The East Java Basin contains a significant amount of oil and gas reserves and therefore the region is known as a major concession area for mineral exploration. The Porong subdistrict, 14 km south of Sidoarjo city, is known in the mineral industry as the Brantas Production Sharing Contract (PSC), an area of approximately 7,250 km² which consists of three oil and gas fields: Wunut, Carat and Tanggulangin. As of 2006, three companies — Santos (18%), MedcoEnergi (32%) and PT Lapindo Brantas (50%) — had concession rights for this area; PT Lapindo Brantas acted as an operator.
From a model developed by geologists working in the UK, the drilling pipe penetrated the overpressured limestone, causing entrainment of mud by water. The influx of water to the well bore caused a hydrofracture, but the steam and water did not enter the borehole; they penetrated the surrounding overburden and pressured strata. The extra pressure formed fractures around the borehole that propagated 1-2km to the surface and emerged 200 m away from the well. The most likely cause of these hydraulic fractures was the unprotected drill string in the second stage of drilling. Borehole protection by steel casing is a common procedure in oil or gas exploration.
The daily flow was estimated at 7,000–150,000 m³. By early September 2006 a hot torrential mudflow had inundated rice paddies and villages, covering an area of approximately 240 ha and resulting in the displacement of more than 11,000 people from eight villages in the Porong subdistrict. Twenty-five factories had to be abandoned, rice fields and fish and shrimp ponds were destroyed, which further threatened Sidoarjo's status as the biggest shrimp producer in Indonesia after Lampung. The Marine Resources and Fisheries Ministry has estimated a financial loss of 10.9 billion rupiahs (US$ 1.2 million) to the fisheries business in Tanggulangin and Porong subdistricts. President Susilo Bambang Yudhoyono declared the 400 ha area inundated by the mud flow as a disaster-prone area unfit for human habitation. As a consequence, 2,983 families had to be relocated to safer places.
On November 23, 2006, eleven fatalities were reported from the explosion of a gas pipe caused by the mud flow. The accident occurred due to significant subsidence of the ground, up to 2 m (6.5 ft), due to the outflow of mud causing a dyke to collapse resulting in the rupture of the state-owned Pertamina gas pipeline. The gas sent flames into the sky and according to the local people, the heat could be felt one kilometer (0.6 miles) away.
As of December 2007 the total volume of expelled mud was estimated at over 28,000 m³, covering an area of , burying eleven towns and displacing at least 16,000 people. It is expected that the mud eruption will last for years to come and the area will experience a significant depression, forming a large caldera.
Transportation and power transmission infrastructure has been damaged extensively in the area. Speaking in front of the People's Representative Council, the house speaker Agung Laksono declared that the state will need to finance the infrastructure repairs, while PT Lapindo Brantas will be responsible for financing the ongoing mitigation effort and also to pay 2.5 trillion rupiah as compensation to the victims. The Porong-Gempol toll road in East Java province has been significantly damaged by the mud flow and is practically inoperable. The chairman of the national team handling the disaster, Basuki Hadimuljono, indicated that a 12 km long, 120 m wide, corridor will be acquired to the west of the affected area in which to rebuild the turnpike and also to construct a new rail line and gas pipeline to replace the disrupted links. These costs will be carried by the public sector.
Ideas have been submitted for the constructive use of the mud for example as bricks and other building material. The heat of the process may also be usable for thermal energy.
There has been an effort to stop and/or lessen the effects of the mud flow through the dropping of chains of concrete balls into the crater. The hope is to shrink the size of the evacuation tube and thus slow the rate of flow. This plan has been criticised for potentially inducing further flows to the surface in an area already severely weakened rather than succeeding in stemming the flow. The first series of concrete balls was lowered into the mud volcano on February 24 2007. It was planned to deployed up to 1500 such balls. On March 19 2007, after hundreds of balls had been dropped into the mouth of the hole, the flow of mud stopped for a period of 30 minutes.
