Executive Summary: Key Legal and Evidentiary Issues

• Alberta Energy’s reliance on extrapolated data for 2010–2012 audits instead of full assessments led to fairness concerns, but was deemed procedurally fair given the low standard applied.

• The Director’s introduction of new disallowance grounds, particularly regarding IT costs under Item 40, without prior notice to Imperial, was found to breach procedural fairness.

• Dispute centered on whether specific centralized cost allocations met the criteria of “allowed costs” under OSACR, particularly when employees were not “solely dedicated” to the Cold Lake project.

• The rejection of Imperial’s long-standing corporate plan allocation method was unreasonable, given prior acceptance by the Imperial DRC and lack of sufficient justification for deviation.

• The Director’s rationale for disallowing certain controller and procurement personnel costs was found to be unreasonable due to misclassification and inadequate evidentiary analysis.

• Multiple issues, including Worley Parsons contractor fees and Noetic Engineering research costs, were remitted for reconsideration due to insufficient or flawed reasoning by the Director.

Background and procedural history
Imperial Oil Resources Limited filed for judicial review of four decisions made by the Director of Dispute Resolution for Alberta Energy. These decisions, dated February 3, March 2, and March 9, 2020, pertained to Alberta Energy’s audit findings for Imperial’s Cold Lake Oil Sands Project from 2009 to 2012. Alberta Energy had disallowed numerous cost claims affecting royalty calculations, leading Imperial to challenge the procedural fairness and reasonableness of the decisions.

Regulatory framework and audit process
The dispute arose under Alberta’s oil sands royalty regime, primarily governed by the Oil Sands Allowed Cost (Ministerial) Regulation (OSACR). According to OSACR s 3(1), a cost is allowable if it is reasonable, incurred for project operations, and adequately evidenced to the satisfaction of the Minister. Schedule 1 of OSACR outlines “specifically included” and “specifically excluded” costs. Alberta Energy’s audit process required Imperial to substantiate its reported costs through documentation, with final determinations issued via Notices of Determination.

Imperial’s objections and procedural fairness issues
Imperial raised three key concerns:

1. The abrupt closure of the 2009–2011 audits, claiming insufficient time to respond.

2. The use of extrapolated data from 2009 and 2012 for the 2010 and 2011 audits instead of individual year assessments.

3. The Director introducing new grounds for disallowance—such as reclassifying IT costs under OSACR Item 40—without prior notice.

The Court found that while the audit process only required a low degree of procedural fairness, the dispute resolution stage demanded more. The Director’s use of new grounds without informing Imperial breached fairness obligations.

Disputed costs and regulatory interpretation
At issue was whether certain cost categories met the definition of “allowed costs.” These included:

• Controller salaries (2009 – Issue 23): The Director wrongly classified their duties as “accounts payable or office support.” The Court found the job titles (e.g., Revenue Support Analyst, Inventory Analyst) did not align with this exclusion and remitted the issue for reassessment.

• Research & Technology employees (2009 – Issue 17, 2012 – Issue 8): The Director reduced internal charge-out rates without sufficient reasoning. He accepted salary costs but denied related costs (e.g., IT support) without justifying the basis for disallowance.

• Procurement and HR costs (2012 – Issue 2 and 4): Disallowed based on job titles indicating managerial roles. The Court upheld this where evidence was lacking but criticized the misinterpretation of OSACR Item 31 regarding warehouse staff.

• Corporate allocation via Imperial’s corporate plan (2009 – Issues 14, 25; 2012 – Issue 20): The Director rejected the use of corporate plan allocations without addressing prior approval from the Imperial DRC. The Court ruled this was unreasonable and directed the Director to accept Imperial’s methodology.

Contractor and affiliate charges

• Worley Parsons contractor costs (2009 – Issues 16, 21): The Director’s rejection of 45% of costs due to lack of differentiation between Imperial employees and contractors was found unreasonable. Imperial had provided spreadsheets distinguishing the two, and auditors failed to follow guidance in Oil Sands Information Bulletin 2013-14, which endorsed respect for third-party contracts.

• Affiliate employee costs (2009 – Issues 19, 36; 2012 – Issue 20): Disallowed due to insufficient documentation despite PwC certification of cost-based charges. The Court upheld the disallowance, noting PwC certification did not exempt Imperial from proving cost eligibility.

Other specific issues

• Information Technology allocations (2009 – Issue 7; 2010 – Issue 3; 2011 – Issue 8; 2012 – Issue 17): The Director’s new reliance on Item 40 (corporate overhead) was not communicated to Imperial beforehand. This procedural lapse led the Court to remit these issues.

• Transmission line survey costs (2009 – Issue unspecified): The Court found insufficient clarity on whether the line was for exporting or importing electricity. The issue was remitted for factual clarification.

• Noetic Engineering Study: Disallowed on the basis that it was not “exclusively dedicated” to Cold Lake. The Court questioned whether this applied to personnel or facilities and remitted for reevaluation under OSACR Item 56.

• US benefit rates: The Court could not verify if Imperial had substantiated higher US rates due to an incomplete record. It directed a fresh review of the paystubs submitted.

Conclusion and directions
Justice Feasby ruled that several decisions lacked intelligible justification or breached procedural fairness. He remitted multiple issues for reconsideration by the Director, including those involving charge-out rates, allocation methodology, IT costs, and certain specific personnel categories. The reassessments were ordered to proceed promptly given the age of the audit years (2009–2012).

There is no single outright successful party. The Court partially granted Imperial’s judicial review application, ruling that:

• Some of the Director's decisions were unreasonable or procedurally unfair, especially where new grounds were introduced without notice.

• Multiple issues were remitted back to the Director of Dispute Resolution for reconsideration with the benefit of the Court's reasons.

Thus, Imperial Oil Resources Limited had partial success, achieving a reassessment of several disputed cost items but did not obtain full relief.