Drinking Deep: At Keahole Point, It’s Boom Time for Seawater Bottlers

posted in: July 2006 | 0

Feeding – or, more precisely, watering – this Japanese fad has pushed “unsweetened water” to the top of Hawai`i’s list of export commodities. Greg Barbour of the Foreign Trade Zone Division of the state’s Department of Business, Economic Development, and Tourism, confirmed recent well-publicized news accounts that the self-reported value of the water shipped abroad by the Keahole bottlers made up most of the $8.8 million in exports of that commodity in the first quarter of 2006, more than double the value of the second-ranked export, chocolate and cocoa products ($4.2 million) or coffee (third-ranked, at $3.9 million).

The water bottlers rely on an infrastructure – pipes, pumps, plumbing – installed by the state over the last 25 years at a cost approaching $80 million. The original plan for the area was to support research and development of alternative energy technologies, with ocean-thermal energy conversion (OTEC) first among them. The bottlers’ facilities are built on state-owned land that was intended to support industries, such as aquaculture, that could put the pumped seawater to productive use.

Now, though, OTEC is but a distant memory. To be sure, it and other energy applications are always being discussed, but few seem to make it past the planning stages. The number of going aquaculture tenants at Keahole hovers around 16 and includes two large producers of algae products, a company that grows abalone for export to Asia, a seahorse nursery, two shrimp growers, and assorted other operations.

But for the last three years, the real growth industry at Keahole has been the desalination and bottling of seawater. In the first quarter of 2006, rents from the six bottlers amounted to around $30,000 a month, easily eclipsing the rent paid by the largest tenant, micro-algae cultivator Cyanotech (monthly rent $12,331). The rents would be even larger, but for contractual discounts allowing the bottlers to deduct up to 69 percent of the cost of their improvements. In addition, the bottlers pay royalties for the use of the NELHA “service mark,” intended to assure consumers that the water they’re buying comes from Hawai`i.

A Fad?

The bottling enterprises occupy much of the mauka part of land managed by NELHA, which lies to the south and west of the Kona airport. Several of the bottling facilities are housed in enormous sprung-steel tent-like structures. Security is tight, with guards posted at the entry to the largest compound, that of Koyo, and the rest of the facilities surrounded by chain-link fences with locked gates.

The process of desalination is not rocket science, with the bottlers employing reverse osmosis technology. This system involves pumping the ocean water through a membrane that filters out most of the mineral and organic content. Still, the precise methods used to give each brand of bottled water its unique profile of minerals is jealously guarded. The representatives of bottlers who spoke to Environment Hawai`i denied that they added back minerals to the desalinated water. Someone familiar with the methods used said that, in essence, the bottlers put “holes” in the membranes used in the reverse-osmosis process, allowing them some degree of control over the minerals in the final product.

That micro-mineral content is what the bottlers use in selling their particular brand of desalinated water. All of them tout the notion that the water has special properties – that it is thousands of years old and consists of melted glaciers that have been transported from the poles to Hawai`i by means of a deep ocean “conveyor belt,” that it is exceptionally pure and pollution-free. (Most water is thousands of years old, of course, and any water that undergoes the reverse-osmosis or distillation process will be pure and pollution-free.)

More than three years ago, Tom Daniel, NELHA’s scientific/technical director, described the development of the deep seawater mystique in Asia. “Sometime about 1996,” Daniel wrote in a paper he gave at the 2003 Pacific Congress on Marine Technology in Taiwan, “a widely watched television program in Japan claimed that because the DOW [deep ocean water] is very pure, drinking it will make one healthy.”

Daniel scoffed at any claim of healthful properties for the water. “Desalinated deep seawater is no different from other pure water,” he wrote. “Some ‘nutrients’ can be allowed to remain through the desalination process, but exactly the same product would result from adding those nutrients to pure water.”

Nor was the desalination process a harmless indulgence of a fad, according to Daniel: “Both the pumping and desalination of DOW consume large amounts of energy and money. There is no logical reason to expend these precious resources to produce ‘healthy water,’ since the same product can be produced much less expensively from other water sources. Since desalination processes remove all contaminants from the water along with the salt, even polluted surface seawater can serve as a less expensive source for the ‘healthy’ product. Desalination is a waste of the DOW resource, and I fear that when people realize that there is nothing special about the desalinated DOW, they will mistakenly reject all of DOW’s truly beneficial uses.”

