East Java: Increasing Mudflow Threatens

UNCLAS SECTION 01 OF 06 JAKARTA 011110

SIPDIS

DEPT FOR EAP/MTS AND EB/ESC/IEC
DEPT PASS OPIC, EXIM, TDA
DOE FOR CUTLER/PI-32 AND NAKANO/PI-42
COMMERCE FOR USDOC 4430

FROM AMCONSUL SURABAYA # 2121

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV EPET PGOV ID
SUBJECT: East Java: Increasing Mudflow Threatens
Infrastructure and More Homes

Ref A: JAKARTA 7839, Ref B: JAKARTA 8250


1. (SBU) SUMMARY: The flow of mud from the fractured
well owned by PT. Lapindo Brantas (Lapindo),a Bakrie
Group controlled entity, in Porong, East Java continues
to increase, reaching volumes as high as 500,000 cubic
meters per day in early August, and has flooded more
than 450 acres, destroying thousands of homes and
dozens of businesses and displacing 10-12,000 local
residents. President Yudhoyono visited the site in
early August to personally assess the situation and
urge action by Lapindo. ConGen Surabaya estimates
economic losses to East Java at USD 1 billion and
rising. Bank Indonesia (BI) Surabaya confirms an
increase in non-performing loans in the province during
June and July due to a 35-40% business downturn. The
Central and local governments' response has been
limited to pressuring Lapindo to solve the problem
quickly. Local leaders are at a loss at what to do
next other than pin the blame squarely on Lapindo
management and try to avoid financial assistance to the
victims. This case is being watched closely not only
in East Java but throughout Indonesia and in the
extractive industry community, both in terms of its
economic impact and in Indonesia's legal response to
this clearly man-made disaster. END SUMMARY

Current Situation
--------------


2. (SBU) The Porong, East Java gas well drilling
accident caused by PT Lapindo Brantas (Lapindo) in May
and reported in Refs A and B continues to produce
increasing amounts of noxious mud, threatening the
province's major transportation corridors and water
supply. The fractured well is located only 40 yards
from the main north-south toll road carrying much of
the goods and produce from southern East Java to the
transportation and manufacturing hub of Surabaya. The
well site is enclosed in a triangle by the toll road to
the north and east, the main rail line from Surabaya to
Malang and southern East Java one half mile to the
north and west and the Porong River one mile to the
south. The estimated 7 million cubic meters of mud
already emitted has filled a 450-acre area fortified by
loose earth walls to a depth varying from 32 feet at
the mouth of the eruption to 10-12 feet at the low
point one half mile away. More than 1,700 homes, 30
businesses and a school have been destroyed. 10-12,000
Porong residents are currently displaced, 8-9,000 of
which are living in stalls in the Pasar Baru
marketplace near the mud lake. Thousands more homes
and businesses are threatened as the mud flow continues
and the rainy season approaches.

Fractured Well Still Flowing Uncontrollably
--------------


3. (SBU) Lapindo's efforts to stop the mudflow have so
far been unsuccessful. The mud flowed at rates
increasing from 5,000 to 100,000 cubic meters per day
until August 1 when the flow rate suddenly exploded to
over 500,000 cubic meters per day. On August 16 the
flow subsided to its previous flow rate and now
randomly varies in flow from 40,000 cubic meters per
day to 600,000 cubic meters per day, defying
explanation or prediction by the experts on site. On
August 26 the well site experienced a series of
explosions shooting mud over 130 feet in the air,
showering the area with boiling hot mud and
hospitalizing two men working at the site, one
eventually died from his injuries.


