Fire has all but destroyed a 'ghost ship' abandoned at one of Bali's most famous surf breaks, triggering fears of more environmental damage.

It was not clear who started the blaze aboard the 30-metre fishing boat on Tuesday night, but police did nothing to stop it and are not treating the fire as suspicious, a local politician says.

"The water police are not investigating. They told me that there's no problem with the shipwreck burning," said Puspa Negara, the local member for Badung Regency, which includes Padang-Padang.

"It's a bit of a nightmare.

"People are trying to chop up the (remains of the) boat and steal the engine and generator, and I am worried there will be pollution into the ecosystem."

The boat burned all Tuesday night until lunchtime on Wednesday, when the tide rose high enough to extinguish the flames, said a spokesman for ROLE Foundation, which runs marine projects in the area and has been working with authorities over the last month to salvage the vessel.

The burning of the Taiwanese fishing boat, which was discovered on July 12 abandoned on a reef at Padang-Padang, some 20km from Kuta beach, happened just days after a World Surfing Championship event was held at the break.

Negara said the incident was potentially embarrassing for Bali, and he was seeking support from the local government to pressure the water police to "take full responsibility to clean up the beach".

Mystery surrounds the 50-tonne fibreglass vessel amid allegations of mutiny and murder.

Its Taiwanese captain is missing, presumed dead, and Taiwan sought the help of Indonesian police to search for the Indonesian crew members who fled when it ran aground.

However, their investigation stalled with no body, no witnesses and a crime scene compromised by looters who took fish, fuel and equipment.

The vessel has also posed a major environmental problem for authorities since it washed up on the reef leaking petrol and oil.

Early attempts to tug it free failed and a large swell pushed it onto rocks at the base of the cliff, where its charred remains sit.

ROLE chairman Chris Moore, a shipbuilder by trade, said that when he heard it had been set alight he had just obtained permission from the ship owner's insurer in Taiwan to allow scrap merchants to take it apart piece-by-piece.

"We are a bit distraught," Moore said.

"Somebody decided the best way to deal with it was to torch it.

"It's an easy way of doing it, but not a very environmentally friendly way of doing it.

"They stripped all the railings off the top and then burnt the cabin and top of the hull to get into the engines; that's the only scrap value left, the engines and the steel."

He said the fire had caused another petrol leak in the area, which was cleaned by ROLE last month before the Rip Curl Pro SEARCH event, contested by the world's top 45 male surfers.

"There's petrol spilt in the ocean again and there's a big heap of black smouldering fibreglass mess in the lower half of the hull, which could be dragged across the reef," he said.

"We're there to pick up the pieces as usual."

The vessel was above the high tide mark for the moment, but would likely start to sink in coming days, he said.