[Marinir] Indonesia Digest No: 35.06 ; 04 - 10 - '06

[Yap Hong Gie]

INDONESIA DIGEST

Indonesia's complex Issues in a Nutshell
Published by: TBSC-Strategic Communication
No.: 35.06 - Dated: 4 October 2006

We wish all our Muslim readers a blessed Ramadhan Fasting Month
We solute our Armed Forces on Indonesia's Armed Forces Day, 5 October

In this issue:

MAIN FEATURE:

"The Largest Mud Flow on Land" wreaks havoc in East Java

NEWS AND BACKGROUND:

1.      Tourism and Transportation:
Inbound Visitors down 8.6%, Outbound Passengers up 7.8%
Indigo LCC buys into Mandala Airlines
Garuda to abandon Bali as Secondary Hub?
Garuda Projects Profitability and New Aircraft fleet

2.      The Economy, Trade and Industry
Government to spend $1.4b for Bio-diesel development in 2007
2006 Fuel Consumption Lower than Predicted

3.      Politics and Security:
Indonesia - Australia Security Pact on Track

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MAIN FEATURE:

"The Largest Mud Flow on Land" wreaks havoc in East Java

On Monday, the second day of October, the first showers of the rainy season 
fell on the hill town of Malang, East Java, some 65 km. south of Sidoarjo, 
center of the hot mud flow that has wreaked havoc here since four months 
ago. These first showers well and truly indicate that the rainy season is 
near at hand.

By now, the hot mud has drowned 8 villages, 1,800 houses, many factories, 
rice fields and roads.  The oncoming rainy season has added to concerns of 
more disasters to this densely populated area located south of Surabaya, 
Indonesia's second largest and busiest city. If the bursts of hot mud at 
Sidoardjo can not be stopped soon, tropical rains will surely flood the 
entire vicinity. Up to today since late May, the brown hot sludge has 
already covered more than 500 hectares of villages and arable land, in 
places to a depth of more than 6 meters.

Embankments which have been hastily built to contain the rising hot sludge 
from overflowing have proven precarious and inadequate, as the mud has on 
several occasions flooded the economically important toll road that links 
East Java's productive hinterland with the harbour of Surabaya,. Not only 
are these barriers unstable as they are constructed of only stone and 
gravel, and are not  strong enough to withstand the continuous pressures of 
the surging sludge, but the incessant gush of thousands of cubic meters of 
mud spewed daily from within the earth has made it imperative for these 
banks to be raised week by week. The banks are now more than 7 meters high 
and five meters wide. And still the mud rises up reaching almost to the 
brim, or breaks through weak patches in the barrier, or water seeps through 
to roads and nearby railway.

For, the mud has nowhere to go, except to the nearby river and sea. But the 
Minister of Environment and the local Madurese fishermen have adamantly 
protested against this move, fearing that disposal of the mud in the sea 
will pollute rivers and seas and spoil the fish catch, destroying the 
livelihood of thousands of fishermen along the coast.

On this point, however, experts diverge in opinion. While some believe that 
the mud originates from the seas, as its water contents, - which constitutes 
70% of the sludge-, is saline, others disagree, saying that dumping the hot 
sludge into the water will certainly kill all marine life.


By now, instead of weakening, the mud geyser has strengthened, spewing twice 
the amounts of hot sludge every day, from some 50,000 cu. m. daily last 
month to some 126,000 cu.meters today. Four villages have been completely 
drowned to the roofs, while at four others, mud is still rising day by day. 
Hundreds of hectares of rice paddies have disappeared. The floor of the mud 
lake has also dropped some 88 cm.

Horizontal conflicts in the offing

For four months now, more than 9,400 villagers have been forced to evacuate, 
living in cramped makeshift shelters. They are out of jobs, out of 
agricultural land, out of homes, and with no clear future in sight.

Meanwhile, during construction of the barriers and in efforts to dump water 
and sludge to neighbouring rivers or to other low-lying areas to serve as 
ponds, such efforts have continuously been hampered by demonstrating 
villagers from the surroundings. The construction of a barrier would mean 
that, on the one hand, one village would be spared from being flooded, while 
the other village would be completely drowned, or vice versa. This has 
caused those from the latter village to break down the construction of 
dykes.  Similarly the laying out of pipes to one side would be protested by 
others being adversely affected. Sociologists, therefore, warn, that should 
the situation be left as is, this may well trigger more serious horizontal 
conflicts when rival villages fight one another.