4. (SBU) Lapindo attempted to install a snubbing unit
in July but that effort failed to stop the mud flow. A
Western well expert brought in to combat the mud told

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econ/pol off Williams on August 23 that the well hole
had been so enlarged and deformed by the high pressure
mudflow that there was no reason to continue. Lapindo
then attempted to stem the mud using a side tracking
well but in mid-August abandoned that effort as well
and is now focused on drilling a relief well. In mid
August, during the period of highest mudflow rate, the
relief well site was inundated with an avalanche of
mud, causing the evacuation of the drillers and
drilling equipment. A new relief well site is now
established and Lapindo has hired the U.S. firm Century
Drilling (although they are still awaiting the delivery
of the drilling rig). The Western expert predicts a
best case scenario of 10 to 12 weeks of drilling to
reach the fractured well at a point deep enough to
divert the flow and cap it. Lapindo also hired
Haliburton as a geotechnical consultant in early August
and received seismic fault mapping information
indicating that the well can be stopped. (Note:
Haliburton has also provided civil engineering support
for the containment dam construction, contributing much
needed expertise to strengthen and manage the dam
walls.)


5. (SBU) The Western Expert now estimates the total
cost to kill the well and control the mud will be USD
200-300 million. Lapindo carried only USD 25 million
of insurance on the project and has already spent USD
50-60 million. Lapindo is now insolvent and relying on
capital contributions from its partners to fund ongoing
well kill and mud control operations. (Note: The
Western expert has prudently advised all U.S.
contractors and consultants to require payment in
advance for any services rendered.)

Mud, Mud Everywhere
--------------


6. (SBU) Lapindo's program to control the existing mud
has met little more success than the program to stop
the mudflow. Loose earth walls have been constructed
to contain the mud by employing 400 dump trucks and 30
bulldozers to construct dams to contain the mud lake at
its current size. There have been numerous collapses
of the earth walls releasing mud and repeatedly closing
the toll road, prompting Lapindo to begin a program to
raise the toll road by 10 feet in affected sections.
In early August, another collapsed dam flooded another
village and temporarily closed the main rail line. With
the rainy season approaching, Lapindo management is
running out of options to control mud in the 450 acre
site and has requested permission to "use" (i.e. flood)
an adjacent 500 acres of village and rice paddy,
destroying an additional 6-800 homes and displacing 4-
5,000 more residents. The expanded containment area
will bring the mud within 50 yards of the Porong River,
a major water supply for East Java.


7. (SBU) Local residents who have been selected to have
their homes flooded with mud are complaining bitterly
about the lack of action by local government, in
particular the Sidoarjo Regent, at supporting there
case and protecting their homes. Faced with a version
of Solomon's dilemma, the Regent has reluctantly agreed
to the plan to sacrifice several villages in order to
contain a wider catastrophe. Much of the residents'
frustration stems from Lapindo's inability to move any
of the mud away from the site. Although Lapindo has
applied for permission to construct a 19-km pipeline to
carry water separated from the mud and treated to the
ocean (Lapindo has completed 4 kilometers of the
pipeline and plans to test two treatment systems
imported from Australia),a senior PT. Bumi Resources
executive admitted to econ/pol off on August 22 that
the project is a red herring. At best, the undersized
pipeline could remove 10-20 percent of the daily flow,

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barely making a dent in the mud build-up. He said
Lapindo wants the public to believe they are trying
everything imaginable to improve the situation. The
residual sludge leftover once the water is removed will
have higher concentrations of phenols, making it more
difficult to dispose of in an environmentally
acceptable manner. Sidoarjo shrimp farmers and Madura
Island fishermen are protesting the pipeline project.

SBY Visit Creates a Stir in The Mud
--------------


8. (SBU) President Yudhoyono visited the well site on
August 11. According to the Western expert, once the
President's planned visit was confirmed, a level of
urgency set in at Lapindo that had not existed
previously. PT. Energi Mega Persada (EMP),the
managing partner of Lapindo, had been trying to manage
the well kill and mud control operations on tight
budgets with a primary focus on cost control, using
mainly Indonesian contractors and consultants related
to Bakrie controlled entities. Once the President
confirmed his visit, they began spending lavishly,
hiring large numbers of ex-pat contractors and
consultants, including Haliburton and Century. During
the President's tour of the well site and the mud flow,
all of the ex-pat consultants were brought forward to
meet the President and the Western expert gave the
President an impromptu briefing on the well and kill
operation status. According to the Western Expert, the
President asked one question, "Can this be stopped?"
The Western expert answered, "Yes, definitely, but I do
not know how long it will take."


