Windfall: The Booming Business of Global Warming (16 page)

The man I’d come to meet was John Dickerson, the founder and CEO of the sixteen-person Summit Global Management, a former CIA analyst, and the buyer of billions of gallons of water in two vital, desiccating river systems I would spend weeks tracing: the Colorado and Australia’s Murray-Darling. Both systems had experienced unprecedented recent droughts, which scientists tied to climate change. Financial managers like Dickerson, meanwhile, had experienced the opposite: a flood of money. Summit had launched its first water fund in 1999, but “for a long time,” he told me, “I was a voice in the wilderness. We couldn’t get anybody to buy our fund. Then came Al Gore and his stuff, the whole global-warming thing, droughts. Water became the go-to idea.”

For the climate investor, water was the obvious thing. Carbon emissions are invisible. Temperatures are an abstraction. But melting ice, empty reservoirs, lapping waves, and torrential rainstorms are physical, tangible—the face of climate change. Water is what makes it real. After
An Inconvenient Truth,
during 2007’s record melt in the Arctic Ocean, at least fifteen water mutual funds had launched globally, more than doubling the number in existence. In two years, the amount of money under management ballooned tenfold to $13 billion. Credit Suisse, UBS, and Goldman Sachs hired dedicated water analysts, the latter calling water “the petroleum of the next century” and referring to “major multi-year droughts” in Israel, Australia, and the American West. “At the risk of being alarmist,” Goldman said in a 2008 report, “we see parallels with Malthusian economics.”

Citigroup’s chief economist, Willem Buiter, would take it further. “I expect to see in the near future a massive expansion of investment in the water sector,” he wrote, “including the production of fresh, clean water from other sources (desalination, purification), storage, shipping and transportation of water. I expect to see pipeline networks that will exceed the capacity of those for oil and gas today. I see fleets of water tankers (single-hulled!) and storage facilities that will dwarf those we currently have for oil, natural gas and LNG. There will be different grades and types of fresh water, just the way we have light sweet and heavy sour crude oil today. Water as an asset class will, in my view, become eventually the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals.” It was Etan Bar’s elevator pitch from Israel all over again—if there’s a market for anything, it’s water, because there is no water!—only this time there was real money behind it.

In his office, Dickerson, in his late sixties, sat in a leather chair next to a window and an old PC, and I sat across his desk from him. The walls had photographs of Alaskan glaciers and Utahan deserts—Dickerson took them himself—and a bookshelf had three copies of
An Inconvenient Truth
and two of
Cadillac Desert,
the seminal 1986 book on water and political power in the American West. Its author, the environmental icon Marc Reisner, was a Summit board member before his death in 2000. “There are all these Zen-like things about water,” Dickerson told me. “It’s the most necessary of all commodities. You know, there’s no substitute for it at any price. And we cannot make water. Did you ever think about that, really? Hydrogen and oxygen. You can’t grow it. It’s a substance that is gonna be forever fixed on this planet.”

Where the water was, already the people often were not. “We still have the exact same amount in our ecosphere,” he continued, “but the ultimate effect of global warming is that percentage that is freshwater is getting smaller, the percentage that is salt water is getting larger, and the maldistribution of freshwater is getting much more severe.” There were record floods in China, unprecedented droughts in Australia. “We seem to go to these climatic extremes,” he said. The “supply/demand imbalance” for water—fueled by population growth, accelerated by carbon emissions—was only increasing. It was a situation ripe for speculation, except there was no easy way for most investors to get in. “If you’re a mom and pop, sitting in Peoria, so to speak, you can buy wheat futures, pork bellies, oats, orange juice futures,” Dickerson explained, but “oddly enough, not water futures.”

Summit’s first water fund, which was up 200 percent after its first decade, with $600 million under management, had navigated this roadblock by picking stocks within the convoluted $400 billion field Dickerson termed “hydrocommerce”: the business of storing, treating, and delivering water for use in households, manufacturing, and agriculture. Dickerson’s newer rivals, including funds from Pictet, Terrapin, and Credit Suisse, mostly did the same. They bought shares of builder-operator multinationals such as France’s Veolia, of the tagline “L’environnement est un défi industriel”—“The environment is an industrial challenge”—and Suez, its compatriot and major rival in water treatment and desalination. They bought diggers of ditches, layers of pipelines, and manufacturers of filters, pumps, meters, membranes, valves, and electronic controls. They also bought privatized utilities in cities big and small, though these, despite—or perhaps because of—widespread fear of financialization of water, serviced just 12 percent of the American public, 10 percent of the globe, and they could hike rates only as high as regulators would allow.

