Sidoarjo Mud Volcano Disaster, shall Lapindo pay for it?

By Fatahillah Hoed


In the last few days, people in Indonesia see in the media related to the spin off drama Lapindo Brantas Inc from PT Energi Mega Persada tbk (Energi), indonesian company listed in Jakarta Stock Exchange,through transfer of share PT Kalila Energy Ltd and Pan Asia Enterprises Ltd based in Hong Kong to Freehold Group Ltd, spv from BVI.
If the Mud Volcano disaster sufferers in Sidoarjo observe it very closely related to continuous action by Energi Mega Persada tbk, it seems that the transfer of share to Freehold Group Ltd could be classify as the worst case scenario available by EMP to discharge the burden even that also contain high risk because the transfer of share was prohibited by Bapepam as Indonesia Capital Market Regulator after Energi Mega Persada tbk have fail to obtain consent from Bapepam to initiate Extra Ordinary General Meeting of Shareholder with transfer of share Lapindo Brantas Inc to Lyte Ltd, affiliated with Bakrie Family (Larangan Bapepam diterabas: Energi Jual Lapindo ke Freehold, www.detik.com). Assume Energi insist to held their Extra Ordinary General Meeting of Shareholder in order to have shareholder approval for the transaction with Lyte Ltd without BKPM consent for such meeting, Energi clearly violated Bapepam Rules IX E1 related to Conflict of Interest on Certain Transaction and IX E2 related to Material Transaction and Changing in Core Business.
Considering the financial burden caused by Lapindo Brantas Inc in Sidoarjo, Energi had to spin off the company regardless any reaction from Gevernment or Bapepam. This Financial Burden will be much higher in the future despite of some opinion arise that what had happened in Sidoarjo was national natural disaster and The Central Government also have to involved financially.
Decision had to be made to choose the future of Energi. Even spin off to Freehold consider as the worst case scenario, from other point of view, the spin off to Freehold could also be consider as “show off” from Energi to Bapepam. It was like kind of statement that said: “well, you have your opportunity, with us or against us, but with or without you, we will keep doing it!”
The Issue of material transaction as basic judgement to consider any transaction have to comply with Rules IX E1 and IX E2 had been swift by Energi by making radical move by conducted spin off to Freehold without any prior notification to Bapepam and said it on the media that the transaction was not consider as conflict of interest because the other parties was not affiliated with Bakrie family. If this kind of move proven to be succesful in the future, it will be recorded in the history as “good media campaign”. Why? That because Energi have been success orchestrated their agenda that approval from Bapepam require only for transaction with affiliated company. So, beside “show-off” Energi also success to have Bapepam to tango a long.
The recent condition shows that Bapepam Chief, Fuad Rahmany, only said “the transaction was improper”. There is no indication that Bapepam will take further progressive action. Fuad stated that Bapepam authorization limited only for asking information related to plan to sale the share (Bapepam: Penjualan Lapindo tidak layak, www.detik.com), regardless that The Capital Market Law No. 8 Year 1995 article 102 authorize Bapepam to impose administrative sanction like suspension of business activity and article 101 for initiate criminal investigation or at least formla investigation based on article 100 for violation of The Law No.8 Year 1995 and implemented regulation. Basically, violation of Bapepam Rules as implemented regulation of Law No.8 Year 1995 could initiate Formal Investigation (see article 100 [1]). The Higher degree is whenever Bapepam consider that the violation could caused public in jeopardy, Bapepam based on article 101 [1] could initiate Criminal Investigation. So actually there is no legal background sufficient to support Fuad Rahmany statement related to Bapepam authority regarding spin off Lapindo to Freehold. People of Sidoarjo that hit by Mud Volcano caused by Lapindo activity on Sumur Banjar Panji-1 could consider have placed public property in jeopardy. Divestment of Lapindo by Energi could be consider as a way of avoiding responsibility especially from financial perspective. Actually Bapepam also require to conduct investigation related to Mud Volcano disaster.
The essence of the investigation is to have detail information related the liabilities burden of the disaster. If the Result indicated that the disaster caused by Lapindo Brantas technical staff only, Bapepam could inform the Public and Capital Market investor, Energi have no contribution that initiate disaster. However, Bapepam also require to utilize their commercial sense if the main action that caused mud volcano disaster was the motive to achieved lower drilling cost by lowering the standard drilling procedure. So the first question need to be answered is: “How they did it? Is they have the same standard with any other oil company which also very concern with safety?” After conducting very dilligent investigation to answer such question by using interview and technical examination, the possible answer will be: “OK, they did it right, but the luck was not on their side at that time”, or “well, it is very obvious you guys were not doing the drilling properly, we need further information to assure the ultimate person as initiator of such idea that finally caused the disaster”.
The Criminal investigation by Bapepam will have unsimilar issue with Police Investigation. The Investigation initiate by Bapepam will be based on Capital Market Law No.8 Year 1995 including all relevant implemented regulation. Whenever Bapepam discover there are violation of other Regulation like Environmental Law No.23 Year 1997 or Criminal Law, that will be part of Police Jurisdiction.
Other than placed public property in jeopardy, article 101 (1) Capital Market Law authorize Bapepam, to initiate criminal investigation based on their opinion which will require further investigation to support it. The criminal investigation could be driven as part of Bapepam social responsibility purposes to Sidoarjo sufferers.
