberger Ltd. helped form
a consortium of the region’s major operators including Goodrich, Amelia Resources,
Sanchez Resources, Halcon, and Comstock Resources to serve as a platform for data
sharing to overcome the region’s challenging geology. Industry-wide, cooperation
among operators is cordial, but can be secretive in some plays. In contrast, the TMS
operators are working together to achieve a shared goal. In addition to technical
problem solving, the operators are looking to standardize unit size and layouts.
Despite these collaborative efforts, production is still expensive in the TMS
compared to elsewhere in the United States. The current cost for a well is about
$15 million, down from $20 million for wells that produce from 300 barrels per
day (bbl/d) to 500 bbl/d according to oil companies operating in the area.38 This
can be compared to the Bakken wells that produce around 275 bbl/d with an $8.5
million to $10 million capital cost per well.39 In Eagle Ford, the same estimate puts
the average crude oil production at about 219 bbl/d. The well cost of the Bakken is
between $5.5 million to $7.5 million per well. With improved production tech-
niques in the TMS, some operators have been getting the cost down to near $10
million per well and drilling times to under 30 days.40
The price for oil has dropped from over $100 per barrel in August 2013 to less
than $50 per barrel average in 2015, making many question the economics of
fracking. Traditionally, experts have said that U.S. tight oil needs to sell at $85 or
$90 a barrel for fracking to be profitable, but producers have become more effi-
cient at fracking, so they can still maintain profitability with prices between $50 and
ECONOMIC DEVELOPMENT STRATEGIES & FRACKING 209

$70 a barrel.41 The breakeven analysis varies between shale plays and operators.
Based on a 20-pecent pre-tax return in table 2, Baird Ltd. estimates a range from $50
to $83 for breakeven with the TMS play operators needing $79.42 However, Goodrich
Petroleum claims it can breakeven in the TMS at $44 with a 10-percent return if
optimization continues and well prices get to $10 million.43 The actual breakeven
numbers are debatable, but productivity gains and the growth imperative support
eventual future growth. The result is that the shale economy is hitting a bust cycle.
The expensive nature of operation in the play is due to several factors. The first
factor relates to the depth of the play. The depth of the TMS play is up to 15,000 feet
compared to some other plays in Texas where the depth is about 7,000 to 8,000 feet.
Second, another factor driving prices up is that the play is not yet operating at
a maximum economy of scale. Many of the service providers that play key roles in
the development of the areas are not yet familiar with the TMS and not situated in
close proximity. However, some companies have announced that they would be
establishing a branch in Mississippi to serve an operating TMS play. Other factors
include that producing wells are not operating efficiently. For example, digging
multiple wells in a single spacing unit at a time improves efficiencies.
Desperate for economic development and seeing a large potential, the local
economic development organizations have come together to market and develop
the TMS. They have designated the economic developer from Pike County as the
Director of TMS to lead the combined efforts. This organization has visited other
fracking regions, lobbied in Mississippi’s capital of Jackson for the TMS, spon-
sored the annual Tuscaloosa Marine Shale Development Summit & Exhibit, been
active on social media, hosted site visits, commissioned studies, and developed
a coordinated economic development strategy. The regional economic develop-
ment group has been aggressive in trying to develop the work force, attract sup-
pliers, and monitor the extraction. They see the TMS as having the potential to
economically save the region. Thus, even though the play is new, and currently
stalled, there have been considerable economic development efforts that present
a useful case study of how shale development is practiced.
Table 2
SHALE REGIONS’ BREAKEVEN ANALYSIS

Oil Play Breakeven Oil Price Rig Count

Eagle Ford $50 104


Bakken $56 91
Tuscaloosa Marine Shale (TMS) $79 7
Overall $65 1,100

Source: E. Bellamy, “Energy Markets & the TMS,” presentation at the 3rd Annual Tuscaloosa
Marine Shale Development Summit, New Orleans, Louisiana, February 4–5, 2015.
210 THE JOURNAL OF ENERGY AND DEVELOPMENT

