A global water classification system to define water as reserves and resources to put on the balance sheet has been developed to ensure this increasingly scarce resource can be measured and quantified and, effectively, managed more responsibly.

The Water Resources Management System (WRMS) is a voluntary standard and non-prescriptive, setting the framework for a standardised approach to the quantification and definition of water resources.

Describing the process whereby water can be defined quantitatively as an asset for accounting and financial engineering purposes, former Venmyn Deloitte MD and WRMS author Andrew Clay, who in June 2020 published the document, explains that the efficient use of the scarce resource requires putting it in the balance sheet.

Effectively supported by the American Association for Petroleum Geologist and the Society for Petroleum Engineers, he tells Engineering News & Mining Weekly that the team is now working not only to obtain worldwide support, but encourage adoption in South Africa.

Clay is working with EY associate partner Siobhan Joubert to potentially enable EY to use the system as a general process primarily for financing transaction work.

While developing the document, Clay also secured support and assistance of former Deloitte colleagues, as well as qualified reserves evaluator Jeff Aldrich and Andrew Johnson from Ground Water Services.

Recognising the need for a water classification system in 2012 while at Deloitte, Clay developed the WRMS based on the principles for reporting of oil and gas under the Petroleum Resources Management System (PRMS), which is a globally adopted standard for reporting administered by the professional bodies of the oil and gas industry and deals with liquids and gas rather than the Minerals Codes under the Committee for Mineral Reserves International Reporting Standards, since the primary state of water is a liquid and a mineral.

It was developed to create a basis from which to do calculations of the estimates of the volumes of reserves and resources in a consistent and comparable manner within a comprehensive classification framework and enables the efficient use of water and effective management of remediation requirements.

According to a presentation done by the team 18 months ago to the California Water Board, the key motivators for the WRMS is to define, besides others, the principles for water balance supply and demand management to ensure water is maintained as a renewable and sustainable resource like any other mineral, and classify water resources as an asset, being a resource controlled by an enterprise from which future economic benefits can flow.

Further, it aims to create water utility structures which have the ability to use the water rights as assets to raise capital as part of responsible water use.

Often, water is regarded as a residual challenge linked to long term rehabilitation and environmental liabilities. However, water as a resource, compared with other minerals, is, many cases, renewable as the reservoirs are repeatedly depleted and recharged.

The WRMS intends to turn liabilities into assets for the water volumes and put them onto a balance sheet and ensure commercial ownership is controlled by the development entity, which will meet the accounting objectives for investor confidence and financing, according to excerpts from the document.

The conversion of residual water into potable water for resale can create an asset, offset the rehabilitation liability, and deliver a sustainable solution, leveraging water as a contributor to economic activity.

Once the water resource has been quantified as an asset, then the potential future benefits can be determined using the income approach, which creates a reliable measure.

“Water, if managed properly, becomes an ongoing sustainable solution,” he notes.

The costs are easy to determine, along with operating and capital expenditure.

“If you can classify residual water in a water balance, you have got specific volumes that you know how much you need to treat to make potable water.”

“You can work out the cost and you can finance it, because you can put the assets and liabilities onto the balance sheet through, for example, green bonds and other financial instruments.”

One significant challenge is the low cost of water.

“Water has always been cheap at source. This legacy of an inadequately priced commodity is coming to a close and the viability of water projects requires significant increases in the downstream sales price.”

The sustainable price can be calculated depending on the project discount rate and can, for convenience, be linked to the rehabilitation liability.

Having a consistent classification system also means that water can be traded, he adds, referring to the Nasdaq water futures, which trade fairly vigorously after opening in October last year.

This allows a price to be set in the market for water.

“Water is the commodity of the future and it is hoped that the water industry can similarly align in a classification process in order to develop and manage the planets water for the future benefit of mankind,” Clay concludes in the WRMS.