The company who is at the center of this catastrophe is Lapindo Bratas, 
which has started drilling explorations for gas at the Banjarpanji well at 
Porong since March 2006. On 29 May, however, at some 150-200 meters distance 
from the drilling well, hot mud suddenly burst forth from the earth. 
Immediately the company began emergency measures, drilling relief wells to 
try and cap the hole, but to no avail.  Three further attempts are still 
being made, and foreign experts also called in. But, after more than three 
months, experts now surmise that the mud originates from a "mud volcano" 
situated some 3 kilometers below the earth surface.

Hot mud flow an industrial accident

So far, the government has taken the position that full responsibility for 
all consequences must be borne by Lapindo Brantas, as the mud flow is an 
industrial accident rather than a natural phenomenon. The flow was 
apparently triggered by the drilling of the exploration well, which was 
executed without the use of protective casing. And, indeed, Lapindo Brantas 
has accepted all financial responsibility for all necessary corrective 
measures, from the construction of embankments, to inviting international 
expertise and equipment, to repaying compensation to villagers for homes and 
land and daily sustenance and supplying jobs to villagers, to the 
resettlement of villagers to other locations in East Java or to other 
Indonesian islands.

The well is 50 percent owned by Lapindo. Another Indonesian firm, PT Medco 
E&P Brantas, has a 32 percent stake, while Santos Ltd. of Australia 
reportedly holds the remaining 18 percent. Lapindo is owned by the Bakrie 
family. Aburizal Bakrie now being the Coordinating Minister for Public 
Welfare, who also oversees natural disasters.


On its side, Lapindo Brantas is holding fast to its conviction that the mud 
source can be capped by "relief wells", which would take some three months 
to install. At first Lapindo said that the geyser could be capped by 
September, but now the company admits, that with all the "social problems" 
and several failed attempts, work may be completed in December only. 
However, by December, Indonesia will be in the midst of the rainy season, 
while the hot mud still keeps rising daily.

The question now becomes: how high must the dykes be built and how large the 
network? And when the rains start to pour down, will the banks hold or 
break, causing another disaster and another crisis.

Is the mudflow stoppable now - or will it take another century to stop?

 A number of Indonesian experts have said that the mudflow could have been 
triggered by a crack of about 1,800m deep in East Java province's Banjar 
Panji well. However, a group of international scientists said last week that 
the mudflow might be a natural phenomenon that could be impossible to stop.


In Jakarta, European scientists said the flow might be coming from an 
emerging mud volcano.
The Media Indonesia daily newspaper quoted geologist Adriano Mazzini from 
Norway's Oslo University saying that the burst might be unstoppable and that 
guessing the timing of the flows and their possible end could be impossible.
That theory has been raised before by a few Indonesian scientists and those 
working for well operator PT Lapindo Brantas Inc. which disputes the mud is 
directly connected with the drilling operation at its Banjar Panji well. 
While, engineers hired by Lapindo, including US and Australian experts, have 
failed to stop the flow of around 50,000cu m of hot mud every day. After two 
unsuccessful attempts to stop the flow, Lapindo Brantas is now digging three 
shafts alongside the hole, hoping to kill the eruption by pumping in 
concrete -- a plan that most geologists say will not work.
"If they manage to stop it, it will be the first time in the world that it 
has been done," said geologist Arif Munsyawar.

Experts say the mud volcano is one of the largest ever recorded on land. 
Geologists fear the technology may not exist to stop the eruption, saying 
mud could flow for years or even centuries -- or stop on its own at any 
time.

The mud is believed to come from a reservoir 3 1/2 miles below the surface 
that has been pressurized by shifts in the crust or by the accumulation of 
hydrocarbon gases.
"The volume of mud that is coming out of the hole is not just large, it's 
enormous," Earl Hunt Jr., an engineer from Woodward, Okla., said while 
supervising dredging operations.

"We are running out of room up here, period," he said. "If they don't pump 
it to sea or something soon, then there will be more villages lost."

