VZCZCXRO7802
PP RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0013/01 0030939
ZNR UUUUU ZZH
P 030939Z JAN 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 2654
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBY/AMEMBASSY CANBERRA 0287
RUEHWL/AMEMBASSY WELLINGTON 1266
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHGP/AMEMBASSY SINGAPORE 5652
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
ZEN/AMCONSUL SURABAYA

UNCLAS SECTION 01 OF 04 JAKARTA 000013 
 
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 #2 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EINV EPET PGOV ID
SUBJECT: East Java: Grim Mudflow Impact Forecast Prompts SBY 
Decisions 
 
Ref. A: Jakarta 13448, Ref. B: Jakarta 13358, Ref. C: Jakarta 12733, 
 
 
¶1. (SBU) SUMMARY:  After a special cabinet meeting held December 28, 
President Yudhoyono announced several decisions concerning the 
Lapindo mudflow including Lapindo will pay $422 million in damages, 
East Java gas supplies will be reallocated from electricity 
production to fertilizer production and infrastructure replacement 
will be accelerated.  A December 27 report from the National Mud 
Disaster Management Team (Timnas) on the probable effects from the 
blowout, which include the eventual severing of the Surabaya-Malang 
rail tracks and Porong road, the loss of high tension power lines 
serving much of southern East Java's manufacturing and residential 
areas, and the displacement of as many as 65,000 additional 
residents, likely prompted the cabinet meeting.  Local leaders are 
meeting to prepare contingency plans for predicted flooding, 
electricity and gas shortages, transportation blockages and 
destruction of thousands more homes and businesses in the 
Sidoarjo/Porong area.  The mud volcano is already having a 
significant economic impact on the immediately affected areas; that 
impact will increase if flooding closes the remaining transportation 
corridors.  Coordinating Minister for Peoples' Welfare Aburizal 
Bakrie and his family are scrambling to find funds to pay for the 
gas well blowout while limiting the financial impact of the disaster 
on the family's business empire.  As damages grow, President 
Yudhoyono's decision to keep Lapindo financially responsible begs 
the larger questions of whether Lapindo is able keep paying the 
damage control bills and if a comprehensive strategy to combat the 
mud can be implemented before thousands more homes and businesses 
are lost.  END SUMMARY. 
 
¶2. (SBU) President Susilo Bambang Yudhoyono (SBY) held a special 
cabinet meeting on December 28, which included the governors of East 
and Central Java, one day after receiving a report from the National 
Mud Disaster Management Team (Timnas) on the prospective short and 
long term impacts of the mud volcano in Porong/Sidoarjo, East Java, 
located approximately 12 miles south of ConGen Surabaya.  After the 
cabinet meeting SBY announced the following decisions: 
 
a) PT. Lapindo Brantas (Lapindo), the gas exploration company 
responsible for the well blowout that started the mudflow, must 
immediately pay USD 144.4 million to cover the costs of the mud 
problem from January 5, 2007 to March 2007. 
 
b) Lapindo must pay USD 277.8 million as compensation to the mud 
victims, with the first 20 percent due in March 2007. 
 
c) Fertilzer manufacturer PT. Petrokimia Gresik will reopen its two 
closed plants taking gas allocation from the National Electric 
Company (PLN), further reducing power generation capacity in three 
East Java electricity plants totaling 1,000 megawatts. 
 
d) Replacement of damaged infrastructure will be accelerated.  Roads 
and the rail line should be relocated within one year.  Minister of 
Finance Sri Mulyani said the the GOI will fund USD 38.9 million to 
reroute 18 kilometers of the rail line.  Sources of funds for other 
infrastructure replacement were not announced. 
 
Worst Case Prognosis Reported To SBY 
------------------------------------ 
 
¶3. (SBU) Timnas scientists briefed ConGen Surabaya twice on their 
report to be presented to SBY (Ref. B).  Timnas told us they were 
recommending that SBY "nationalize" the mud situation, wanting the 
GOI to assume not just financial but, more importantly, management 
responsibility for the mud situation from Lapindo.  (Note: In the 
seven months since their well blowout started the mud volcano, 
Lapindo has yet to produce a comprehensive plan on how they will 
handle the mud flow or the 25 million cubic meters of mud already 
produced. End Note)  Timnas' report assumes that the mudflow has 
become unstoppable and uncontrollable and that the flow rate will 
continue to increase, more than doubling to 475,000 cubic meters per 
day by the end of 2007.  Their preliminary predictions were broken 
into two segments: short term or immediate risks (likely to happen 
over the next six months) and long term risks (likely to happen 6 
months plus.)  According to Timnas, the immediate risks are: 
 
