READ AMANDA BROCK’S COLUMN IN THE JUNE ISSUE OF GLOBAL WATER INTELLIGENCE
Booms, busts, and the next big thing
Water needs to keep looking beyond the horizon, says Amanda Brock.
Water industry players are eternal optimists with short memories. Looking at the global macroeconomics of water scarcity and infrastructure needs, who can blame us? Any logical person would conclude that there is big money to be made and invested. Consider California – one would assume that opportunities abound for smart water companies and investors. However, while there is growth in certain niche segments, there remain few viable options for the private sector to develop and fund long-term sustainable solutions. Water is not always about logic.
The American Water Works Association just published its 2015 Annual State of the Water Industry Report, which again concludes that infrastructure challenges top the list of concerns, and questions how to finance critical infrastructure. AWWA estimates $1 trillion is needed in investment to replace and expand US water and wastewater infrastructure. The reality, however, is that the municipal market has not developed as hoped, and continues to disappoint private sector investors. While the lack of opportunities has driven certain players to exit the market, the sheer magnitude of investment required is so tantalising that they are quickly replaced by fresh players keen to crack the code.
With the hurdles facing the growth of the municipal sector, many hoped that the “next big thing” in water would be water treatment in the unconventional oil and gas sector. But as rapidly as the market grew, it then contracted. Many water and oil field service companies which made significant investments in the sector are scrambling to redefine their focus. While the energy industry is used to dramatic boom and bust cycles, water players are not, and this sort of volatility has hit them particularly hard.
To compound the problem, the US Environmental Protection Agency has now published its long-awaited draft report on the impact of hydraulic fracturing, concluding that frac’ing has not led to widespread systemic impacts on drinking water sources. This result will further delay investment in water treatment in the unconventional energy sector. Only those companies with strong balance sheets, well-defined channels to market and a diverse product and client base, or those with proven, commercialised technologies that lower costs, will survive in the longer term.
So what now? We do what we always do: try to ignore the disappointments and look for the “next big thing” to get excited about.
Players are now rushing to position themselves in the growing industrial and power sectors, fuelled by the availability of cheap energy. Power utilities now see themselves as the next big water players, capable of taking advantage of their access to the retail market, their own water needs, their ability to co-locate power, water treatment facilities and desalination plants and, most promisingly, delivering behind-the-fence, multi-commodity services to industrial clients. Allete, a Minnesota- based power utility, recently bought U.S. Water Services, an integrated industrial water management company, in order to gain access to the industrial sector, and more M&A activity is predicted.
Desalination is all the buzz in Texas, and companies are arriving in droves touting their references and establishing offices. Curiously, European players are looking to expand into the US and Mexico, while US players are looking to expand globally. Meanwhile, all is not lost in the oil and gas water treatment sector. There is continued growth in water treatment for enhanced oil recovery, smart water injection and produced water treatment, recycling, and waste minimisation, while a mid-stream sector is beginning to emerge.
Overall, we should be cautious and consider the implications of the markets that have not developed as anticipated, and consider lessons learned. Making money and succeeding in the water sector is hard. But what makes us unique in water is the very fact that we have short memories and are always looking forward. As eternal optimists, we remain convinced that we will always be the ones to find the “next big thing.”