President orders the sludge deposited into the sea and people resettled

Faced with several dilemmas - and diverging proposed solutions-, President 
Yudhoyono has formed a National Team to overcome this disaster, chaired by 
Energy Minister, Yusgiantoro. And, faced with the possibility that "it could 
take a century to stop the flow" - as some experts believe, while torrential 
rains may come down only too soon, while, at the same time also faced with 
the fact that the yearly peak domestic traffic will be due around the Ied'l 
Fitri holidays in the fourth week of this month, while also the arterial 
road and railway to and from Surabaya may be blocked by sludge, the 
President finally agreed to two measures.

Firstly, while admitting that this may be a natural phenomenon and a 
disaster situation, the government is adamant that it still considers the 
Lapindo mud flow "an industrial accident" for which consequences and 
whatever measures must be taken, Lapindo will be financially responsible. 
(On the other hand, if it is considered a "natural disaster", then the 
government must bear all costs).

For both reasons, Lapindo will continue with efforts to cap the hole, while 
resettlement efforts of evacuees must be started immediately. Meanwhile, 
main transportation routes to and from Surabaya harbour are to be raised or 
re-routed, as must be the railway lines.

Secondly, considering the onset of the rainy season, it is imperative to 
prevent greater disasters that will likely affect wider areas. For this 
reason, the hot sludge and water must be dumped into the sea, to be done by 
piping off the water through the Porong river, even it means without first 
having been processed it through necessary treatment.  To vehement 
objections made by Environmental groups, Public Works Minister, Djoko 
Kirmanto, laconically retorts: "What is more important? Saving the fish or 
saving people?"

Pumping of water and sludge into the Porong river and on to the Java Sea is 
due to start on 5 October. Meanwhile, the local government is preparing a 
nearby resettlement site of around 500 hectares to relocate people from 4 
villages.

Meantime also, Police have seized the drilling rig involved in the accident 
and are investigating whether to bring criminal charges against the 
principal well owner, PT Lapindo Brantas. Police also claim that the company 
has mishandled the accident by failing to cap the hole properly, allowing 
the mud to surge to the surface from several cracks close to the well.

 (Sources: Kompas, Metro TV, SCTV, ANTV, Reuters, AP)       (Tuti Sunario)
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NEWS AND BACKGROUND:

1.      Tourism and Transportation:

Inbound Visitors down 8.6%, Outbound Passengers up 7.8%

The National Statistics Bureau, BPS, revealed that January-August 2006 
visitor arrivals to Indonesia through 13 international air- and sea ports 
declined by 8.6% compared to the same period last year. Comparing arrivals 
in August, the decline was 15% month on month, where Bali suffered the worst 
contraction at 24.4%. Compared to arrivals the month before in July, 3% 
fewer tourists visited Bali, while arrivals increased considerably to 
Makassar, Padang's Minangkabau airport, Solo's Adi Sumarmo, to Lombok and 
through the Juanda airport in Surabaya, East Java, though from a much lower 
base, reports Bisnis Indonesia.

Meantime, anticipating the week-long holidays around Ied'l Fitri, three 
foreign airlines have reportedly requested an additional 3,936 outbound 
seats on the Jakarta-Kuala Lumpur, Jakarta-Singapore and Surabaya-Kuala 
Lumpur sectors. These are Malaysia Airlines, SilkAir and AirAsia. With the 
extra seats, the three airlines will serve 285,474 outbound seats during the 
upcoming holidays, from 17 October to 1 November 2006.

Both foreign and Indonesian airlines have requested a total of 22,784 extra 
seats, or up 5.34% compared to the holiday period last year. Indonesian 
airlines, meanwhile, have also not lagged to take advantage of Indonesians 
propensity to travel abroad, by requesting an additional 18,848 seats on the 
three routes, up 13.3% from last year, said Director General for Air 
Transportation, Moh. Ikhsan Tatang, as reported in Bisnis Indonesia. Total 
outbound passengers during this year's peak holiday season, is expected to 
be up 7.8%.
Four airports will be specially monitored during these holidays, these are 
the Soekarno-Hatta airport in Jakarta, Polonia Airport in Medan, Juanda 
airport in Surabaya, and the Ngurah Rai in Bali.


Indigo Partners LCC Buys into Mandala Airlines

America's Indigo Partners LCC is said to have bought 49% of Mandala Airlines 
shares released by Cardig International, said the airline's President 
Director, Diono Nurjadin.

