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A worker on an Athabasca Oil Corp. oil rig.

Handout/Athabasca Oil Corporation

The Fort McKay First Nation has settled its long-standing dispute about Alberta's Dover oil sands property, bringing the controversial project a step closer to provincial approval and full control by PetroChina Co. Ltd.

The Dover in situ project – operated by Brion Energy Corp., a joint venture between Athabasca Oil Corp. and the Canadian subsidiary of PetroChina – is slated to produce 250,000 barrels of bitumen per day north of Fort McMurray, an area crowded with oil sands projects.

The Fort McKay First Nation held up development of the project as it disputed the size of a environmental buffer zone between the Dover project and an expanse of reserve land known as Moose Lake. Fort McKay community members use the Moose Lake reserve lands for hunting, trapping and fishing, and say its one of the last remaining bits of wilderness around its traditional area. They requested a buffer of at least 20 kilometres between the reserve and any bitumen operations.

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On Friday, the First Nation said it reached a pact with Brion and agreed to remove its objections as they pertain to the Alberta Energy Regulator's approval of the project. Athabasca Oil shares jumped more than 11 per cent on the Toronto Stock Exchange on Friday.

The deal is an example of how First Nations can find agreement with oil sands operators as the growing industry expands its reach in Northern Alberta, raising concerns about the effects of bitumen production on water, wildlife and communities.

The deal comes at a time of growing disputes about Canadian resource projects. Companies developing oil properties and pipelines are often at odds with First Nations and environmental groups that aim to block them or to ensure environmental risks are kept to a minimum.

"We've managed to reduce the significance of their development on our First Nations' lands," said Fort McKay Chief Jim Boucher, whose 700-member community is located 65 km north of Fort McMurray. "The offshoot of the agreement is that they're allowed to proceed with development."

In an interview, Chief Boucher said he views the deal as "a good model for us to follow with respect to other companies that may be operating within our territory."

In 2010, PetroChina bought 60 per cent of the Dover oil-sands project. The agreement had a put/call option, allowing either side to trigger the sale of the remaining 40 per cent after regulatory approvals, giving PetroChina full control of the project. Athabasca investors have anticipated proceeds from the Dover sale will be used to finance the company's other operations.

Almost all Alberta energy projects are given the green light by the provincial government once they are approved by the Alberta Energy Regulator. Brion's Dover project got the go-ahead from the regulator last August, but has yet to receive final approval from the provincial cabinet.

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That state of limbo for Athabasca Oil intensified last fall when its stock dropped after the Alberta Court of Appeal granted the Fort McKay First Nation's leave to appeal the energy regulator's approval of the project.

Chief Boucher said the specifics of the deal with Brion are confidential. However, he said the "realistic" agreement includes a buffer zone for some activities – such as well pads – of approximately three to five kilometres, as long as environmental risk assessments are completed. No industrial plants will be allowed within 13 km of the reserve boundaries.

Brion spokeswoman Kristi Baron said the deal focuses on the ability of Brion to develop the resource, the protection of both the environment and Fort McKay's traditional activities on the land. The company will also help Fort McKay First Nation in the community's business ventures, including its oil-sands servicing companies that generate more than $100-million of annual revenue.

The PetroChina arrangement to take over the Dover project was signed before Ottawa brought in new restrictions on foreign investment in the oil sands.

"The put/call is something that our shareholders are going to have to decide upon," Ms. Baron said. "We're waiting to hear from Athabasca Oil Corp. and PetroChina."

But RBC Dominion Securities Inc. analyst Mark Friesen said the fact that the Fort McKay First Nation is removing all of its objections to the energy regulator's approval of the Dover project presumably clears the way for regulatory approval and settlement of the Dover put option.

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"While we believe a positive settlement of Dover has largely been priced in to the stock, this is positive in that ultimately should lead to receipt of the Dover proceeds of $1.32-billion which improves the company's financial liquidity," Mr. Friesen wrote in a note.

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