Bulk water exchange

By Sarah O’Connor

Published: July 23 2008 16:17 | Last updated: July 23 2008 16:17

Otto Spork has hired three glaciers. He is siphoning off the melting glacier water, and plans to put it in tankers and ship it to thirsty companies and countries across the globe.

Water is the new oil, reckons Mr Spork, chief executive of Canadian hedge fund Sextant Capital Management: “Two years ago we were looking for the next big commodity and settled on water. It was underappreciated, mispriced, and growing scarce.”

Sextant bought 95-year water rights to three glaciers in northern Europe, all close to ports. One glacier will be used to create bottled water; the other two will provide bulk water transported to customers in 24,000 litre containers or supertankers.

Mr Spork plans to float his glacier-owning companies in the next 6 months, and says he is in talks with major commodity exchanges which he hopes will lead to a global market in water futures, fed by his glaciers.

Is the former dentist mad, or inspired?

Water certainly is scarce. The growing global population, climate change, waste and pollution have conspired to put pressure on the 1 per cent of the world’s water mass that is both fresh and available.

Merrill Lynch estimates that by 2025 two thirds of the world’s population could be living in conditions of “water stress”, which would have a major impact on farming (which uses 70 per cent of the world’s freshwater), industry (22 per cent) and day-to-day living (8 per cent.)

Statistics like that have persuaded the “commodities king” Jim Rogers, who has a track record for timely and lucrative investments, of Mr Spork’s point of view.

“Water is the single most important resource because without water there’s no agriculture, there’s no industry,” he says. “You can survive war and famine and plague and epidemics and a thousand other things but you can’t survive without water.”

Legendary oil investor T.Boone Pickens agrees, and has spent $100m buying up water rights in Texas and building a 250 mile pipeline to the city of Dallas, where he hopes to sell it.

But water is not yet traded as a global commodity. It is owned, by and large, by governments, not by private companies. It is heavily subsidised in many countries, particularly for farmers, exacerbating waste and inefficiency. Prices vary hugely across the globe, and often the poorest people without access to municipal water pay huge premiums.

Water needs to become more expensive, says Mr Rogers, and the free market is the best tool for the job.

“When something’s free people use it. When it’s priced to market rates people use less of it, and people find more of it and bring it to market. This is simple economics since the beginning of time,” he says.

Christopher Gasson, publisher of journal Global Water Intelligence, says the wheels are in motion: “Previously the price of water has been set primarily by social concerns. Now we are moving to a time where the main driver will be scarcity.”

Indeed, there are already examples of water trading within nations.

Australia made the leap 25 years ago when the government instigated a water trading system after it realised farmers had been over-allocated water and were depleting the country’s reserves.

Canberra said farmers who wanted permanent water rights or annual allocations should trade them with each other, much like the trade in carbon.

Last year $1.3 billion in permanent and temporary water rights were traded across specialised exchanges in Australia, according to national water broker Waterfind. The market is growing at 20 per cent a year.

“It’s only recently that water values have started to climb and the markets have gained some critical mass,” says Tom Rooney, Waterfind’s chief executive. “Now people can invest in water and hold water without land, like an investment…it’s starting to turn into a commodity.”

Mr Rooney says the market, as yet unregulated, is maturing fast. Although most trading is done between farmers, he says some national and international investment groups are also moving in. Water derivatives are being developed.

Parched west Texas also has a history of water rights trading, and there are murmurings of similar plans in China and India.

Dan Nees, an associate at the World Resources Institute, thinks new pricing mechanisms are inevitable. “We’re going to get the right price signals in placed country by country, some via water trading, others via municipalities raising rates,” he says. “Then it’s just a matter of time before we can move to a global market.”

However, a global market in physical water, not just water rights, faces practical and political hurdles.

Water is essentially local, difficult and expensive to transport. T.Boone Pickens hasn’t managed to persuade Dallas to buy his water yet. He is asking too high a price, the city says.

When Barcelona shipped in tankers of drinking water this summer, it paid around $3 a cubic metre according to Mr Gasson – more than triple the “average” cost. The city saw it as a stop-gap, and is now feverishly building desalinisation plants instead.

“Most international transfers of water would require shipping, and if you have a nearby sea, you may as well just desalinate the water instead,” says Mr Gasson.

Otto Spork has staked a lot of money on his bet that Mr Gasson is wrong. “Water is the most inelastic of commodities, people will pay any price to get what they need and pricing has started to increase to a point where it becomes feasible for people to ship water,” he says.

If Mr Spork’s vision was realised, it would be political dynamite.

Danielle Morley, policy researcher at Water Aid, echoes the feelings of many when she says the charity would always oppose water – a basic human right – being taken from public hands.

“How would water trading support access to water for the billions of people that don’t have it?” she asks. “In countries without strong regulators, you would have corruption, private entities buying water, taking the rights to water away from poor people.”

Mr Nees says any trading system would have to be coupled with government regulation, control, and protection for the poor. “It’s a very real concern, we’re talking about millions of people that could be priced out of the water market,

“But that’s not an argument for not having a market, it’s an argument for not having poorly designed markets or poor governments.”

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