Alberta Court Declares Ministerial Decision Under Oil Sands Royalty Regime Unfair and Unreasonable

In a judicial review, the Alberta Court of King’s Bench, in Imperial Oil Resources Limited v. Alberta (Minister of Energy), overturned decisions (Decisions) made by a delegate of the Minister of Energy, the Director of Dispute Resolution for Alberta Energy (Director). The Decisions related to the costs incurred by an oil sands project owner and their treatment under Alberta’s oil sands royalty regime (OSR Regime).

This decision reinforces that administrative actors will be held accountable for unreasonable or procedurally unfair decisions in the context of the OSR Regime. To learn more about the cases discussing the emerging judicial trend, see our previous March 2019 Blakes Bulletin: Alberta Court Overturns Ministerial Decision on Oil Sands Cost Recovery and our October 2023 Blakes Bulletin: Alberta Court of Appeal Upholds Quashing of Ministerial Decision Under Alberta Royalty Regime.

Background

Imperial Oil Resources Limited (Imperial) challenged multiple decisions of the Director, disallowing various cost claims associated with the project. The OSR Regime permits cost recovery only for specifically allowed, fundamental or minister-approved costs that are adequately documented and not expressly excluded. The disallowed costs pertained to an assessment of several of Imperial’s claimed costs, including the allocation of centralized personnel costs, information technology expenses, research and development costs, and contract fees with third parties.

Imperial argued that Alberta Energy’s audit process and the subsequent Decisions were procedurally unfair and substantively unreasonable under the OSR Regime. At issue was whether the Director’s decisions to disallow the claimed costs were justifiable and whether the audit decisions reasonably interpreted the regulatory framework intended to balance Crown revenue interests with investment incentives for oil sands development.

Decision

In this case, Alberta Energy auditors disallowed C$77-million worth of deductions for the period between 2009 and 2012 for Imperial’s project. Imperial claimed that the audit and dispute resolution processes were not procedurally fair because two of the audits had been closed early, two of the audits relied on extrapolated data, and the Director had issued different reasons than the auditors to disallow the costs.

Imperial was successful on several key issues. The Court reaffirmed that the applicable standard of review is reasonableness and that the duty of fairness owed to Imperial as part of the dispute resolution process is low. The Court noted that despite the low level of procedural fairness required, Alberta Energy is not entitled to circumvent the procedural rights of resource developers.

The Court followed the framework set out in Canada (Minister of Citizenship and Immigration) v. Vavilov and assessed the reasonableness of the Director’s decision related to certain corporate allocations, procurement and personnel costs, and research and technology costs. Following this approach, the Court determined that:

• The Director breached the low level of procedural fairness owed to Imperial when they relied on new reasons for disallowing the claimed costs without giving Imperial a reasonable opportunity to respond.
• The Director’s decisions were unreasonable because they were inadequately explained, misapplied regulatory definitions or failed to consider relevant evidence.
• The Director unreasonably dismissed Imperial’s longstanding use of a corporate allocation plan for cost apportionment, which had previously been accepted under Alberta’s own Dispute Review Committee. The Court found that this was contrary to the reasonable expectations of the parties.
• The Director’s Decision to exclude from review the documents (which had not been available to the auditors) that Imperial provided in support of its claims that specific roles were fundamental was entitled to deference. The Court found it was a reasonable application of the mandatory rule that does not permit the Director to request or consider any additional information.

Conclusion

This case reinforces the importance of transparent, rational and procedurally fair reasoning in administrative decision-making under Alberta’s OSR. The Court signalled that while courts owe deference to the Director under the reasonableness standard, it is not a rubber stamp. This is even more vital where administrative decisions fail to engage meaningfully with the regulatory framework or parties’ submissions. The ruling also includes a critical reminder to oil sands project owners that mandatory wording in a statute will be interpreted strictly and that failing to provide complete supporting documentation during the audit phase will preclude its consideration by the Director, regardless of its potential relevance or the merit of the claimed costs.

For more information, please contact the authors or any other member of our Litigation & Dispute Resolution group.