Drilling operations have been seriously hampered, with continual delays forced upon the relief well drilling team due to lack of funding. Drilling operations have been suspended until the implementation of the National Government Team's plan to plug the flow with the concrete balls.
There is controversy as to what triggered the eruption and whether the event was a natural disaster or not. According to PT Lapindo Brantas it was the May 2006 earthquake that triggered the mud flow eruption, and not their drilling activities. Two days before the mud eruption, an earthquake of moment magnitude 6.3 hit the south coast of Central Java and Yogyakarta provinces killing 6,234 people and leaving 1.5 million homeless. At a hearing before the parliamentary members, senior executives of PT Lapindo Brantas argued that the earthquake was so powerful that it had created deep underground faults, allowing the mud to flow thousands of meters away, and that their company presence was coincidental, which should exempt them from paying compensation damage to the victims. If the cause of the incident is determined to be natural, then the government of Indonesia has the responsibility to cover the damage instead. This argument was also recurrently echoed by Aburizal Bakrie, the Indonesian Minister of Welfare at that time, whose family firm controls the operator company PT Lapindo Brantas.
However the UK team of geologists downplayed Lapindo's argument and concluded that the earthquake was merely coincidental. While it could have generated a new fracture system and weakened strata surrounding the Banjar-Panji 1 well it could not have been the cause of the formation of the hydraulic fracture that created the main vent 200 m away from the borehole. Additionally there was no other mud volcano reported on Java after the earthquake and the main drilling site is 300 km (186.5 miles) away from the earthquake's epicenter. The intensity of the earthquake at the drilling site was estimated to have been only magnitude 2 on Richter scale, the same effect as of a heavy truck passing over the area.
Aburizal Bakrie frequently said that he is not involved in the company's operation and further detached himself from the incident. Even in his capacity as Minister of Welfare, Aburizal Bakrie was reluctant to visit the disaster site. Aburizal Bakrie's family business group, Bakrie Group, one of the owners of PT Lapindo Brantas, had been trying to distance themselves from the Lusi incident. Afraid of being liable for the disaster, Bakrie Group announced that they would sell PT Lapindo Brantas to an offshore company for only $2, but Indonesia's Capital Markets Supervisory Agency blocked the sale. A further attempt was made to try to sell to a company registered in the Virgin Islands, the Freehold Group, for US$1 million, which was also halted by the government supervisory agency for being an invalid sale. Lapindo Brantas was asked to pay about 2.5 trillion rupiah (about US$ 276.8 million) to the victims and about 1.3 trillion rupiah as additional costs to stop the flow. Some analysts predict that the Bakrie Group will emulate many US mining companies and pursue bankruptcy to avoid the cost of clean up, which could amount to US$ 1 billion.
On August 15, 2006, the East Java police seized the Banjar-Panji 1 well to secure it for the court case. The Indonesian environmental watchdog, WALHI, have meanwhile filed a suit against PT Lapindo Brantas, President Susilo Bambang Yudhoyono, the Indonesian Minister of Energy, the Indonesian Minister of Environmental Affairs and local officials.
After investigations by independent experts, police have concluded the mud flow was an "underground blow out", triggered by the drilling activity. It is further noted that the steel casing lining had not been used which could have prevented the disaster. Thirteen Lapindo Brantas' executives and engineers face twelve charges of violating Indonesian laws.
Workers helping to relocate families after new hot gas flows began to appear. The workers were taken to a local hospital to undergo treatment for severe burns. In Siring Barat, 319 more families have been displaced and in Kelurahan Jatirejo, 262 new families are also going to be affected by the new flows of gas. Protesting families took to the streets demanding compensations, which in turn added more delays to the already stressed detour road for Jalan Raya Porong and the The Porong-Gempol toll road.
The government has stated that their heart is with the people. Though the cabinet meeting on how to disperse the compensation has been delayed until further notice. Local official, Saiful Ilah, signed a statement announcing that "The government is going to defend the people of Siring." After this announcement all protests came to an end and traffic flow returned to normal an hour later.