Case Study Data

Incentives for Oil and Gas Production: To compete with Louisiana, Mis-
sissippi reduced the oil and gas severance tax in 2013 from 6 percent to 1.3 percent
for oil and gas extracted from horizontally drilled wells for a period of 30 months
or until the payout of the well. This reduces costs $700,000 to $800,000 per well.44
The legislation applies to all qualified wells until 2018. In Louisiana there is
a standard severance tax of 12.5 percent, but this is rebated for horizontal drillers
for two years or until the payout of the well cost is achieved. According to a recent
report, this rebate cost the state $239 million in revenue.45 Industry argues that
these breaks are needed to keep the exploration going, while critics contend the
incentives merely affect which part of the TMS play is tapped first.
The counties rely on the severance tax revenue to help maintain the roads
where the drilling is occurring. Before the new legislation, two-thirds of the
revenue went to the state and the remaining one-third to the county, but until 2018
the counties will just receive the 1.3 percent severance. This resulted in about
$225,307 in foregone revenue annually for the region (see table 3).
The economic developers interviewed were supportive of the reduced in-
centives to encourage initial production in the region, but were amenable to the
incentives “sun setting.” They saw the need for severance revenues to support
public services such as the roads. They did want to be able to offer economic
development incentives for the oil and gas supply chain. However, most of the
state incentives are geared toward manufacturing so did not apply to much of the
oil and gas extraction supply chain (see table 1).

Table 3
OIL AND GAS SEVERANCE FOR AMITE COUNTY, PIKE COUNTY,
a
AND WILKINSON COUNTY

Tax Year Oil Payments Gas Payments Total Payments Estimated Revenue*

2007 $1,161,918 $206,589 $1,368,507


2008 $1,494,484 $180,777 $1,675,261
2009 $2,111,517 $212,708 $2,324,225
2010 $1,427,945 $42,799 $1,470,744
2011 $1,494,538 $27,618 $1,522,157
2012 $1,678,122 $29,510 $1,707,632
2013 $1,776,572 $160,801 $1,937,373 $2,072,989
2014 $1,255,247 $26,047 $1,281,294 $1,370,985

a
* = estimated revenue without rate reduction.
Source: Mississippi Department of Revenue, Annual Report Fiscal Year 2014 (Jackson,
Mississippi: Mississippi Department of Revenue, 2015).
ECONOMIC DEVELOPMENT STRATEGIES & FRACKING 211

Economic development incentives need to be utilized where they can influence


the company’s location decision and provide enough return to justify the public
costs. The reduced severance taxes encouraged the operators to test the Mississippi
region first, but now that the play has been proven, there is not a need to extend the
severance tax break. For other incentives, cyclical factors need to be considered.
Diversified businesses (e.g., iron and steel fabricators which serve multiple in-
dustries) that will become embedded in the region need to be given priority.
Increasing the Productivity of Fracking: Improvements in technology and
advances in the geologic knowledge of the TMS have driven down the costs of
drilling substantially. It has involved significant trial and error, but the drillers have
begun to “crack the code” for effectively producing oil from the TMS play. This
knowledge includes solving wellbore instability issues and best practices for drilling
into highly fractured “rubble zones.” Other advances include bit, motor, and fluid
selection and the use of multi-well drilling pads. This has brought well costs down
from $20 million to almost $10 million and a breakeven of under $80 per barrel.
Across the industry, there are signs that productivity is slowing. Operators
might be hitting the limits of existing tools, technology, and strategies.46 There are still
improvements being made in the TMS processes, but this region too might face
stagnating productivity. The project of increasing productivity in the TMS will involve
a mixture of tacit and codified knowledge. However, with the drop in oil prices, much
of the work force is moving away to lower cost fields. There is the concern that some
of these TMS specific drilling skills could be lost. It is ultimately up to the companies
to maintain this knowledge and skills, but the economic developers want to ensure that
this TMS-specific expertise is embedded into the work force training programs. If the
economic developers in the TMS fail to capture and protect the valuable skill com-
ponents in both the actual labor force and the future-oriented training resources that
develop talent, then productivity enhancements will be hampered.
Work Force Training Programs to Help Local Labor: Getting local workers
trained for the fracking-related jobs was a key concern for the economic developers.
They held job fairs, conducted research, and sought training grants. A consortium in-
volving community colleges in the area received a $2-million Trade Adjustment As-
sistance Community College and Career Training (TAACCCT) competitive grant from
the Department of Labor and Department of Education to train medium/heavy equip-
ment/diesel mechanics and related transportation careers growth related to the operations
at the Natchez Port and the TMS reserves. Southwest Mississippi Community College
(SMCC) established a well construction technology program to provide classroom and
laboratory instruction on rotary rig, power equipment, mechanical maintenance, drilling
fluids, hydraulics, and other areas associated with well drilling operations. The well
drilling program (CIP 46.0504) had seven completions in 2013. SMCC and the
economic developers worked to involve the industry as they developed the oil and gas
technology program geared toward training local workers for shale economy jobs.
212 THE JOURNAL OF ENERGY AND DEVELOPMENT

