'Beverly Hills" is the pride of Fort McKay.

A building boom is under way on this street of stylish new houses, nicknamed after one of America's wealthiest cities. It's a required stop for every visitor to this First Nation reserve smack-dab in the middle of Alberta's oil sands region.

Cobblestone driveways, stainless steel appliances and spacious decks are standard features of the roomy homes. One street over, painting crews are finishing the interiors of another set of new houses as heavy-duty vehicles pack dirt at the next building site. The goal is to get Fort McKay First Nation residents out of the hamlet's old trailers and houses and into 100 new homes in the next four years.

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"People come to McKay, and they say it doesn't even look like a reserve," boasts Fort McKay Councillor Gerald Gladue.

The burgeoning prosperity in Fort McKay is a direct result of the community's embrace of the nearby oil sands industry. A host of First Nations-owned businesses that work with energy companies create over $100-million of annual revenue for the 700-person community located 65 kilometres north of Fort McMurray. Unemployment is negligible.

In recent years, Fort McKay has built an indoor hockey arena, and with the help of Royal Dutch Shell PLC, a large building for daycare and the reserve's elders. Future building plans include water and sewer upgrades, stone paths and a 1,800-person amphitheater. Fort McKay has few signs of the poverty that besets other Canadian First Nations.

But the economic progress has come at an environmental cost. Dene and Cree Fort McKay members say the Athabasca River that flows next to their community is too polluted to drink from, the fish are too contaminated to eat and the surrounding boreal forest has too many oil sands mines, roads and gates to hunt freely.

"Every direction you look, you see industry," says long-serving Fort McKay Chief Jim Boucher.

Now the Fort McKay First Nation has drawn a line in the oil sands. The band is taking legal action to block development of a key part of the proposed Dover oil sands project adjacent to an expanse of reserve land called Moose Lake used for hunting and trapping. The land is sacred territory, Chief Boucher says, part of the band's last areas not hemmed in by oil sands developments.

Taking its fight to the Alberta Court of Appeal, the Fort McKay First Nation wants to create a 20-kilometre buffer zone on property leased by the Dover project, controlled by global energy giant PetroChina Co. Ltd., and approved for development by Alberta's energy regulator.

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A ruling in Fort McKay's favour could block development of a rich segment of Dover's bitumen reserves. And it could force the province's energy regulator to consider how oil sands projects affect constitutionally protected First Nations' rights to hunt and fish in their traditional territories, on and off reserve land – and tip the scales in favour of First Nations when it comes to Canadian land-use disputes in Alberta and beyond.

For the energy industry, the widely watched case is pivotal. The legal proceedings initiated by Fort McKay threaten to spill out into the wider world of energy development, and serve as a risk to the oil industry's growth plans for years to come.

Energy companies have invested hundreds of billions of dollars to unlock the 168 billion barrels of reserves in Alberta's oil sands, and are increasingly pushing into vast stretches of frontier territory to do it. Such new projects are essential for the industry to meet its ambitious objective of doubling daily oil sands production to more than four million barrels of crude a day over the next 10 years.

And that rising output is key for the Canadian economy, which relies on a vibrant western energy industry to create jobs and wealth as the country strives to be a fast-growing energy power.

To many, Fort McKay's opposition is a wake-up call to the oil and gas industry, as well as federal and provincial governments, that First Nations' concerns must be resolved for the industry to progress.

"If we can't work things out with Fort McKay, it's going to be much more difficult to find accommodation with the next batters up. And there's a long list of those First Nations," said Bill Gallagher, a lawyer who examines conflicts between First Nations and energy developers.

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In Alberta, the list includes Beaver Lake Cree First Nation, which is arguing a Court of Appeal case that the cumulative effects of hundreds of oil sands and other industrial projects have eroded its ability to hunt, fish and trap. The Athabasca Chipewyan First Nation, which has taken legal action against both companies and governments in the past, says a ruling in favour of Fort McKay would help potential legal challenges of Shell's expansion plans at its Jackpine mine project, or oil sands projects north of the Firebag River. It describes the lands there as "cultural protection areas" – including Teck Resources Ltd.'s proposed Frontier project and Shell's Pierre River project.

"If Fort McKay can set precedents for what's necessary to preserve their cultural rights, it strengthens our arguments," said Eriel Deranger, a spokeswoman for the Athabasca Chipewyan.

A number of other companies, including Sunshine Oilsands Ltd. and its large-scale West Ells development near the Moose Lake reserve, could also be affected by a buffer zone.

Surrounded by industry

On a riverfront street in the hamlet of Fort McKay, band member Lee Wilson says the rest of Canada should be watching to see what will result from the First Nation's legal challenge. He believes the result will set a precedent for cases having to do with industry encroachment on treaty lands.