The investable universe of hydrocommerce was small—about four hundred publicly traded companies, according to Summit—and the recent gush of new investors was dramatic, and prices had become inflated. “I’m a value investor,” Dickerson said. Rather than try to time the ups and downs of the market, he bought stocks strictly based on their price in relation to what the company itself was worth. So in overheated 2007 and 2008, he found himself selling more than buying—and the resulting cash hoard was one reason Summit had survived the financial crisis largely unscathed.

Dickerson’s second response to creeping global drought and sudden pressure from rival investors was more intriguing and, as other funds again began to follow his lead, more significant: He had decided that hydrocommerce—things merely related to water—wasn’t enough. He wanted actual water: “wet water,” as he called it. Raw water. The thing itself. In June 2008, he opened a second hedge fund, the Summit Water Development Group, to amass water rights in Australia and the American West. Already the new fund had attracted hundreds of millions of dollars. “I’ve watched water rights go up and up,” Dickerson told me. “Just tick, tick, tick, tick.” He lifted a hand in the air, jerkily raising it higher and higher. “The real future,” he said, “is going to be the direct assets—not through the medium of a utility, not through the medium of a pump company—but the direct, physical water assets.”

 • • • 

“WATER FLOWS UPHILL
to money,” wrote Marc Reisner in
Cadillac Desert
. The adage captures the spirit of the moment, but as a description of what is happening to water the more the world warms, the more rivers like the Colorado wither, it is imprecise. Water is heavy—about 8.3 pounds per gallon—and to move it in bulk without significant help from gravity or the Army Corps of Engineers was still too expensive for privateers to profitably pull off. If Citigroup’s Willem Buiter was right about the future of international water markets, parts of that future were proving slow to arrive.

The comparative shrewdness of zero-sum strategies like that of the Summit Water Development Group, which bought up rights within a stressed river system rather than importing water from overseas, is illustrated by the failures of recent bulk-shipping schemes. In the Mediterranean, a $150 million water treatment and export facility was completed in 1998 near the mouth of Turkey’s southerly Manavgat River, and four hundred miles south an intake pipeline was built in Ashkelon, Israel, now home to the massive desalination plant I visited with IDE. The two countries’ 2004 “water for arms” deal—certain high-tech weapons would go to Turkey, 13 billion gallons of Manavgat water a year to Israel—quickly fell apart over high costs and diverging politics. In Sitka, Alaska, one company after another signed one-cent-per-gallon contracts for up to 2.9 billion gallons a year from the city’s Blue Lake. A pipeline was built in 2007 to fill tanker ships with 60 million gallons apiece, and the Texas-based S2C Global Systems, the latest lessee, declared that it was creating its first “World Water Hub” in southern India. But the contracts in Sitka kept requiring extensions; especially in India, the water-poor are often money-poor, and S2C has seemed unable to find the right buyer. Not a drop has been shipped from the harbor.

In Iceland, per capita the most water-rich country in the world, at least until Greenland gets its independence, three successive ventures have negotiated leases in which they would pay a tenth as much per gallon as S2C for the water running off the Snaefellsjökull, the volcano from Jules Verne’s
Journey to the Center of the Earth
. One was a fraudulently run hedge fund managed by a Canadian former dentist named Otto Spork, another a more aboveboard venture by a British hedge fund called Moonraker. None has exported more than a few bottles, let alone turned a profit. In 2011, I visited Spork’s half-built water plant on the flanks of the volcano: sheet metal, dirt floors, 100,000 square feet, two pipelines dumping ninety liters per second of glacier water uselessly into the sea. “Everywhere in the world,” explained one Icelander who had run the numbers on shipping costs, “it is cheaper to do desalination.”

