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Cablegate: East Java Mudflow: Lapindo Financial Woes

VZCZCXRO4185
PP RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2733/01 2921045
ZNR UUUUU ZZH
P 191045Z OCT 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1468
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBY/AMEMBASSY CANBERRA 0030
RUEHWL/AMEMBASSY WELLINGTON 1088
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHGP/AMEMBASSY SINGAPORE 5513
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
ZEN/AMCONSUL SURABAYA

UNCLAS SECTION 01 OF 03 JAKARTA 012733

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 # 2613

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV EPET PGOV ID
SUBJECT: East Java Mudflow: Lapindo Financial Woes
Frustrate Relief Well Effort

Ref A: Jakarta 7839
Ref B: Jakarta 8250
Ref C: Jakarta 11110

1. (SBU) SUMMARY: PT. Lapindo Brantas (Lapindo)
recently informed its relief well contractors that it
no longer has funds to pay for relief well operations.
Haliburton and other contractors, including local
contractors, temporarily left the site, halting
drilling operations, due to lack of payment and
mismanagement by Lapindo. We informed the Presidential
Palace of this development on Saturday, October 14, and
they promised to follow up. The contractors began
returning October 18 after Minister for Energy and
Mineral Resources Purnomo Yusgiantoro guaranteed
payment to all contractors. Minister for Social
Welfare Bakrie and family sold their interest in
Lapindo to an offshore Bakrie controlled shell company.
Expat well contractors informed President Yudhoyono on
October 8 of Lapindo's financial problems and resulting
relief well delays. The mudflow has increased to over
one million barrels per day (185,000 cubic meters) and
underground erosion threatens East Java's main methane
supply line. No level of government is providing
humanitarian assistance to the 13-16,000 displaced
residents now facing the rainy season's imminent
arrival, and all levels of government are blaming each
other for the increasingly serious humanitarian
disaster. This problem has not hit the press, but U.S.
contractors are concerned they will be blamed in the
press if they end up leaving the job unfinished due to
lack of payment. END SUMMARY.

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Insolvent Lapindo Stiffs Relief Well Contractors
--------------------------------------------- ---

2. (SBU) On October 13, several expat well experts
working on the Lapindo well blowout and mudflow
eruption in Porong, East Java (see Refs A-C) described
gross mismanagement and severe financial problems at
the company. (Note: Lapindo is a company controlled by
Minister of Social Welfare Aburizal Bakrie and his
family.) Earlier that day the president-director of
Lapindo met with all expat contractors explaining that
Lapindo was nearly out of cash and that they would need
to wait for payments. The contractors were already
unhappy with Lapindo's failure to pay invoices or for
equipment and services needed to run the relief well.
The relief well drilling operation has suffered from
three evacuations caused by flooding and five work
stoppages due to lack of payment to contractors by
Lapindo. Local fuel and dump truck contractors are
also not being paid, hampering drilling and dam wall
construction efforts.

Haliburton Leaves
-----------------

3. (SBU) On October 13, Haliburton announced to the
other contractors it was tired of fighting with Lapindo
over money and was leaving Surabaya immediately.
Haliburton is providing the concrete pumping services
and directional drilling expertise needed to connect
the relief well to the blown out well. According to
the expat well experts, Haliburton is the only company
with sufficient directional drilling expertise needed
to run such a complex drilling operation that is
currently operating in Indonesia. The lack of
directional drillers and fuel at the site prompted
Century Drilling to stop all drilling activities at the
relief well on October 13. Haliburton demanded USD 5
million in advance from Lapindo to drill the next
section of the relief well. We informed the
Presidential Palace of this development and they
promised to follow up. On October 16, Lapindo
reportedly told Haliburton they did not have the money

JAKARTA 00012733 002 OF 003


to continue. Energy Minister Yusgiantoro then
reportedly guaranteed payment to Haliburton assuring
them that an escrow account with sufficient funds for a
continuous drilling operation will be established.
Yusgiantoro's guarantee was apparently sufficient to
coax Haliburton to return and give comfort to other
expat contractors that the GOI is now taking over
financial responsibility for the relief well.

