Alberta Court Overturns Ministerial Decision on Oil Sands Cost Recovery
March 19, 2019
On judicial review, the Alberta Court of Queen’s Bench overturned a ministerial decision of the Alberta Department of Energy (ADOE) regarding costs incurred by an oil sands project owner in Fort Hills Energy Corporation v. Alberta (Minister of Energy). The case was decided on a standard of reasonableness and is the first to interpret and articulate the underlying policy of some of the relevant cost recovery rules.
The court found that the Minister of Energy’s decision to disqualify C$791,831,844 in project development costs incurred by the project owner was unreasonable and quashed the Minister’s decision on this point. There is no appeal pending and the period of appeals has expired.
The case illustrates that the interests of oil sands investors in cost recovery are just as important a consideration as the Crown’s royalty rights and thus the Minister must take into account the producer’s rights and expectations. Further, the court’s decision to order that a fresh government team must be appointed to engage in any further review or audit of the costs may be of considerable interest to industry players concerned about entrenched government decision-makers.
The case concerned the applicant’s claim for recognition of certain development costs of the Fort Hills oil sands project. Approval of such costs is important to producers because they determine the date upon which a project owner is said to have fully recovered its development costs, which in turn triggers substantial royalty increases payable to the Crown.
In this example, the Minister had initially adopted a position that only C$33-million in costs were eligible, later revising that position to zero. Under the Oil Sands Royalty Regulation, such costs were potentially recoverable provided they were incurred during a period when the project was not “substantially suspended”, which was the main issue between the parties.
The court noted that no prior court had considered the underlying policy, object and purpose of the statutory and regulatory regime. However, the court did review prior findings by the Oil Sands Dispute Review Committee, which considers disputes concerning allowed costs between producers and the Alberta government prior to an application for judicial review before the courts. The Alberta Court of Queen’s Bench adopted a balanced interpretation of the underlying intentions of the regime, but one which recognized the interest of industry, for example:
We must remember that the whole idea behind these provisions is to ensure that the developer is entitled to recover its costs of developing an oil sands project before it is required to pay an enhanced royalty to the Crown. OSRR ’09 is, however, structured in such a way to ensure the developers are encouraged to develop the oil sands project in a timely manner and to ensure that the Crown is not required to bear costs that do not advance the oil sands project. Taking a ‘pragmatic and functional’ approach, this Court is of the view that what the Operator was doing in the case at bar during the 3-year period was advancing the FHOS Project…Thus, the decision under OSRR’ 09… was unreasonable.
The court found that the Minister’s conclusion that the project had been suspended was not supportable in circumstances where the true objective of the proponent was to reassess the project following a significant merger in 2008 and to re-evaluate the economics of the project in a period of major energy market upheaval. On the facts, the court refused to equate these prudent steps with a suspension of the project.
Therefore, the court quashed the decision regarding costs and the matter was remitted back to the Minister to determine eligibility in accordance with the principles and findings set out in the decision.
Furthermore, the court directed that in the event the Minister chose to refer the matter back to the ADOE for further assistance in reviewing the costs, the personnel reviewing the matter should be different from the personnel who reviewed the matter in the first instance.
The regulations applicable to individual industry players seeking cost recognition will change from case to case, but the general interpretive principles proclaimed in the case likely have broader application. The case stands as a precedent for the position that the interests of a project proponent in recovering the costs of large infrastructure projects are just as important as the interests of the Crown in recovering royalties.
The court’s willingness to carefully assess the matter on the standard of reasonableness, which under Canadian law typically involves a large measure of deference to ministerial or other governmental authority, sets it apart from many other judicial review cases.
Lastly, the court’s direction that fresh eyes must be brought to bear in the event of a successful challenge to a ministerial discretion may be a welcome development for industry players in circumstances where the findings of prior government representatives may be perceived as inflexible.
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