Santos Says Java Mud Disaster Provision Appropriate

By Angela Macdonald-Smith

Sept. 15 (Bloomberg) -- Santos Ltd., Australia's third- biggest oil and gas producer, said it believes a provision made for a mud-flow disaster in Indonesia is appropriate and rejected a suggestion it understated the incident's severity.

Santos will continue to review the adequacy of the provision, the Adelaide-based company said today in a statement to the Australian stock exchange. Its dropped 57 cents, or 2.9 percent, to A$18.80 in Sydney trading, the largest decline since Sept. 4.

The Australian company owns 18 percent of the Banjar Panji gas exploration well in East Java, where mud started flowing after a blowout in May 2006, inundating homes, rice fields, factories and roads. In February, Santos raised its provision for the incident by $7 million to $79 million.

``The situation remains dynamic, complex and uncertain,'' Santos said in today's statement.

Santos faces an increase in the clean-up bill for the incident, which has affected 75,000 people, the Australian Financial Review reported today, citing a study by the United Nations Environment Program and AusAid that is yet to be made public.

Santos's share of the mitigation cost could be as high A$830 million ($681 million), nearly 10 times more than the company has disclosed to the market, the newspaper reported. The total cost may be as much as A$4.6 billion, it said, citing the study. The study found that the only solution is to transport the mud 14 kilometers (9 miles) to the ocean, the Review said.

Santos said today it can't specifically comment on the UNEP report. Satwant Kaur, an information officer at UNEP's Bangkok office, couldn't provide any information on the report.

The UN report estimates that the total economic loss from the mudflow, which began after a drilling incident involving a venture operated by Lapindo Brantas Inc., has risen to A$3.4 billion, the Review said.

Santos ``continues to believe that a resolution may ultimately be reached between all relevant parties,'' it said in the statement.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net