9. (SBU) According to the high-level official in PT.
Bumi Resources, another Bakrie-related company, the
President noted that the government's own study on the
situation concluded that if both the rail line and the
toll road were closed for six consecutive weeks, the
East Java economy would collapse, thousands of
businesses would close (at least temporarily),and
possibly hundreds of thousands of East Javanese laid
off their jobs. During this meeting, the President set
Lapindo's priorities for mud containment efforts as
defending: 1) human life; 2) the Surabaya-Malang rail
line; 3) the toll road; 4) the environment (read Porong
River); and 5) homes, businesses and personal property.
The strategy of expanding the containment area much
closer to the Porong River to relieve pressure on the
dam walls near the railroad and toll road directly
reflects the President's priorities.

But will they be prosecuted?
--------------


10. (SBU) Another apparent result of the President's
visit is the slowing of the criminal cases against
several executives from Lapindo, EMP and the Bakrie
related drilling company that botched the well. At an
August 16 gathering of top East Java provincial
political, police and military officials at the East
Java Parliament offices to listen to the State of the
Union address, the "Lapindo disaster" was the sole
topic of discussion. The East Java police chief noted
that they had sufficient evidence to make arrests of
corporate executives involved with the well due to
gross negligence and willful misconduct directly
leading to the accident. (Note: No one asked the
obvious question if any investigations were being done
higher up the chain of command in the Bakrie
organization.) Another long-time ConGen contact told
us that the East Java police were ordered to hold off
on any arrests related to Lapindo for the time being by
the "highest levels of the central government." He was
frustrated that arrests had not been made and noted
that the need to identify publicly the culpability of

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Lapindo's management in this debacle, fearing that
Lapindo executives would be able to wiggle out of their
financial responsibilities to the East Javanese who
lost their homes, land and businesses. He echoed local
officials fear that the public will lay this disaster
at the government's feet and fault them for lack of
financial recompense. (Note: The provincial
government has expended large amounts this year for
several natural disasters, including the massive
mudslides in Jember, which also received USAID funds.)

Government's Anemic Response
--------------


11. (SBU) Provincial and local government officials
claim they are financially unable to provide any kind
of meaningful assistance to their displaced residents,
other than police and military security to keep out
looters and outside provocateurs from organizing
dissent among those displaced. Their position is the
disaster is Lapindo's fault and the company needs to
step up and take care of the affected people. In late
July, Lapindo offered immediate one time compensation
to the displaced residents of approximately US $350 for
housing, moving expenses, and food. Many of the
residents refused the compensation offer as woefully
inadequate; several short-lived protests followed.
Although there are frequent high-level delegations sent
from Jakarta to inspect the site and admonish Lapindo
for the lack of progress, there has been no financial
or other assistance to the displaced residents or local
authorities. The message to Lapindo from Jakarta has
been it's the company's problem and they had better fix
it and fast, "or else." Several contacts have told us
that "or else" would be arrests and prosecution of
Lapindo executives.

NGO's Kept Away From Displaced Residents
--------------


12. (SBU) Local NGOs are struggling to deliver
emergency services and supplies to displaced residents
due to tight security in the inundated villages and the
Pasar Baru IDP camp in Porong. The coordinator of
Damar Alit, an NGO managed by Nadhalatul Ulama (NU),
the largest Muslim social organization in Indonesia,
reported that soldiers guarding Pasar Baru prevented NU
workers from delivering needed supplies of food and
water. Local officials affirm that the tight security
is to maintain order, prevent looting and outside
provocateurs from creating disturbances. NU involved
itself in a controversy surrounding the mud when it
initially offered to organize a class action lawsuit
for residents against Lapindo and its partners. NU has
since backed away from that offer and local residents
have accused them of accepting US $110,000 from
Aburizal Bakrie, Minister of Social Welfare and another
US $110,000 from the President during his visit to
Porong. Bakrie claimed the funds were donated to NU to
help pay for a conference for Muslim Scholars and the
President said his money was a personal donation for
use to aid displaced residents. Living conditions for
local residents in the Pasar Baru market are very basic
with only 110 toilets for the 8-9,000 residents.
People complain of a lack of privacy and are very
worried living conditions will deteriorate quickly once
the rainy season begins in the next month or so.