The first action is to verify whether the transaction have no conflict of interest and not classify as material transaction. To verify there are no conflict of interest, the ultimate shareholder of Freehold Group Ltd has to be disclosed. The next step will be to make further clarification and extensive and intensive research to uncover any business relation of the ultimate shareholder or majority ultimate shareholder of Freehold with majority Ultimate Shareholder or Ultimate Shareholder of Energi.
Those step needs to be taken as implementation of Bapepam Rules IX E1 point 2 [“ If there is a transaction in which Comimissioner, Director or the substansial shareholder or the affiliated Person of Director, Comimissioner or the substansial shareholder has the Conflict of Interest, it must first to be approved by independent Shareholders or their authorized representative in General Meeting of Shareholder as described in this rule. Such approval must be confirmed in the form of Notarial Deed”] which have two substansial element relevant to this case, Direct Person (Director, Comimissioner, substansial shareholder) and Indirect Person (affiliated from Direct Person). The Direct or Indirect Person needs to be verify that none of them have Conflict of Interest. Bapepam Rule IX E 1 section 1.d. define Conflict of Interest as “a difference between the economic interest of a Company and the personal economic ineterest of the Director, Comimissioner or the major shareholder of the company or affiliated party of the Director, Comimissioner or the major shareholder).
So, based on those Rules, Bapepam require to identify the parties in Lapindo spin off regardless any reason provide by Energi (confidentiality etc). It will be hopeless to go much further when one of the party in the transaction only SPV.
Verification and cross examination including also tracking from any available source of information also require to find out whether there was any existence of affiliation relationship between the parties.
The affiliation relationship should not limited only to holding-subsidiary relationship, but also require to include whether there was joint operation or other running business cooperation between the parties or any set off package exist. From profit and losses perspective, it would be hard when unaffiliated party will enter the transaction that already suffer huge losses at front which could be much harder in the future especially after the occurrence of blast gaz pipe owned by Pertamina in Porong Sidoarjo on Wednesday 22nd November 2006a cross Mud Volcano area (Pipa gas Pertamina disemburan lumpur meledak, www.detik.com). There is no assurance for such a kind will not occur in the future at Mud Volcano area. That is only one of occurrence from potential disaster that finally arise become reality.
Lapindo also have to face the real cost estimate by Faiz Shahab, Energi Director, at least US$ 106 million until the end of 2006 which Insurance only cover US$ 25 million from PT Asuransi Tugu Pratama and its Consortium and US$ 2,5 million from PT AIU Indonesia (Beli Lapindo US$ 2, Lyte pikul kerugian US$ 106 juta, www.detik.com). By any means necessary, Energi have to spin off Lapindo at any cost because Lapindo mud volcano disaster could become cancer, could swallow the whole profit.
From the two point above, clearly shown Energi have huge economic interest to spin off Lapindo especially to prevent further decrease of company financial performance. The Lapindo Cancer in the end could also hit the Energi as substansial shareholder of Lapindo Brantas Inc and then substansial shareholder of Energi, so the substansial shareholder also have economic interest to prevent further losses caused by mud volcano disaster at Sumur Banjar Panji-1 at Brantas PSC that operate by Lapindo Brantas Inc and owned 50% by Lapindo Brantas Inc, 32% by PT Medco Energi Internasional tbk and 18% by Santos. Energi as the sole owner Lapindo Brantas Inc through PT Kalila Energy Ltd and Pan Asia Enterprises Ltd, indirrectly responsible financially to bear and settle the cost of mud volcano disaster. The Shareholder of Energi have economic interest to maintain profitability and to prevent further decrease of financial performance of the company. So economic interest actually could not limited to create profit but also create losseses or to prevent losses. The final conclusion, there should be conflict of interest involved at least between the interest to avoid losses and interest to settled losses.
Related to Bapepam Rule IX E2 on Material Transaction and Core Business Shifting, determine by parameter designated by definiton on point 1, equal or greater than 10% of Company revenue or 20% of Company equity. So just take a look at Energi Financial Report and compare the revenue of Energi with the residual value of Lapindo Brantas Inc after deducted for cost financing mud volcano disaster.
Unfortunately, Mud Volcano sufferers at the end will only become the believers of one of the known proverb that said: “The Truth is hurt”. They have to face the reality that Lapindo is the only one who bear the responsibility of the Sidoarjo Mud Volcano disaster. Vice President Jusuf Kalla stated that whoever the purchaser, the responsibility still remain and another statement said: Lapindo is the one who will responsible and Lapindo still remain in Indonesia (JK: Siapapun Pembeli Lapindo harus Tanggung Jawab, www.detik.com ). The statement indicated the responsibility solely bear on Lapindo. It seems there is new progress consist of a kind of written obligation that Lapindo will not the only one bear the cost of mud volcano disaster. Especially based on article 3 section 1 Company Law No.1 Year 1995 that limited the responsibility of the Company Shareholder only as much as the value of his share, Energi parctically in secure position unless one of point at article section 2 discovered, the sufferers will only rely on good faith of Lapindo and affiliated company.
So, for the sake of Mud Volcano sufferer, let us hope that Lapindo will not file petition for bankruptcy and than transfer the profitable wells which in the end left the sufferer with the misery.