In Shell Canada Limited v. Alberta (Energy), the Court of Appeal of Alberta (Court) upheld a judicial-review decision of the Court of King's Bench of Alberta quashing a decision of the Alberta Minister of Energy (Minister) under Alberta's oil sands royalty regime (OSR Regime). The Court's decision is the first appellate-level case to interpret the OSR Regime. The case illustrates that courts are willing to intervene in appropriate cases to ensure that the government treats energy industry participants fairly and reasonably.

This decision is part of a more significant trend of courts in Alberta holding administrative actors accountable for unreasonable or procedurally unfair decisions in the context of the OSR Regime. This appeal serves as a reminder that the judicial review process can be an effective oversight tool in supporting the proper implementation of the OSR Regime as between the province and industry participants who have invested billions of dollars in Alberta's economy.

Background

The OSR Regime allows oil sands producers to deduct reasonable costs in calculating royalties owed to the Crown. Certain employee costs are among the costs that can be deducted, including those that are "solely dedicated" to an oil sands project.

In this case, the Alberta Department of Energy (ADOE) disallowed certain employee costs of an operator. The basis of the ADOE's decision was that, while the costs were solely dedicated to a particular project, the subject employees had also performed work for other assets within the broader integrated operation within the same calendar year — which other costs the operator did not seek to deduct. The operator objected to the disallowed costs and initiated an administrative appeal. After significant administrative delay, the Minister issued a brief decision, concluding that Shell's position was "without merit" and refusing to convene a hearing about the issue before an independent and impartial tribunal, known as a Dispute Review Committee.

The operator successfully brought an application for judicial review of the Minister's decision. The Alberta Court of King's Bench in Shell Canada Limited v. Alberta (Energy) concluded that the operator's position had merit and a hearing before the Dispute Review Committee was legally required. The Minister appealed this decision.

Decision

The Court first reviewed the purpose and context of the OSR Regime and framed the question before the Court as whether it was reasonable for the Minister to exercise the statutory gatekeeping function to screen out the operator's position as frivolous, vexatious or without merit. In deciding that the Minister's decision was unreasonable, the Court applied the framework for judicial review from Canada (Minister of Citizenship and Immigration) v. Vavilov. It emphasized that in circumstances where an administrative decision-maker issues written reasons, the Court will seek to develop an understanding of the decision-maker's reasoning process to determine whether the decision as a whole is reasonable.

Applying this analytical process to the Minister's decision, the Court concluded:

The Minister's reasons do not explain the analysis undertaken or test applied to determine that Shell’s position was "without merit." The reasons simply repeat the department's position that Shell's interpretation was "inconsistent with the regulations as written." The reasons do not disclose the reasoning process that led to that conclusion, fail to address the context and purpose of the regulations and, in the result, do not bear the hallmarks of reasonableness — justification, transparency and intelligibility.

While the Court noted that it is often appropriate to remit a matter back to an administrative decision-maker to reconsider the decision with the benefit of the court's reasons, it declined to do so here. In these circumstances where the Minister took almost three years to respond to the operator's request that a Dispute Review Committee be convened, the Court found it was appropriate to declare that a committee must be established.

Conclusion

The specific regulations applicable to individual industry participants seeking cost recognition for the purposes of royalty calculations will be case specific. However, this case stands as an appellate-level precedent supporting the emerging trend of Alberta courts intervening to guard against decisions by government officials that are unreasonable or procedurally unfair. Further, it reminds parties that Alberta must approach its mandate of managing royalties reasonably because 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.

Finally, the Court’s decision to not remit the matter for reconsideration, partly on the basis of the administrative delay, serves as a welcome reminder that Alberta's royalty regime is designed to ensure an expeditious and fair process.

Blakes acted in this appeal for the successful respondents, Shell Canada Limited and Shell Canada Energy.