Economic Impact
--------------


13. (SBU) The economic impacts of the mud disaster are
mounting; we conservatively estimate USD 1 billion of
damages to date, not including social costs or
opportunity costs. Ground water contamination has
started forcing residents from homes not inundated with

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mud but served by local wells that are now filling with
the hot, brackish ground water which is entering local
aquifers. There are reports of large numbers fish
dying as far as 3 miles from the well site in the
25,000 acres of fish farms in Sidoarjo Regency due to
contaminated water. Water tests for contaminates at
the fish farms have been inconclusive. There are
reports the European Union (EU) has pulled Sidoarjo-
farmed shrimp's "organic" designation, Indonesia's only
such designation for exported shrimp, and is
threatening to decertify all shrimp exports from the
regency due to contamination. Bank Indonesia Surabaya
announced they observed a 1% increase in non-performing
loans in June and July to 7.5% in East Java province
due to a 35-40% downturn in business and rapidly
declining real estate values in Sidoarjo regency and
areas south of the well site. Two golf resorts south
of the well site report a 60-70% decline in business.
One course laid-off half of its 650 employees and the
other laid off 300 of its 550 employees. Local
governments protested the lay offs until they were told
the other option was to close completely until the toll
road is more consistently open. Other business
contacts south of the well site also report losses due
to transportation issues and unavailability of raw
materials and are contemplating lay offs in the near
future if the mud situation does not improve. Most
businesses hold no hope of recovering anything from
Lapindo given its political connection to the Bakrie
family.

Residents Remain Patient, Looking For Big Payout?
-------------- --------------


14. (SBU) There has been surprisingly little local
unrest, with only a few small protests by the displaced
local residents. Believing Minister of Social Welfare
Aburizal Bakrie's statements that Lapindo will make
good on losses, displaced residents remain convinced
that there will be a big payoff by Lapindo for their
homes, land and businesses once the mud is stopped.
Given the paltry offer for shelter and food by the
company made in July, we see no history of corporate
generosity on which to base their hopes.

What Does the Future Hold?
--------------


15. (SBU) Much of the outcome of the "mud monster"
still depends on when the flow can be stopped and how
fast it flows until then (and no one involved with the
effort would give us odds.) Lapindo seems to have
finally put a competent team together to kill the well
and control the mud but is still depending on luck to
keep from doing major damage to one or more of East
Java's major infrastructure pieces. Lengthy closures
of the rail line and toll road would be devastating to
local businesses, cutting supply lines, delaying orders
and slowing transportation of agricultural products.
Massive lay-offs would certainly increase tensions and
anger in the area of the disaster, making large scale
demonstrations and political fallout more likely.


16. (SBU) One of the consultants hired by Lapindo
created computer models of the effects of flow rates
and time before the well is killed. In the best case
scenario, the flow subsides to an average 25,000 cubic
meters per day, the mud flow is stopped in 3 months,
the new containment area holds, and a total of 22,000
residents are displaced. In the worst case scenario,
the flow rate averages 250,000 cubic meters per day,
the well is killed in six months, the mud forces its
way in and over the Porong River, inundating villages
between the containment area and the river and more
rice paddy land south of the river, causing
uncontrolled flooding of the Porong river during the

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rainy season due to the thickness of the mud and 55,000
residents are displaced. The Western expert remains
convinced they can hold off the mud, maintain the
relief well site and stop the mud flow, with a caveat,
"If we have to move the relief well again, the delays
would make matters much worse." He added, "If the
relief well fails, my crew and I will be on the next
plane out of Indonesia."

PASCOE