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Santos Stuck in Mudflow Controversy

SIDOARJO, INDONESIA–¬†Santos is facing a blowout in the clean-up bill from the world’s largest mud volcano in East Java, as a new report funded by the Australian government concludes the disaster cannot be contained.

The study, which was conducted by the United Nations Environment Program and AusAid and is yet to be made public, says transporting the mud 14 kilometres to the ocean and creating a new wetland is the only titigation option available.

These updated costings of as much as $830 million are nearly 10 times higher than Santos has disclosed to the stockmarket, leading to accusations that the oil and gas major is deliberately playing down the severity of the disaster.

The UN report also estimates the total economic losses from the mudflow so far at $3,4 billion.

Santos has yet to admit liability for the disaster, which began after a drilling incident in May 2006, and it had paid almost no compensation to the 75,000 affected.

“I don’t think there is wide public understanding of the magnitude of this problem,” says Tim Lindsay, director of the Asian Law Centre at Melbourne University.

“If the projections are correct, it will be catastrophic for any company held responsible.”

Santos has made provisions of just $88.5 million for the mudflow, which has now affected 1800 hectares of densely populated land in East Java.

In a statement the company said it would not comment on the UN report, but believed its provisions remained an “appropriate estimate of its potential liability.”

“The government of Indonesia has taken a major role in responding to the mudflow,” it said in a written statement.

In its 2007 annual report Santos said its provisions were based on an assumption that “condition at the site will remain stable or improve over the longer term.”

This is clearly not the case,” says John McLachlan-Karr, an Australian consultant leading the UN team.

He says retaining walls at the site have failed three times this year and on current projections, the dams will overflow in 2009. This has forced the Indonesian government mitigation team to earmark another 110 hectares for mud lay-down areas, but this is viewed as only a temporary solution.

The mud pools are growing by 20 olympic size swimming pools every day and the weight could make the area subside by 146 metres in the next decade.

“It is true to say the volume of mud has declined somewhat but the retaining walls and geology of the area has become less stable,” McLachlan-Karr says.

“If anything, the impacts are actually increasing.”

It is this assumption that led the UN team of 12 scientists and engineers to conclude that the mud must be moved. Their 122 page report, commissioned by the Indonesian government, was compiled over the past 12 months. It outlines three possible courses of action. “There is, however, no easy answer,” McLachlan-Karr says.

One option is to pipe the mud to the sea but there are concerns that the material is too viscous and the pumps would not be able to move the required volume.

The second option is to pump the mud into a nearby river, which would then be dredged and dumped along the coast. But there is strong local opposition to this method and concern about the increased flood risk.

Both these options would cost about $1,( billion over the next 25 years, according to the UN report.

The final option is to build an open canal that would then transport the mud slowly to the ocean. This is the most expensive at $4,6 billion as land, including many shrimp farms, would have to be purchased.

Santos, despite not admitting any liability for the disaster, is already paying its share of mitigation and clean-up costs, while maintaining the mud flow cause had “yet to be determined.”

Santos has an 18 percent non operation stake in PT Lapindo Brantas, which experienced drilling problems near the site the day before the mud volcano erupted. Presuming it continued paying 18 percent of mitigation costs, Santos is facing a clean-up bill of between $355 million and $829 million over the next 25 years, according to the UN report.

The UN team was not asked to determine the mudflow’s cause.

This is a highly controversial subject in Indonesia, as a company associated with the country’s richest man, Aburizal Bakrie, is Lapindo’s major stakeholder. Bakrie, who is also one of the government’s most powerful ministers and a close allay of President Susilo Bambang Yudhoyono, has maintained the mudflow was triggered by an earthquake.

This has been universally discredited.

A team of British, US and Indonesian scientists said in June they were “99 percent certain” that drilling caused the disaster. Their findings were published in the academic journal Earth and Planetary Science Letters.

Michael Manga of the University of California Berkeley rules out the Yogyakarta earthquake as a potential cause, saying it happened two days before and was 250 kilometres away.

“In this case the earthquake was simply too small and too far away,” Manga says.

The report’s lead author, Richard Davies of Durham University, says a “kick” in the well a day before the mudflow erupted resulted in an underground blow-out and a leakage of fluid. He says the chances of controlling this pressure would have increased if the well had contained more protective casing.

This lack of protective casing raises the issues of negligence and liability.

So far Santos has spent $US28,5 million ($34,9 million) on mitigation and clean-up efforts. A spokesman for the company said it had paid a small amount of compensation to victims, but would not disclose the figure.

Bakrie has not admitted any liability for the disaster either, but due to “Indonesian values” has pledged to pay 4 trillion rupiahs ($526 million) in compensation. So far he is estimated to have handed over about 20 percent of this to those affected.

But this is just a fraction of what the UN estimates the total damages to be. McLachlan-Karr says his team has calculated total economic loss caused by the mudflow, not including mitigation, at RP26 trillion as of April.

Attempts to recoup these losses have so far been rejected by Indonesia’s notoriously corrupt lower courts. A class action by Friends of the Earth Indonesia has twice been rejected and is at present under appeal with the High Court, which ranks above the High Court in Indonesia.

But Lindsay from Melbourne University says these early court decisions are irrelevant. He says the merits of the case will be decided when it reaches the Supreme Court, which ranks above the High Court in Indonesia.

“The Supreme Court knows, understands and has been trained in class actions,” Lindsay says. “It is an increasingly impressive institution that has been making good decisions.” He says there will be serious legal implications for those found responsible.

And whit each day the mud continues flowing, the potential damage get larger.

Flooding during the wet season has been raised as yet another problem.

McLachlan-Karr says the pumping of mud into a nearby river during the dry season has silted up the waterway and raised concerns about flooding.

“They shouldn’t be pumping in the dry season but they literally ran out of space in the holding dams and so had no other option,” he says. “It’s not good but compared to the alternative, the consequences are relatively minor.”

But then there’s the issue of subsidence.

Davies from Durham University says the mudflow area could subside by 146 metres over the next 10 years.

“That’s the worst case scenario,” he says, but no one can be sure of what impact this may have on the surrounding area.

“This thing continues to surprise us so who’s to say what will happen next or how long it might last.”

After more than two years, Davies says, the pressure causing the eruption has not lessened.

“It will most likely carry on in some form for decades to come. The area will provide an interesting case study for scientists, but apart from that the land is worthless.

(Angus Grigg)

(c) The Australian Financial Review РABIX via COMTEX

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