A cyclical perspective is also important for productivity enhancement and skills


training. Eventually, oil prices are expected to rebound and the play will again attract
business that needs the knowledge to efficiently operate in the TMS. This gives time to
develop and plan for the knowledge and skills that will be needed in the future. However,
these skills need to be developed with transferability in mind. Tools such as the com-
patible O*Net occupations can help economic developers plan for this crossover of
skills. Fruits of this planning can be seen in efforts to recruit firms from other industries
that have similar skill needs to counteract the cyclical forces that take valuable skilled
talent away from the region during economic downturns. If workers could “stay local”
for a longer period of time with flexible work opportunities, the firms in the shale
economy would potentially be able to realize greater profits as a result of lower re-
cruitment and training expenses. The enhanced processes around talent identification and
work force deployment would aid these firms in providing more effective and efficient
strategic responses to dynamic external economic forces that impact the industry and
ultimately the firm’s chance for survival. These arrangements could also lend stability to
the regional economies which are already facing many simultaneous pressures.
Fracking Creates a Strain on Local Services and Tax Revenues: One of the
main pressures facing regional economies is the constant need to maintain trans-
portation infrastructure. Visits to drilling sites in the TMS revealed hard top roads
reduced to gravel by increased truck traffic. Officials discussed the trucks driving
unsafely and ignoring road signs. County officials mentioned that the operators would
repair roads when pushed and that some drillers were much better at maintaining roads
than others. Maintaining the roads was a constant concern in the TMS region and the
projected costs displayed in table 4 far exceed the oil revenues (see table 3). Although
some transportation infrastructure expenses in the affected counties are not attributable
to fracking, the figures in table 4 highlight the potential public financial shortfall.
Officials in the TMS are concerned that they are not a priority in the statewide
competition for road funds. Mississippi consistently ranks in the top 10 in the

Table 4
PROJECTED COUNTY ROAD COSTS IN THE TUSCALOOSA MARINE
SHALE REGION FOR 2016-2021

Cost (in millions of


U.S. dollars) Amite County Pike County Wilkinson County Total

Maintenance costs for roads 26 23 21 70


Bridge replacement costs 3 25 0 28
Total 29 48 21 98

Source: Mississippi Economic Council, Ramping Up Mississippi’s Economy through Transportation


(Jackson, Mississippi: Mississippi Economic Council and The State Chamber of Commerce, 2015).
ECONOMIC DEVELOPMENT STRATEGIES & FRACKING 213

Reason Foundation’s Annual Highway Report, but is nearer to a middle ranking in


rural Interstate pavement condition (ranked 30th in 2014). Much of the state’s
success with roads can be traced to the 1986 Advocating Highways for Economic
Advancement and Development (AHEAD) Act that mandated all counties should
have four-lane highway access.47 However, one of the few sections that was never
completed involved Highway 24/48 that runs through the heart of the TMS. This
so-called “autobahn” of the TMS features a 90-degree turn in Liberty as well as
several other bottlenecks that could cause severe truck congestion issues should
production increase to expected levels. It is estimated that it would cost $700
million to convert Highway 24 into a four-lane road, so a truck by-pass of Liberty
has been proposed.48 Even with these improvements, trucks accessing to and from
the well sites will need to leave the state highways onto small county roads, and
the communities are not getting enough oil severance revenue to cover the costs.
The other strains on local services (e.g., schools, fire protection, health, etc.)
experienced by more established shale plays were not yet evident in the TMS
region. A housing shortage for workers was an issue that the county officials were
working on since area hotels were fully booked before the drop off in drilling. The
economic developers worked with the private sector to develop lodges for oilfield
and service workers. The water and sewer lines to the lodges were funded by local
governments and facilitated by the economic developers.49 Roads were the only
major public service that was seen as an issue by economic developers, but they
were aware from their own research and visits to other fracking regions that local
government could face challenges from a full shale boom.
The delay in the TMS will allow long-term planning and development of in-
frastructure such as roads. It is crucial for community leaders to take advantage of
this business-cycle-induced reprieve to do transportation and public service plan-
ning and preparation. The community needs to support counter-cyclical planning
and, given the nature of funding mechanisms (primarily tax revenues) and the de-
cision processes involved, leaders at the local, regional, and state level need to be
encouraged to be involved in a proactive and productive manner. However, before
these relationships between political leaders and the stakeholders in the shale
economy can bear fruit, economic developers need to intentionally educate and
inform all involved parties with regard to both macro-economic and micro-economic
realities and engage in real policy conversations that account for the latest data
projections related to the overall business cycles of the industries in the area.
The Indirect Nature of Job Creation in the Shale Economy: An emerging
reality in the shale economy has to do with job creation. Although shale plays
typically create many jobs, economic developers observe that there are a limited
number of jobs created directly from the drilling operations and most of the new jobs
are indirectly related to the shale economy. For example, when the shale boom first
reached the TMS region, economic developers aspired to create over 30,000 jobs in
214 THE JOURNAL OF ENERGY AND DEVELOPMENT

