(Adds background, analyst comments) By Nury Sybli and Harry Suhartono JAKARTA, Nov 28 (Reuters) - Indonesian energy and mining firm PT Energi <ENRG.JK> on Tuesday lost a potential buyer of some gas assets as controversy over devastating mud flows from near a drilling site in East Java continued to rage. PT Energi Mega Persada Tbk wants to sell stakes in firms that control gas block operator Lapindo Brantas -- a company that has been blamed for causing mud to gush from near a drilling site for months. The flow has inundated surrounding villages and displaced more than 10,000 people. A gas pipeline explosion last week which killed 11 people has also been linked to the mud flow. Lapindo has denied the mud is directly linked to the drilling operation. Lapindo holds a 50 percent stake in the Brantas block and is controlled by the family of Indonesia's chief social welfare minister, Aburizal Bakrie. PT Energi said on Nov. 15 it had reached a deal to sell its shares in two units that control Lapindo to Freehold Group Limited, a firm incorporated in the British Virgin Islands. But in a statement on Tuesday, PT Energi said: "Freehold has told the company of its intention to cancel the sale and purchase agreement between the company and Freehold, related to the controversy with the sale of the stakes." Anger has mounted over the failure to stem the mud flow, with strong protests from the Indonesian public as well as pressure groups such as Greenpeace, which held a protest by dumping black-greyish mud at the office of Minister Bakrie in September. The government, including Minister Bakrie, has said that Lapindo should be held responsible for the disaster. The minister has said that he is no longer involved in the activity of the business group since holding public office. OPPOSITON FROM MARKETS WATCHDOG The latest deal has faced opposition from Indonesia's capital markets watchdog (Bapepam), which had also blocked a previous attempt by Energi to divest its stakes in those firms controlling Lapindo to an affiliated company. Laksono Widodo, head of equities at Mandiri Sekuritas, said the sale would have helped Energi's minority shareholders, but felt Bapepam was looking at the public interest. "Bapepam has a strong reason to reject the sale and the fact that Energi accepted that decision is something that should have happened in the first place.". A partner in Brantas block, Medco E&P Brantas, a unit of Medco Energi, has filed a complaint against PT Lapindo Brantas in international arbitration over the exploration accident. Medco, which holds a 32 percent stake in the Brantas block, is seeking to relieve itself of any financial costs stemming from the drilling accident. Several experts have said the mudflow could have been triggered by a crack about 6,000 feet (1,800 metres) deep inside the well operated by Lapindo. (Additional reporting by Yoga Rusmana in Jakarta and Heri Retnowati in Surabaya)
