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Investing in Desalination

Written By Nick Hodge

Posted April 15, 2009

blue goldJust to recap, we’ve been discussing water shortages and related problems for a few weeks now.

In the first issue of this Blue Gold series, I discussed the numerous water problems we hear about a lot but never really string together to get a full sense of the scope of the water issue.

Such problems include incessant drought in the American Southeast and Southwest, arid population centers in Australia and the Middle East, and falling water tables and reservoirs that generally make weekly headlines.

We also learned that, if nothing is done, two thirds of the world’s population would live in water-stressed areas by 2030. One third of the population already suffers that plight.

In the second issue, we learned about river systems that are increasingly at risk of being overused or overpolluted, and discussed how industries are dependent upon a supply of clean water for everyday operation.

Today, we’ll continue to discuss the link between water and industry before getting to a few of the profitable solutions to looming water problems.

The Energy-Water Nexus

As I said, we began to discuss water’s impact on other industries last week.

We learned, for example, that it takes 37 gallons of water to grow, package, and ship enough coffee to make a single cup of morning Joe.

Similar statistics can be found for nearly any manufactured or processed good. All agriculture is reliant on water to grow crops. All meat came from livestock processes that are water intensive.

Factories need large amounts of water for cooling and processing and cleaning. You get the idea. Water is not only our lifeblood, but the lifeblood of the entire economy — no matter oil’s attempts to claim that spot.

And speaking of oil. No industry is more inextricably tied to water availability than energy.

Take a look at just a few of those relationships:

  • It takes, for example, 4 barrels of water to produce just one barrel of oil

  • The Canadian tar sands use more water than the entire population of Alberta (where they’re located) on an annual basis

  • In the U.S., the transportation and purification of water consumers 4% of all electricity

  • In California, water consumes 19% of the state’s electricity and 31% of its natural gas

  • It takes 800 gallons of water to generate one megawatt-hour of electricity

  • 50%-80% of desalination costs are for energy

Pay attention to that last bullet. It’s the one that will do the most to solve the energy-water problem and to generate profits for savvy investors.

Solutions to the Water Problem

I recently saw a commercial saying that if every American cut their shower short by 2 minutes we’d save enough water everyday to fill the Great Lakes.

While I don’t know if that’s true or not, I certainly appreciate the intention. But I question the efficacy.

It seems to me there should be a more systemic approach to solving our water woes than public awareness campaigns asking me to take shorter showers.

Indeed, conservation will be part of the solution, but it needs to be regulated, incentivized, and carefully implemented. History has taught that consumers don’t change their behaviors easily. . . we’ve been seeking energy independence since the 1970s, remember.

To be sure, water conservation will eventually take root, only it will be via rate-based schemes that mandate it, kind of like cap-and-trade.

It’s an important aspect of solving water problems, but not a very profitable one.

That comes when market-based solutions start emerging. We saw the initial glimpses of this in the recently passed stimulus, which allocated $20 billion for improving and updating clean water infrastructure.

That money will go to companies specializing in improving our water delivery system. . . from pipes and valves to entire wastewater purification systems. This is the systemic method of improving the efficiency of the water system.

And steady profits stand to be made by investing in the stalwarts of that sector. Companies like Jacobs Engineering (NYSE: JEC) and Veolia Environment (NYSE: VE) are sure bets as the stimulus money begins flowing and water issues start rising to the surface.

But the most obvious solution to prolonged water shortages is desalination, exploiting the 97.5% of our water that has largely been off the table. So far, desalination hasn’t been a real option because of its intense energy requirement.

The "energy-water nexus" has delayed the rapid expansion of desalination because up to 80% of its costs are for energy to pressurize and move water.

That’s why only 10 to 14 billion gallons of water are desalinated annually. . . a mere 0.26% of global water demand.

Nonetheless, the water problem is growing more dire. So, energy requirement or not, desalination is slated to greatly expand.

A recent industry report by Lux Research said "the global desalinated water supply will grow at a CAGR of 9.5% over the next decade, reaching 54 billion m3/year (cubic meters per year) in 2020. . .or triple what it had been in 2008."

That’s 200% growth in the next 10 years — a major profit opportunity.

What’s more, there’s one company that has a device that reduces the energy consumption of desalination by up to 60%. So you can imagine how popular their product is.

Their market share in the desalination industry grew 51% from 2005 to 2006, and another 151% from 2006 to 2007. Its revenue has grown 400% in the same time.

GE, Doosan, Hyflux . . .they’ve all contracted to use this company’s product in upcoming desalination projects. It’s estimated that this company’s product will be used in 70% of all new such projects.

And yet the company trades for about $7.00. It’s the perfect blockbuster opportunity.

As a part of the Blue Gold series, I’ve compiled a special report all about the company and the potential profits you could make by acting now.

Click here to learn all about the tiny company that will take the $95 billion desalination industry by storm.

Call it like you see it,

nick hodge