Mandala Airlines is one of Indonesia's pioneer airlines, established in 1969 
by the Kostrad Institute. On 17 April 2006 the airline was sold 100% to PT 
Cardig Internasional at a value of Rp.  300 billion. Both Cardig and Indigo 
have now agreed to build a long-term relationship and both are committed to 
develop Mandala into one of Indonesia's best airlines, reports Kompas daily. 
Indigo is reported to own shares in a number of European, Asian and American 
airlines.

In the near future Mandala Airlines plan to rejuvenate its fleet acquiring 
six Airbus A-320 aircrafts. Its management will review its present route 
network to increase flights and improve organizational effectiveness. 
Mandala also plans to shore up pilot and crew training overseas to follow 
international operational standards. At present Mandala operates 14 
aircrafts serving 18 cities.

Minister for Transportation, Hatta Rajasa, confirmed that under Indonesian 
law, foreign investors may own a maximum of 49% shares in Indonesian 
airlines in order to strengthen Indonesia's airline industry.

Garuda to Abandon Bali as Second Hub?

According to Travel Trade Gazette's (TTG) Mimi Hudoyo, Garuda Indonesia may 
soon be restructuring its network, minimizing the role of Bali as a flight 
hub for its flights from Australia and Japan, reports balidiscovery.com
Quoting Garuda's Vice-president of Sales and Marketing, Agus Priyanto, "We 
are now studying the way we operate out of dual hubs in Jakarta and Bali. 
But we expect to only use Jakarta because having two hubs is too costly and 
the recovery of the Australian market to Bali has been slower than expected, 
and (due to) Garuda's limited fleet."
If the national carrier goes ahead with the proposed change to its air hub 
structures, passengers from Japan and Australia on Garuda will face the 
disincentive of longer flight times to Bali, due to an intermediate stop in 
Jakarta. Bali-Perth flights are expected to remain operating on a direct 
basis, says balidiscovery.com.

Garuda Projets Profitability and a Newer Fleet of Aircraft
Having recently received the agreement from Parliament for the Government to 
support ailing Garuda Indonesia with US$ 52.2 million financial injection 
this year, the airline now plans to allocate US$1.6 million for rental fees 
to secure two new Boeing 737 NG aircraft in 2007, reports Bisnis Indonesia
The four uses designated for the emergency cash injection to the national 
carrier are:
o Initial lease payments for the rental of two new B-737 NG worth US$1.6 
million.

o Repayment of US$14.7 million of short term debts totaling US$43.6 million.

o Payments for US$17.3 million in repairs and overhaul of a projected 
US$19.6 needed for six Airbus 330 aircraft owned by Garuda.

o Allocation of US$18.9 million or a an estimated US$20 million needed to 
undertake repairs on the remaining aircraft of the airline's aging fleet.
A second cash injection of US$52.5 million allocated from the 2007 State 
budget, will be used next year for ongoing management restructuring at 
Garuda, short term loan repayments, and additional repairs needed on the 
Airline's fleet, quotes balidiscovery.com
Garuda Targets Profits in 2007
Meanwhile, balidiscovery.com further reports that the Indonesian language 
BisnisBali confirms Garuda is projecting a profit of Rp. 444 billion 
(approximately US$48.2 million) in 2007, an impressive financial rebound 
from losses of Rp. 692 billion (approximately US$ 75.2 million) suffered by 
the Airline in 2005.
A Garuda Indonesia spokesman recently told the Indonesian Parliament that 
the airline expects total revenues in 2007 to reach Rp. 13,136 trillion 
(approximately US$1.42 billion).


2.      The Economy, Trade and Industry

Government to spend $1.4b for Bio-diesel development in 2007

The government will set aside Rp13 trillion ($1.42 billion) from its 2007 
state budget to help spur private sector initiatives aimed at hitting an 
overall bio-diesel output target of 250,000 to 300,000 metric tons a year, 
an industry official said last Monday (25/9/06).

Such funding would be a first for the government, which has never allocated 
any part of its budget for the bio-diesel sector, reports Indonesia's Trade 
and Investment News published by the Coordinating Ministry for the Economy.

The budgetary allocation will be broken down into Rp10 trillion in 
infrastructure subsidies, Rp2 trillion in subsidies for seed purchases, and 
Rp1 trillion in interest breaks offered to bio-fuel investors, the chief of 
the government-backed National Bio-fuel Promotion team, Alhilal Hamdi, said, 
according to Dow Jones Newswires, quoted by Indonesia's Trade and Investment 
News published by the Coordinating Ministry for the Economy.