But for him, the case is personal. He says he needs the peace and quiet of Moose Lake – officially called the Namur Lake reserve lands – where there's a smattering of cabins, clean water, plentiful fish, and a high-quality moose and caribou habitat.

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"The reason why we go up there is basically to get away from the situation here in Fort McKay, because there is really no place else to go."

The hamlet of Fort McKay has Suncor and Syncrude mines directly to the south. The Shell-controlled Muskeg River and Jackpine mines are to the east. Canadian Natural Resource Ltd.'s Horizon project is north. And to the west, Total SA's Joslyn North Mine is under construction.

Looking out the front window of his bungalow, Mr. Wilson can see the night sky glowing from the lights of the oil sands operations, many within a 20-kilometre radius. During bird migration periods in the late fall and early spring, the cannons that are used to scare the fowl away from tailings ponds are heard on a regular basis.

"The cannons sound like gunshots going off every two minutes ... Boom, boom, boom. All day, all night," Mr. Wilson, 41, says sitting in his kitchen.

"If you drive around at night, it's like a whole bunch of little cities all over the place."

At the same time, Mr. Wilson is a busy partner in a trucking and fluid hauling company that services the oil sands industry. He says he understands the economic importance of the oil sands.

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"It not only feeds our economic prosperity and growth, but it feeds the rest of Canada," he says.

But Mr. Wilson is disheartened that oil sands mines have eaten up his community's best hunting and trapping grounds. When he wants to escape to the wilderness, he says it's difficult to get through oil sands security checkpoints and gates.

The father of five is also concerned about the health of Fort McKay members, living so close to oil sands mines, and playfully dares you to drink the tap water given that many houses in the hamlet are stocked with bottled water.

That is why Moose Lake is so important to band members. In October, the Alberta Court of Appeal surprised many industry watchers when it gave Fort McKay the nod to appeal the Alberta Energy Regulator's (AER) decision to approve the Dover project.

Economic benefits

Fort McKay says it's not against the project as a whole, but wants the buffer zone to include what is now the proposed northern section of the Dover project, which is being developed by Brion Energy, a joint venture between PetroChina and Athabasca Oil Corp.

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Brion Energy and the Alberta Energy Regulator say that's the location of the highest-quality bitumen reservoirs. The company said more than one-third of the predicted 4.1 billion barrels of bitumen to be produced over the Dover project's 65-year lifespan will come from the northern part of the project area.

Like most firms breaking ground on new oil sands operations today, Brion Energy will use steam-assisted gravity drainage (SAGD) technology, which sees bitumen extracted through steam injection and oil recovery at well sites, and doesn't require the land to be dug up and disturbed the same way oil sands mining does. Brion has also committed to a number of environmental measures, including minimizing light pollution, and helping to reclaim caribou habitat outside of its lease zone.

In its decision report released in August, the Alberta Energy Regulator agreed that there could be a negative impact on wildlife, and traditional land uses in the area, but said given that cabins on Moose Lake are more than eight kilometres away from Dover's industrial activities, community members are unlikely to hear, smell or see project-related activities. The regulator came down in favour of the project.

"The economic benefits are so significant that despite the social and environmental impacts described by the parties, the positive aspects of the project outweigh the negative impacts," the energy regulator said in its decision.

Brion Energy said it's continuing to work to find a resolution that's acceptable to both parties.

"We have been in extensive discussions with Fort McKay to more fully understand their concerns and want to develop a long-term relationship based on mutual respect," Brion spokeswoman Kristi Baron said in an e-mail.

The regulatory hearing and legal manoeuvring around the project has hurt the stock price of Athabasca Oil, which owns 40 per cent of the Dover project. PetroChina owns 60 per cent of Dover and is expected to take full control through an option arrangement once the project clears regulatory hurdles.

"The Alberta Court of Appeal's decision granting the Fort McKay First Nation (FMFN) the right to challenge the AER on constitutional grounds is significantly negative for Athabasca and potentially sets a concerning precedent for the industry, increasing the risk of project approvals or delays in the regulatory process," wrote RBC Dominion Securities Inc. analyst Mark Friesen when the court made its decision in October to hear the case.

Conflicted

Many band members struggle with the fact that over the decades, the people of Fort McKay have gone from berry picking, hunting and trapping to being boxed in by oil sands projects – and enjoying great financial rewards while being a part of the industrial apparatus.

"We are what we are," Chief Boucher says. "Of course you're going to be conflicted."

But the wealth in the community is a significant point of pride, and Fort McKay has progressed quickly in recent decades.

Former Chief Dorothy McDonald-Hyde – one of the first women to lead an Alberta reserve – had the foresight to establish the Fort McKay Group of Companies in 1986. The 100-per-cent First Nation-owned group of companies is now involved in construction, road maintenance, fuel supply and hauling, industrial parks, and in conjunction with Syncrude Canada Ltd., operates the Beaver Creek Wood Bison Ranch, where buffalo have roamed on reclaimed oil sands land for 20 years.