the region.50 With only around 18,000 workers in the three-county region, this was an
admittedly high goal to reach. The region was expected to replicate the direct, in-
direct, and induced job growth experienced in other shale regions such as North
Dakota. They were going to learn from the mistakes of these other regions to create
extensive jobs for local workers and mitigate the inflow of oil migrant workers.
However, an analysis of the secondary employment data for the TMS region
from 2010 to 2015 shows surprisingly little influence from fracking. The largest
job gains were in support of animal production (155 jobs added) and higher ed-
ucation (105 jobs added). Of the top 20 job-gaining industries, only pipe fitting (81
jobs added) was possibly a direct consequence of fracking (see table 5). “Support
activities for oil and gas operations” was the only industry directly related to
fracking that added jobs (table 5). The other fracking-related industries showed no
appreciable gains even with trucking included. Job growth across the board was

Table 5
TOP 20 INDUSTRIES FOR JOB GROWTH IN THE TUSCALOOSA
a
MARINE SHALE REGION, 2010-2015

2010 2015 5-Year


NAICS Description Jobs Jobs Change

115210 Support activities for animal production 31 186 155


903612 Colleges, universities, & professional schs. (local gov.) 214 319 105
336510 Railroad rolling stock manufacturing 0 94 94
722511 Full-service restaurants 344 437 93
492110 Couriers and express delivery services 21 112 91
113310 Logging 219 306 87
332996 Fabricated pipe and pipe fitting manufacturing 59 140 81
321113 Sawmills 444 522 78
551114 Corporate, subsidiary, and regional managing offices 91 149 58
611110 Elementary and secondary schools 198 246 48
562111 Solid waste collection 18 59 41
332321 Metal window and door manufacturing 221 261 40
311615 Poultry processing 1,398 1,436 38
326113 Unlamented plastics film & sheet (not packaging) mfg. 107 145 38
447110 Gasoline stations with convenience stores 379 407 28
621111 Offices of physicians (except mental health specialists) 282 309 27
722515 Snack and non-alcoholic beverage bars 27 53 26
115310 Support activities for forestry 20 44 24
453210 Office supplies and stationary stores 17 37 20
541370 Surveying and mapping (except geophysical) services 14 34 20
722513 Limited-service restaurants 838 858 20

a
gov. = government; mfg. = manufacturing; and schs. = schools.
Source: Economic Modeling Systems, Inc., “EMSI Developer,” available at http://www.
economicmodeling.com/
ECONOMIC DEVELOPMENT STRATEGIES & FRACKING 215

Table 6
OIL- AND GAS-RELATED INDUSTRIES’ EMPLOYMENT IN THE COMPARATIVE SHALE
a
REGIONS DURING THE FIVE-YEAR START-UP PHASE

TMS Bakken Marcellus


5-Year Job 5-Year Job 5-Year Job
Change Change Change
NAICS Description (2010-2015) (2008-2013) (2008-2013)