Daniel wrapped up his paper with a parting shot at the change in state administration that promoted a profit orientation for NELHA, at the expense of research. “The new policy increases tenant operating expenses, thus penalizing rather than rewarding tenants in the costly startup phases of innovation and new technology development,” he wrote. “Existing tenants are looking elsewhere for an environment that supports innovation, and new tenants are almost all Japanese companies planning to desalinate and bottle DOW for sale as drinking water… The administration demonstrates poor leadership when it supports bottled water businesses of dubious value and fails to support innovative new technologies.”

For his candor, Daniel was fired in early 2004 by the then-NELHA director, Jeff Smith. (Daniel’s position remains unfilled.) Smith, a champion of desalinated water, left NELHA himself a few months later to work for Deep Seawater International, one of the Keahole bottlers.

NELHA’s new executive director, Ron Baird, who came on board in 2005, is not bucking the trend. In an interview with a writer for a California paper, he spoke in glowing terms of the deep ocean water bottled by a NELHA tenant: “It’s delicious – I and my staff are hooked on it. I think people are recognizing the benefits of putting healthier food and drink in their bodies.”

“I believe they [the bottlers] will be a long-term source of revenue for NELHA, even though they’re just in the start-up phase,” Baird told Environment Hawai`i. “Look at the success of Koyo,” he said, referring to the largest of the three plants now operating. “You’ve got to say that if everyone else does as well as Koyo, it’s the thing that’s going to work here in terms of making the [Natural Energy] lab go well.”

A Costly Addiction

Baird may tout the health benefits of bottled deep ocean water, but the real benefits for NELHA are to its bottom line. Or so the thinking goes. The bottlers pay land rent and, for use of the NELHA “service mark,” royalties.

The rent and royalty arrangements can be lucrative indeed. Consider the case of Koyo. Under terms of its lease, base rent for the 30 acres of land it occupies comes to about $670,000 a year, with gradual increases to more than $1 million by 2019. But while that sounds like a sweet deal, it pales in comparison to Koyo’s sales projections. In addition, Koyo is allowed to discount its rent payments over the first 10 years of its lease 69 percent a year to offset the cost of capital improvements, up to a total of $10 million.

In addition, Koyo agreed to pay a royalty of a tenth of a nickel for every liter-and-a-half bottle of desalinated Keahole water it ships out. For 2005, total payments by Koyo to NELHA came to just over $300,000. Allowing the maximum for rent offsets, the lease payments represented about $214,000 of that amount. Royalties account for the remaining $86,000. (That figure for royalties suggests that Koyo’s sales in 2005 fell short of its projections – calling for sales of more than 25 million 1.5-liter bottles – by nearly a third.)

In 2006, Koyo anticipates exporting nearly 29 million 1.5-liter bottles, with gross sales projected to exceed $21 million. By 2010, when Koyo expects gross sales will approach $33.5 million, NELHA can look forward to combined royalty and rent payments amounting to $623,000, or less than 2 percent.

The original agreement between NELHA and Savers Holdings, another bottler (still starting up operations) provided for even higher royalties – up to 2 cents per liter (for half-liter bottles), with minimum annual royalty payments of $30,000 a year, even during construction and start-up periods. Hawai`i Deep Marine agreed to royalty payments of $0.003 per liter, about 10 percent less than Koyo’s rate.

Deep Seawater International – the company that employs former NELHA director Jeff Smith – negotiated bargain-basement rates of $0.0004 per liter, roughly 12 percent of Koyo’s royalty rate.

After Savers protested the lack of uniformity among royalty rates, NELHA attempted to renegotiate royalties with the bottlers. According to NELHA’s 2005 annual report, all the bottlers now pay the same rate. In fact, though, not all the bottlers have agreed to amend their contracts. NELHA’s accounting office confirmed that most have settled on royalty payments of $0.01262 per gallon, or $0.003 per liter (slightly less than what Koyo, the largest bottler, was paying), Deep Seawater International has balked at consenting to what amounts to an eight-fold increase in its royalty commitment to NELHA.

The lease structures remain as varied as the royalty structures were. Deep Seawater International, for example, pays $48,000 a year for its 20-acre site or 2 percent of gross sales, whichever is greater. (Gross sales do not include taxes, tariffs, commissions, or shipping costs.) It can take as a credit against any percentage rent owed beyond the base rent an offset for up to 100 percent the cost of permanent land improvements and 35 percent of the cost for above-ground improvements during the first five years of its lease. Since August 2004, Deep Seawater has never paid more than its base rent. After five years, base rent jumps 10-fold, to $40,000 a month, with no further offsets allowed.