The First Nation has backed its housing and community-building boom with funds from the Group of Companies, with revenue Chief Boucher pegs at around $120-million last year, and joint ventures. The band also receives money from long-term agreements – up for negotiation every five years – with nearby oil sands operators for their presence in traditional territory, although those funds have to be directed toward community facilities. Transfers from the Department of Aboriginal Affairs now make up less than 4 per cent of the Fort McKay's total budget, according to reserve officials.

Fort McKay is now in a similar position to the oil sands companies themselves – facing a labour shortage. To help with that dilemma, the First Nation has flown in dozens of construction workers from the Blood tribe – a large, southern Alberta band with high unemployment – and plans to make similar arrangements with other aboriginal communities.

The Fort McKay First Nation already has a close relationship with its Métis neighbours. Just steps outside the First Nation reserve boundaries sit the Fort McKay Métis Community office, the centre of the community for 83 Métis members. The two communities are closely linked with both familial relationships and finances.

There, sentiment about Moose Lake is more strident. Métis president Ron Quintal says Fort McKay has already "given, given, given" to industry.

"Our traditional territory has been completely wiped off the map," Mr. Quintal says.

While Chief Boucher talks of court cases and negotiations, Mr. Quintal says the community is on edge over Moose Lake.

Oil sands developers "will never get close to that area. The community is at a point where they would go Oka," he says, referring to the violent 1990 land dispute between Mohawk people and the town of Oka, Que.

Mr. Quintal later gave a more detailed explanation regarding his comments in an e-mail: "If the community exhausts all legal and political options in trying to protect Moose Lake, the community would be prepared to take a stand, whether it be peaceful or a standoff. God forbid that anyone get hurt. However stopping development in this area is so crucial that the community would be prepared to protect it themselves."

While speaking vehemently about Moose Lake, Mr. Quintal spends much of his time and energy focused on the community's oil-related business ventures and following the First Nations lead in building houses for the Métis community members.

Mr. Quintal's Métis community is equally ambitious as the First Nation, and has plans to break ground on a hotel and conference centre within two years, and eventually build a strip mall.

"What we're trying to do is make Fort McKay as completely livable as possible," Mr. Quintal says.

The way forward

For the energy industry, finding resolution with First Nations starts with engagement.

Canadian Association of Petroleum Producers president David Collyer, a former Shell executive, spent a number of years working with Chief Boucher. He said they didn't always agree, but they always had a good working relationship. The dispute over Dover is an issue for the industry, he said.

"Any time that we have differences with somebody like Jim, it's a cause for concern," he said. "I think he's been a very balanced First Nation leader with respect to the oil sands industry," Mr. Collyer said. "What I would encourage is for all the parties concerned to try to find a constructive way through it."

But, he noted, business often wants to move quickly with projects, he said, while "First Nations want to take the time. And we need to understand that there's a need to take the time to develop the relationship, to build the trust."

A report by energy, environmental and First Nations leaders released this week warned that bitter conflicts across Canada are "leading us towards energy resource development gridlock." The report said First Nations need to be consulted well in advance of applications being filed for project approvals, and discussions should address the total increase of resource development on traditional lands, not just the effects of a specific project. The report also endorsed aboriginal demands that they see greater benefits from resource development, including some form of revenue sharing.

Another report, by Douglas Eyford and commissioned by Ottawa, said First Nations need "a real stake in regional economies," and "to foster inclusion, aboriginal employment and business opportunities must translate into real jobs and successful businesses."

In an interview, Alberta Energy Minister Diana McQueen – who served as environment minister up until Friday, but was moved to the energy portfolio in a cabinet shuffle – would not comment on whether cabinet will move to approve the Dover project before the court appeal plays out, but said the government and Fort McKay have had a good working relationship in the past.

"We value working with the chief, and trying to find the balance for the multiple land uses," Ms. McQueen says. "First and foremost is to find out from the chief what are his concerns, and then to see if there's an opportunity for solutions."

But there's little sign Fort McKay is going to compromise when it comes to protecting Moose Lake. While the past two decades have seen the community embrace the business opportunities that come with living in the midst of one of the world's largest oil-producing regions, they maintain they didn't choose the oil sands, the oil sands chose them.

Earlier this year, Mr. Gladue, a hunter and band councillor, spoke about Moose Lake being Fort McKay's last wild retreat at a hearing on the project in Fort McMurray. He asked the Alberta Energy Regulator's three panel members to carefully consider the band's request for the buffer zone.

"They have chopped off our arms and our legs. Now they are going for our heart."