211111 Crude petroleum & natural gas extraction –21 1,481 1,088
213111 Drilling oil & gas wells 0 5,618 1,229
213112 Support activities for oil & gas operations 10 14,759 2,030
237120 Oil & gas pipeline & related structures const. 0 2,015 229
333132 Oil & gas field machinery & equip. mfg. 0 38 11
486110 Pipeline transportation of crude oil 0 100 14
486210 Pipeline transportation of natural gas 0 161 89
238910 Site preparation contractors 4 1,712 788
484 General freight trucking 29 271 –724
721110 Hotels and motels 9 1,173 –185
Total jobs 17,978 171,860 2,510,135
Total change in jobs –552 61,561 –11,070

a
const. = construction; equip. = equipment; mfg. = manufacturing; and TMS = Tuscaloosa
Marine Shale.
Source: Economic Modeling Systems, Inc., “EMSI Developer,” available at http://www.
economicmodeling.com/

less than in other shale plays at similar stages of development as can be seen from
table 6. Secondary data collected by Economic Modeling Systems, Inc. from the
Mississippi Department of Employment Security is often prone to reporting issues,
but it does indicate that direct job creation from fracking in the TMS is limited and
the employment impacts, if any, are predominately from indirect jobs.
The economic developers, as well, did not claim large direct job claims from
drilling, but did report indirect job claims. These new jobs came from suppliers
and the induced impact on hotels, restaurants, and other related industries. De-
spite the drillers originating from places as far away as Texas, one economic
developer noted a number of these oil field workers were originally from Mis-
sissippi and this was a chance for them to return to their state of origin. Examples
of suppliers being attracted to the region include Newpark Drilling Fluids, which
opened a warehouse and a potential drilling-fluids manufacturing facility that
will create 40 jobs, and Anchor Drilling Fluids, which is planning an oil-based
mud plant. The economic developers are aggressively trying to attract more of
the fracking supply chain to the region, but the job gains are not great given that
the drilling activities are primarily exploratory in nature. Further, there has not
been success in attracting the penultimate job creator, an energy-intensive
216 THE JOURNAL OF ENERGY AND DEVELOPMENT

manufacturer, or firms that use shale products as a manufacturing input in their


normal operations.
Taking a counter-cyclical perspective, economic developers should continue to
develop their relationships with the suppliers. They need to leverage supplier re-
tention programs to monitor for closure as well as cycle completion. As economic
developers typically seek firms with large work force needs, they should also work
to recruit firms that are energy-intensive so that proper advantage can be taken from
existing wells. Finally, firms that are more diversified are better able to handle
contraction periods, so these firms should be emphasized for new recruitment efforts
as well. Given the fact that many companies face some of their highest potential
controllable costs in the area of human resource management, a focus by economic
developers on countering the business cycles related to talent acquisition and work
force needs across a portfolio of recruited firms will likely benefit the entire region
in which a shale play exists while providing for the economy as a whole.
Need to Diversify from the Energy Supply Chain: The ideas undergirding
portfolio management can also be advantageous when considering the inherent
volatility associated with energy markets. The drop in oil prices and subsequent
reductions in fracking production made the TMS economic developers acutely aware
of the need for diversification. In 2015, energy extraction companies in the TMS
exploration announced major lay-offs in their shale extraction operations including
Schlumberger laying off 11,000.51 Planned supplier projects have been put on hold or
abandoned. CN’s planned frac sand transload terminal in McComb has been post-
poned. Suppliers who were looking to set up local offices are no longer calling, and
other projects have stopped entirely. Not directly TMS-related but tied to falling oil
prices, Delta-Energy Group LLC cancelled its $45 million investment in a Natchez
facility to make fuel oils from scrap tires for plastics and chemical makers.
If the economic developers want to have a diversified economy, the shale econ-
omy is an area where they likely have a good chance for competitive advantage.
However, developers must manage these factors related to the volatility of the energy
business as they seek to assemble a healthy and balanced portfolio of firms, and
diversification is a critical component of managing business cycles. Economic de-
velopers need to be vigilant and remain aware of the mix of industries in their region
and think of their companies as an investment portfolio.52 Just as the need to achieve
diversification in a personal financial portfolio, economic developers should strive to
have a diversified company portfolio for their community. In many cases, the survival
of the local economy depends on this.
Monitoring the Environmental Impact: Much like the survival of the local
economy, issues related to the survival of the natural environment weigh heavily
on the minds of many regional stakeholders in the shale economy. Although the
economic developers in the TMS area are certainly aware of potential environ-
mental issues, many did not seem particularly concerned. Consistent reports reveal
ECONOMIC DEVELOPMENT STRATEGIES & FRACKING 217