JAKARTA 00000013  002 OF 004 
 
 
 
a)  Failure of the earth dam walls: The walls are structurally 
unsound and highly likely to fail during the rainy season, releasing 
millions of cubic meters of mud with a significant force of impact. 
(Probability: 80-90 percent.) 
 
b)  Loss of Surabaya-Malang rail tracks and Porong road: The gas 
pipeline explosion (Ref B.) caused the permanent closure of the Toll 
road and fractured the dam walls making the mudflow direction and 
path no longer controllable. The mud is now a few yards away from 
the two remaining major north-south transportation routes. 
(Probability of inundation and closure: 95 plus percent.) 
 
c)  Flooding in western Porong city:  Rain runoff to the Porong 
River is obstructed by the mud. Flooding would affect 10,000 homes, 
displacing an additional 55,000 residents. (Probability: 70 
percent.) 
 
d)  Loss of high tension power lines:  The lines currently  running 
through the mud ponds likely will have to be cut off, significantly 
reducing the electricity supply in southern East Java's 
manufacturing and residential areas.(Probability: 60-70 percent.) 
 
4) (SBU) The potential long term impacts are too many to list, a 
highlight follows: 
 
a)  Eight miles wide, six feet under:  Timnas projects that an area 
4 miles in radius, around the epicenter of the mud volcano, ten 
times its current size, will be flooded with mud to a depth of 6 
feet by December 2007.  This projection is based on the mudflow 
continuing to grow at its current rate as the well hole enlarges 
from erosion.  (Note: The four mile radius covers 32 square miles, 
or roughly half the size of Washington D.C. End Note) 
 
a)  No way to go:  All three main transportation corridors remain 
blocked, severely reducing traffic flow and causing major delays 
between Surabaya and southern East Java. 
 
b)  Flooding reaches Surabaya:  Large masses of mud flow into the 
Porong River causing major flooding throughout the Brantas River 
Delta, including Surabaya. 
 
c)  Brantas changes course:  Brantas River flooding potentially 
causes the river to change course away from Surabaya's fresh water 
intake system. 
 
d)  Fish find new waters: Severely reduced fishing catches due to 
increased silt in the Madura Straits. 
 
e)  Gas Main closed:  Permanent closure of the gas main serving 265 
industrial users in Surabaya, Sidoarjo and Gresik, including 1,000 
MW of power plants. 
 
ConGen Arranges Meeting, Local Government Reacts 
--------------------------------------------- --- 
 
¶5. (SBU) The Timnas scientists offered neither recommendations or 
immediate actions the government could take to avoid the potential 
destruction nor economic projections of regional impacts of the 
different scenarios in their report to the President.  We were also 
surprised to find that there had been no contact between Timnas 
leadership and the provincial or local governments, leaving local 
leaders in the dark about potential disasters.  ConGen arranged a 
December 18 meeting introducing the Timnas scientists to the senior 
economists advising East Java's political leaders.  Our actions to 
encourage communication between the disaster response team and local 
government prompted an immediate response from local governments. 
East Java Governor Imam Utomo held an emergency December 19 meeting 
at his home with all the Regents and Mayors of the immediately 
affected areas to brief him on the economic effects and projections 
in light of the Timnas forecasts.  Local leaders reported that their 
economies are down an average of 15% in comparison to the period 
prior to the Lapindo well blow out that caused the mud volcano on 
May 29.  Following that meeting, Governor Utomo, for the first time, 
acknowledged publicly that the East Java economy has been damaged by 
the mud and that the economic impacts of the mud are increasing.  On 
 
JAKARTA 00000013  003 OF 004 
 
 
December 27, Win Hendrarso, Sidoarjo Regent and Utomo requested USD 
332 million from the GOI to offset social costs to the province of 
the 15,000 internally displaced residents and called for Lapindo and 
Bakrie to quickly pay the USD 191 million already promised to the 
first 3,964 homeowners who lost their homes to the mud. 
 