Hamdi said the government next year would seek a further Rp15 trillion to 
Rp20 trillion ($1.64 billion to $2.2 billion) from banks for bio-fuel 
development.

President Susilo Bambang Yudhoyono said earlier this year that the country 
ought to prioritize development of bio-fuels -- blends of vegetable oil and 
fossil fuel -- as a potential solution to many economic and social problems.

Meanwhile, air pollution levels are high in many of Indonesia's urban hubs, 
and bio-fuels' cleaner emissions are seen as a way of alleviating this 
problem.  The government sees increased need for bio-fuel feedstocks as a 
source of job creation, which could help to reduce poverty and unemployment 
in the sprawling archipelagic nation.

Tatang H Soerawidjaja, chairman of the Indonesian Bio-diesel Forum, said 
recently that the government would offer Rp10 trillion ($1.1 billion) in 
subsidies for developers of transport infrastructure, such as roads and 
ports to ensure a ready supply of bio-fuel feedstocks from remote plantation 
areas.

Soerawidjaja said the government will also offer companies investing in the 
bio-fuels sector Rp1 trillion in "interest incentives", whereby the 
government subsidizes part of those companies' interest repayments on bank 
loans used to fund their investments.

Hamdi said some 19.7 million hectares of plantation area in Indonesia are 
suitable for the propagation of bio-fuel feedstocks such as palm oil, 
jatropha and cassava.

While Indonesia's fast-growing bio-fuel sector has so far focused primarily 
on bio-diesel, which can be burned in some diesel engines, the country could 
see construction start on its first ethanol plant at the end of next year, 
he said.  Ethanol is a bio-fuel that can be used in some gasoline-burning 
cars.

A Pertamina spokesman said recently that it is researching ethanol 
development in Indonesia, but that few available car models in Indonesia can 
run on the fuel.  Pertamina already sells a 5% bio-diesel blend in many of 
its gasoline service stations in Jakarta.

Meanwhile, executive chairman of the Indonesian Palm Oil Association, Derom 
Bangun, said on Monday (25/9/06) that bio-diesel projects would not be hit 
by the fall in crude oil prices as investors feel the current dip is 
temporary and prices will bounce back.

"Even if crude oil prices go down for a while, people believe after one or 
two years they will again go up," he said.  "Developments in bio-diesel will 
continue and investments on new plants will not be hampered.  It is not the 
government but private investors who will decide when and where to build 
bio-diesel plants."

Bangun said Indonesia expects six new bio-diesel plants to be in operation 
by 2007, and about 500,000 tons of bio-diesel to be produced from three of 
these plants by early next year.  He estimated about 600,000 tons of palm 
oil would be used for bio-diesel production in Indonesia in 2007.


2006 Fuel Consumption Lower than Predicted

In a related development, Indonesia expects to consume 37.9 million 
kiloliters (kl) (238 million barrels) of subsidized fuel this year, lower 
than previous estimates of 41.6 million kl, due to lower domestic demand, an 
official at the state oil firm, PT Pertamina said on Monday (25/9/06), as 
reported by Indonesia's Trade and Investment News.

"Domestic consumption is lower than earlier predicted because the government 
raised oil product prices last October," the official, who declined to be 
identified, told Reuters.

The official said consumption of subsidized gasoline is likely to fall 
slightly to 17 million kl from 17.1 million kl and diesel oil is seen down 
to 11 million kl from 14.5 million kl estimated earlier.  Subsidized 
kerosene consumption is likely to be slightly lower at 9.9 million kl 
compared with an earlier estimate of 10 million.


3.      Politics and Security:

Indonesia - Australia Security Pact on Track

Australia and Indonesia are expecting to sign off on a landmark security 
pact by the end of the year, reports Indonesia's Trade and Investment News.

Presidential spokesman Dino Djalal predicted the pact would be signed some 
time this year. "There is now good progress ... on a bilateral treaty on 
security cooperation," he told a security conference in Canberra.

The pact will be a comprehensive framework covering areas such as maritime 
security, intelligence and natural disasters.

Djalal believes the treaty will be a significant milestone in relations 
between the two countries. "It will ... (mark) a shift in the geopolitical 
relationship between our countries," he said. "The treaty doesn't make 
Indonesia and Australia allies. But it does express our common conviction 
... that the security of Australia and Indonesia are inter-related.

For your comments and further inquiries, please e-mail to: 
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