that they examined the problems faced in other shale regions during their fact-
finding tours and, generally, they tended to trust that the local industry would
abide by environmental standards and that these standards were sufficient. Many
developers are satisfied with the current regulatory environment. The industry is
tightly regulated at the state level by the Mississippi Oil & Gas Board and Mis-
sissippi Department of Environmental Quality and at the federal level by the Clean
Water Act, Clean Air Act, Safe Drinking Water Act, Superfund law, and other
regulations. Although environmental integrity is considered to be a shared goal
among the developers, the common refrain was, to paraphrase, “60+ years of
drilling and the water’s fine.”53
Although water management policies that are environmentally friendly are
portrayed as a competitive advantage of the region, there is a considerable amount
of water in the region that borders the Mississippi River, and the options related to
water access have not yet been optimized for best results. Although the growing
problem of water access could evolve into a competitive disadvantage, several ef-
forts have been undertaken to alleviate the problem. Amite County and Wilkinson
County have planned a two-county water district, funded by a surcharge on water
usage, to control the use of water that will be needed for fracking, and this will be
the nation’s first public water management district created only for fracking. There
is also a plan to build a pipeline to move treated sewage daily from McComb,
Liberty, Gloster, and other Southwest Mississippi communities for use in the
completion of wells.54 Currently, water is being pulled from surface sources (e.g.,
ponds and streams), but in the longer term, an aquifer below the drinking water
aquifer might need to be tapped. The region’s geography has injection zones sep-
arated from drinking water so waste water can be injected into old vertical wells
below the drinking water aquifer. This wastewater is heavier than freshwater and not
likely to migrate upward. The transportation of water will be within the region.
Non-water waste can also be disposed of within the region. Waste Management
out of its Madison (Mississippi) office has set up a one-stop-shop solution for the
handling, transporting, and disposing of soils, drill cuttings, and other solids
generated during the production of oil and gas in the TMS. They have built the
Plantation Oaks landfill in nearby Sibley to handle solid waste from the TMS.
Given that the general feeling among economic developers is that environmental
issues are being handled properly with no significant spills or other adverse events
to report, there is a low likelihood that their collective perspective will soon
change. However, the need to be proactive managers of shifting business cycles
requires policy positions and organizational cultures that enhance revenues and
minimize costs whether the local shale economy is in expansion or recession. To
that end, a strategic focus which minimizes long-term externalities in the natural
environment, regardless of how challenging it may be in the short-term, will likely
be advantageous for all stakeholders.
218 THE JOURNAL OF ENERGY AND DEVELOPMENT

Discussion of TMS Case Study: In considering the totality of responses from


the economic developers, a clear conclusion is that Southwest Mississippi is an area
desperate for economic development. In the beginning, the TMS play appeared to
be a panacea for the bleak economic conditions of the region. Although there were
signs of early promise and economic growth, the plummeting price of oil has dis-
rupted the economics of the project as a whole. The business model of the drillers
had been to prove the viability of the TMS and then sell-out to major energy-
integrated companies such as Chevron and ExxonMobil. Unless oil prices reach
over $80 per barrel again, this sell-out is not likely to happen. As a result, the drillers
are laying down rigs and divesting from the region. The supply chain has stopped
expanding in the region and the effect of induced gains is not perceptible. Although
the region never reached a true economic boom, it is now reverting to a state of
economic bust that plagued it previously.
Regions that have attracted the elusive energy-intensive manufacturers are less
impacted by the fall in oil prices. It means their manufacturers are able to lower
their costs of production and, in so doing, become more profitable. However, it is
difficult to attract these types of companies. The requirements for their site lo-
cations involve more than access to inexpensive oil and gas. They tend to seek all
the benefits of an industrial manufacturing cluster, but besides access to the raw
materials, rural regions like Southwest Mississippi lack these other desired as-
sets.55 Until the cluster factors (e.g., specialized work force, infrastructure, ag-
glomeration, etc.) are developed, the less cyclical energy-intensive manufacturers
will likely continue to bypass the region.
Barbash’s lessons for economic developers on the shale economy hold up for
the case of the TMS. Although not all the lessons were followed, the region would
have likely been better off if they were followed. Given the fact that the lessons are
better suited as general guidelines than actionable steps, processes that are specific to
communities in shale economies should be developed. For example, techniques that
attract drillers and suppliers in a specific way are part of a diversified business at-
traction plan. Also, economic developers face other issues such as identifying the best
ways to monitor environmental issues for externality mitigation or even the acqui-
sition and development of effective programs for creating, training, and sustaining
a talented regional work force. These are all items for which an organization such as
the International Economic Development Council (IEDC) can develop best practices
and specific guidelines, but there is also a great need for economic developers to learn
to think strategically about how to manage boom-and-bust business cycles.