The water industry’s biggest dreamers are the “bag and drag” men: those who would fill enormous polyester bags with freshwater and tow them through the oceans. Best known is Terry Spragg, the obsessed inventor of the Spragg Bag (www.waterbag.com). In the early 1970s, the Rand Corporation was studying how to tow icebergs to perennially water-stressed Southern California, and Spragg, who was ski bumming through the Rockies at the time, got in touch with the authors. Soon he was representing Prince Mohamed Al-Faisal of Saudi Arabia, the founder of Iceberg Transport International Ltd. and sponsor, in 1977, of the First International Conference and Workshops on Iceberg Utilization for Fresh Water Production, Weather Modification, and Other Applications. (Papers and talks included the succinctly titled “Calving.”) The next year, Spragg got the California legislature to endorse iceberg towing. But gradually he lost faith in it himself. Icebergs melted too quickly. “I said: ‘Let’s just go to the mouth of a river and fill a bag,’” he told me. “I’m just trying to solve a problem: There’s enough water in the world, just not in the right places.”

Spragg made his first water bag in 1990 and tested it in Puget Sound near Seattle. He filled it up at the edge of the rain forest on the Olympic Peninsula—“the best place in the whole United States for water”—and began to tow, then watched the bag split open and spill 700,000 gallons into the sound. Undeterred, he had an MIT professor help him design and patent a zipper system with big enough teeth to hold two big water bags together. He hired the Colorado engineering firm CH2M Hill—ubiquitous in the profitable battle against drought, with tunnel projects near Las Vegas and desalination plants in Australia—to design a water bag loading and unloading system. He began envisioning bladders the shape and general size of a nuclear submarine, zipped one to the next in fifty-bag trains and deposited one by one in depots worldwide. In 1996, he completed a successful drag across Puget Sound to Seattle, only to have a tugboat run into his docked prototype. He had no insurance.

Spragg took interest in the Manavgat, hiring an agent in Israel, as he would later do in Australia as the Murray-Darling ran dry. He wrote a heroic novel about saving the Middle East via water bags—
Water, War, and Peace
—that starred a thinly autobiographical character named Gerald Earl Davis. But the Manavgat still flows mostly to the sea and the novel remains unpublished, and for two decades Spragg has been trying to raise money for another prototype. As for the common petroleum-to-plowshares dream of shipping water with old single-hull oil tankers—which are in low demand after the
Exxon Valdez
—he and other experts are dismissive. Single-hull tankers may be inexpensive to buy, but they are expensive to retrofit. Not only do the ships’ holds need to be cleaned, but pipes, pumps, valves, and washers need to be replaced. “I’ve seen the numbers,” says Spragg. “Basically, it’s cheaper to take the tanker and cut it down and use it for scrap than to redo it.”

Another would-be bagger was Ric Davidge, a deputy to Secretary of the Interior James Watt during the Reagan administration who later became Alaska’s first director of water. In 2000, he enraged Northern Californians with a proposal to bag water from two Mendocino-area rivers, the Albion and the Gualala, and tow it six hundred miles south to import-dependent San Diego. The plan had to be abandoned in the face of angry opposition, and Davidge had to rename his company. At the time he was also chairman of a consortium called World Water SA, which consisted of a large Japanese shipping line, a Saudi industrial conglomerate, and a Scandinavian water bag company, Nordic Water Supply. Nordic’s bags were among the few in history to see commercial use, delivering five million gallons a pop from the Manavgat to arid Cyprus. Bags of freshwater float high in the salty Mediterranean, but Nordic’s costs were more crippling than Davidge and the other partners were told. Nordic went bankrupt soon after Davidge was run out of Mendocino. The “first law of Davidge water,” he explained to me, “is that everybody lies about transport costs. Don’t talk to me about sources. I know sources all over the world. Talk to me about conveyance systems.”

A decade later, Davidge had mostly given up on water bags. There were promising new tanker designs coming out of Europe and Asia, he said, and his new company, Aqueous, had lately been negotiating with Sitka. Spragg, meanwhile, had not given up. “In Spragg’s perfect world,” he told me, “which may be crazy, I could store the bags on a big spit on the Olympic Peninsula, then take them out into the ocean and let them go, track them by GPS. The currents will take them all the way to Southern California.”