A permanent government agency has been set up to help communities affected by a torrent of mud that has swamped entire villages in East Java province, Indonesia's presidential spokesman said.

Toll roads, railway tracks and factories have been submerged and 15,000 people displaced since May when the mud began flowing out of a "mud volcano" following an oil-drilling accident in Sidoarjo, an industrial suburb near provincial capital Surabaya.

"The new team will continue efforts to rescue citizens, to handle social and infrastructure issues around the disaster areas," spokesman Andi Mallarangeng told reporters.

The Sidoarjo Mud Management Agency, chaired by a former army general, replaces a temporary team with a seven-month tenure that ended last week.

Mallarangeng said a decree to set up the team issued by President Susilo Bambang Yudhoyono stipulated the government was responsible for covering costs related to the disaster's social impact on people living outside swamped areas.

However, PT Lapindo Brantas, the operator of the Banjar Panji 1 well from where the mud has been flowing, would pay for stopping and handling the mudflow as well as compensation for directly affected residents, he said.

The well is part-owned by Australian company Santos; Lapindo Brantas is a unit of PT Energi Mega Persada Tbk.

Lapindo had been told by the government to pay 3.8 trillion rupiah ($A512.6 million) to victims and for efforts to halt the flow, but officials say the cost could double that.

The company and Energi dispute the idea that the disaster was caused by the drilling and also whether Lapindo alone should shoulder the cost. Energi is owned by the Bakrie Group, controlled by the family of Indonesia's chief social welfare minister, Aburizal Bakrie.

Scientists have dropped hundreds of concrete balls into the mouth of the mudflow to try and stop it but have so far failed.