Conclusion

Industries and firms of all kinds face periods of expansion and recession, and
a number of management principles have been developed to reduce the potentially
negative effects of these booms and busts. We contend that these principles of
ECONOMIC DEVELOPMENT STRATEGIES & FRACKING 219

business-cycle management (BCM) can be applied to issues of economic devel-


opment in shale economies. As we have highlighted above, these issues for de-
velopers include incentive structures, productivity enhancements, and work force
development strategies. Additionally, developers face concerns related to the lo-
calization of costs and revenues, the challenges of job creation, the need to pursue
diversification, and the importance of strategic environmental monitoring. Al-
though BCM is a relatively new discipline that has been mostly applied to the
private sector, related ideas such as product life-cycle theory and the need to di-
versify are already relatively well-known concepts with economic developers.
However, a tool like BCM, if specialized for the issues facing oil and gas firms
operating in the shale plays, could be a useful strategic guide particularly in re-
gions where fracking is likely to return once oil prices consistently reach levels of
approximately $75 per barrel.
A strategic guide for BCM implementation that has been growing in popularity
recently is the “master cyclist” framework.56 The master cyclist framework
identifies five important capabilities for firms. As translated and applied to eco-
nomic development, these capabilities would include the following:
1. Economic developers need “business-cycle literacy” and to develop a market
orientation for business attraction and expansion efforts.
2. Economic developers need to develop and utilize various forecasting tools.
3. Economic developers need to educate and inform the political structure on
macroeconomic conditions and projections.
4. Economic developers need to apply business cycle-sensitive management
principles.
5. Economic development organizations need an organizational culture that
supports business cycle-sensitive management activities.
Future research should elaborate on the specific processes and tactics necessary
to apply these strategic BCM principles to economic development. In the context
of developing shale economies such as the TMS play, BCM can help developers to
understand and eventually lead firms to best exploit the local economic conditions
(whether expansionary or recessionary) through proven counter-cyclical be-
haviors. These behaviors can be applied regardless of expected trajectories and
forecasts to gain competitive advantage.57 Ideally, economic developers could
leverage these ideas to curate a local shale economy that features firms that
simultaneously retain their competitiveness while pursuing cooperation toward
the achievement of common regional economic goals. Although this myriad of
tasks for the economic development of distressed regions is certainly complex
and challenging, the rewards are sure to be worthwhile and durable enough to
create a positive lasting impact which will benefit a variety of regional stakeholders
for decades.
220 THE JOURNAL OF ENERGY AND DEVELOPMENT

NOTES
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3
R. Holeywell, “North Dakota’s Oil Boom is a Blessing and a Curse,” Governing, August 2011.
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S. Tully, “The Shale Oil Revolution is in Danger,” Fortune, January 9, 2015.
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7
E. Dile, “Shale Energy: States’ Varied Approaches, Plus Lessons for Economic Developers,”
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8
T. Kurtz, “Fracking’s Downstream Impact: Balancing a Resurging Southwest Louisiana with
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9
M. Barbash, “Earth Day 2015: Lessons from the Shale Oil Economy,” Blog Post, April 20, 2015.
10
Ibid.
11
J. M. Barth, “The Economic Impact of Shale Gas Development on State and Local Economies:
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17
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20
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T. C. Kinnaman, op. cit.
22
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24
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27
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33
F. Mauro et al., op. cit.
34
M. Barbash, op. cit.
35
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36
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37
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38
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222 THE JOURNAL OF ENERGY AND DEVELOPMENT
39
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40
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42
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43
R. Turnham, op. cit.
44
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45
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47
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48
T. Carter, “Counties ‘Hoping to Get It Right’ as They Await Tuscaloosa Marine Shale Boom,”
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49
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50
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51
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52
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