Transportation and Gas Shortages Hurt Local Producers 
--------------------------------------------- -------- 
 
¶6. (SBU) Economic damages, so far contained mainly to the 
Porong/Sidoarjo area, will spread to a much larger area of the 
province with reduced access to transportation and less consistent 
gas and electricity supplies.  East Java accounts for approximately 
16 percent of Indonesia's GDP and, according to the Central 
Statistical Bureau, the eight regencies likely to be most impacted 
by the flooding account for 35-40 percent of East Java's GDP.  The 
economic impacts of large scale transportation failures will be 
significant to export manufacturers in the Pasuruan, Malang and 
Pandaan industrial estates.  According to several export factory 
manager contacts, if transportation times increase to 1-2 days and 
transportation costs increase by $300 per container, they will start 
considering closing operations until conditions improve.   According 
to information provided to Timnas by the Regional Economic 
Development Institute in Surbaya (REDI), there are 537 factories 
that will be immediately impacted by the transportation corridor 
loss.  REDI estimates that 100-150,000 jobs could be lost in those 
companies within 90 days of closure of the rail line and the Porong 
Road.  The East Java Investment Board reports that the 537 factories 
at risk of closing from transportation failures have an investment 
value of nearly USD 19 billion.  The general manager of the Philips 
light bulb plant in Sidoarjo also reports significantly reduced 
supplies of gas since the pipeline explosion.  His plant has lost 
millions of dollars in export orders because it can no longer 
guaranty delivery times.  The decrease in gas supply after the 
pipeline explosion is also impacting domestic fertilizer production 
and forced the closure of two PT. Petrokimia plants in Gresik, which 
may now reopen after the gas reallocation.  Both East Java rice and 
sugar producer associations recently complained that they anticipate 
10-20 percent reduced crops due to fertilizer shortages in the 
province. 
 
Bakrie Financial Woes Mounting 
------------------------------ 
 
¶7. (SBU) The Lapindo disaster is only one of several financial 
strains on Aburizal Bakrie's business empire.  Bakrie controlled PT. 
Energi Mega Persada (EMP), the 50% owner and managing partner of PT. 
Lapindo Brantas (Lapindo), announced December 21 that the company 
would report a USD 180 million loss for 2006, wiping out the 
company's entire book equity position.  The losses are due solely to 
expenses incurred in conjunction with the well blowout and resulting 
mudflow in Porong.  The Bakrie family has been funding Lapindo's 
relief well and mud control construction efforts, ostensibly from 
personal funds and funds from other family businesses.  The Bakrie 
family's coal business in Kalimantan, PT Bumi Resources (Bumi) is 
also struggling with USD 216 million of negative operating cash flow 
year to date, mounting debts and an USD 800 million loan secured by 
its ownership in the mines reported in default.  According to 
contacts, the USD 150 million Bakrie has already spent on Lapindo 
has emptied his coffers of cash and some of the Bakrie privately 
held businesses are now not paying their bills as a result.  A 
contact at the Jawa Pos newspaper told Pol/econoff that Bakrie was 
very recently in Singapore trying to arrange a USD 100 million loan. 
 Terms offered were a 10 percent loan fee, 7.5 percent interest rate 
for a one year term, secured by his shares in other Bakrie 
businesses not related to EMP or Bumi. 
 
Comment: Important Questions Remain 
----------------------------------- 
 
¶8. (SBU) The mud volcano has escalated onto the national stage as an 
issue that will likely drag on for many more months.  SBY's reported 
decisions about the mudflow appear to keep the onus squarely on 
Lapindo to finance damage control efforts and clarify some issues, 
particularly GOI financial support for the rebuilding of some 
infrastructure, but also leave many questions unanswered.  Chief 
 
JAKARTA 00000013  004 OF 004 
 
 
among these is who will be responsible for developing a long term 
strategy for dealing with the mudflow as it grows in size and 
economic impact.  Additionally, it is not clear whether Lapindo or 
the Bakrie family businesses have the financial wherewithal to pay 
over USD 400 million in initial compensation (USD 200 million 
demanded by March 2007) and who will step in if they don't.  We 
doubt that SBY's pronouncements on the mudflow are the last word. 
If Lapindo and/or Bakrie are unable to foot the bill, GOI experts 
working on the problem will be forced to come up with a plan that 
will likely be expensive and politically difficult to implement. 
Any such comprehensive plan will likely take many months to complete 
and implement, by which time it may be too late to stop the mudflow 
or save the thousands of homes and businesses at risk. 
 
HEFFERN