Bakrie Slips Lapindo In To Offshore Shell Company
--------------------------------------------- ----

4. (SBU) According to newspaper reports, Minister
Bakrie and his family's 50 percent ownership in Lapindo
was recently sold by PT. Energi Mega Persada (EMP) for
USD 2 to an off-shore company, of unknown financial
capacity, owned by Bakrie family members. Some
observers believe the sale of Lapindo could be a
prelude to an eventual bankruptcy filing by the company
in an effort to shed liability and insulate the Bakrie
family. PT. Medco Energy International (Medco), a 32
percent minority partner in Lapindo, admitted to the
National Mudflow Disaster Management Team that they had
not funded any of their USD 50 million of cash calls
presented by Lapindo as the general partner. They
explained that Lapindo had not provided any budgets,
plans or evidence of how funds were spent to
necessitate the cash call, as is required in their
joint operating agreement. Santos, an 18 percent
minority partner, apparently has funded all of its cash
calls. Neither limited partner wants to take over the
management of the blown well unless forced to by the
government because they do not want to assume EMP's
liability as the well operator and general partner.

Mudflow Increasing, Erosion Threatens Gas Line
--------------------------------------------- -

5. (SBU) The mud volcano continues to increase its flow
rate. A Dutch dyke and land reclamation expert now
calculates the flow at greater than 1 million barrels
of mud per day (180,000 cubic meters, equivalent to
Indonesia's daily national oil production). Lapindo
has been trying unsuccessfully to pump the mud in to
the Porong River since September and is now building a
channel to allow the mud to flow directly from the mud
detention lake to the Porong River. Experts estimate
the imminent advent of the rainy season will add
450,000 barrels per day to the mud detention lake and
make repair or construction of the loose earth dam
walls impossible. GOI geologists are now finding that
the land around the well site is sinking due to
underground erosion from the high pressure hot water
dissolving the shale under the mud lake and dam walls.
The land under the mud lake has sunk over one foot and
is sinking at an increasing rate. The underground
erosion caused two dam wall collapses, as its weight
caused sections of the wall to suddenly sink 4-5 feet,
releasing large flows of hot mud. The geologists are
concerned that the weight of toll road repairs, piling
dirt on top of East Java's main methane line, could
cause a sudden collapse and rupture the line. The toll
road operator reopened one lane October 11 to try to
alleviate the massive traffic jams as Surabaya
residents head home for the Idul Fitri holiday.

SBY Informed of Lapindo Problems
--------------------------------

6. (SBU) Neither the central nor local governments with
jurisdiction in Porong have provided any significant
humanitarian assistance to the 13-16,000 displaced
residents, relying solely on insolvent Lapindo to
provide funds for food and temporary shelter.
President Yudhoyono made his second visit to the
disaster site on October 8 and received a briefing by

JAKARTA 00012733 003 OF 003


several expat well and mud experts. According to a
person present at the briefing, the President was told
that the well can be stopped but Lapindo's
unwillingness to commit adequate resources to the
project is making this nearly impossible. Apparently,
participants expressed directly to the President high
levels of frustration with a number of poor management
practices at Lapindo. Well experts advised the
president that mid January is now the best case
timeframe to stop the mudflow and Lapindo needs an
immediate USD 100 million "war chest" to kill the well
and combat the mud. A ConGen political contact
complained at a recent meeting that high level central
government officials are pressuring local politicians
to not oppose GOI strategies in dealing with the mud,
such as dumping the hot, thick mud in to the Porong
River. The central government officials threatened to
publicize that Lapindo was drilling on an expired
permit and that local officials should have been
inspecting the well for use of casings while drilling
was on-going, blaming local officials for the massive
disaster. Our contact fears that if East Java
residents believe that local government negligence or
corruption caused the blowout, there will be large
protest demonstrations.

American Companies Fear Blame For Lapindo Mistakes
--------------------------------------------- -----

7. (SBU) Haliburton and other expat contractors were
forced to actually leave the relief well operation and
risk being seen as leaving "poor" Lapindo/Indonesia in
the lurch to finally prompt central government action
and secure payment. The expat contractors expressed
great frustration that Lapindo mismanagement has added
months to the "kill operation" and caused the
destruction of thousands more homes by wasting time
looking for cheaper ways to operate rather than push
forward with the best technology available. American
contractors are concerned that they may be made the
scapegoats if the relief well is eventually
unsuccessful or they leave the operation because of
lack of payment.

PASCOE

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