By that sixth year, however, Deep Seawater is forecasting gross sales of more than $135 million. Payments to NELHA will amount to some $3 million, just over 2 percent of gross sales.

Close Ties

Most of the contracts between the bottlers and NELHA were signed by Jeff Smith as executive director of NELHA. The agreement between NELHA and Deep Seawater International was inked in June of 2004. In September, Smith started work as chief operating officer of Deep Seawater. In January 2005, he was joined there by another former state employee, Steve Bretschneider, who stepped down from his post as deputy director of DBEDT for marketing to join the bottling company as its chief marketing officer.

Smith’s involvement with Deep Seawater caused some NELHA personnel discomfort. The state Ethics Commission was asked for advice as to whether NELHA could enter into further contracts with Deep Seawater, which in 2005 was seeking to lease more land and sign a licensing agreement for use of the NELHA mark.

The response was that so long as NELHA did not negotiate directly with Smith, his involvement with the company would not be a problem. Under state law, there is a two-year period following the employee’s departure during which the agency he or she used to work for is prohibited from entering into any contract “with any person or business that is assisted or represented in the contract by the former employee if, while a state employee, the former employee participated in the matter with which the contract is directly concerned.” While that might seem to rule out NELHA executing any further contracts with Deep Seawater for up to two years, the Ethics Commission gave agreements between NELHA and Deep Seawater the green light, “if the former executive director is not involved in this matter on behalf” of Deep Seawater.

In an effort to discourage the new director, Baird, from following Smith’s lead, the NELHA board of directors approved the insertion of a clause in Baird’s contract that precludes his being employed “by any tenant of NELHA with whom [he] has at any time had dealings on behalf of NELHA under his contract.”

Soaring Sales

The sky would seem to be the limit for the sales projections of the deep seawater bottlers. Deep Seawater International projects $230 million in sales in its tenth year. Savers Holdings, one of the newer entries in the field, is projecting a more modest $25 million in by the end of its first decade at Keahole. Koyo hopes to attain $33.5 million in sales in the same period, with the expectation of surpassing $104 million in sales by the year 2033, when its lease expires.

And as those sales rise, so, too, should NELHA revenue. Koyo alone forecasts cumulative rent and royalty payments of more than $7.5 million by the end of 2006. Savers expects its payments to reach $5 million by then. Deep Seawater International projects payments to the state in base and percentage rents will reach a cumulative total of $50 million, exclusive of royalties, by the end of its first decade of operation.

The forecasts for revenues from aquaculture operations at Keahole are on a much more modest scale. At present, 16 companies that raise everything from algae to zooplankton pay about $30,000 a month in base rent. That is roughly equivalent to monthly rents paid by the six deep seawater bottlers or other companies hoping to cash in on the deep seawater fad. Nor do any of the aquaculture enterprises have forecasts for sales as extravagant as those of the bottlers.

Water – with a Difference?

“Service mark defense” – guarding against the use of the NELHA logo on bottled water products that don’t originate at Keahole – is not something that will be easy or cheap. In fact, it may not even be possible.

Jan War, operations manager at NELHA, confirmed that at the moment, there is no test that can distinguish between bottled water derived from Keahole deep seawater and any other water. At some point, he said, it may be feasible. “There are different ratios of chemicals we think we can use to determine” a unique profile for Keahole water, he said. “Once it comes out of reverse osmosis, it’s basically distilled water. But the bottlers put back brine. We may be able to see chemical signatures in that brine that we hope we can trace back to our deep seawater. … It’s something we are trying to determine as part of our water certification program.”

But, War adds, “it may not be within our budget to set up the type of tests we need to get it to that level. It may get down to radioactive isotopes or something like that, that can only be found in deep seawater. We’re not quite there yet.”

So far, he said, no one has been known to use the NELHA service mark on contraband water. “There was at one point something marketed in Japan that claimed to have come from NELHA,” he said. “We received samples, determined it could not have come here. So the state put pressure on this company and they took it off the market.”

“Our best defense is to indicate which companies are actually processing and bottling water on the site. Our board has made a policy requiring that the service mark can be used only on water bottled here. In so doing, we’ve tried to protect ourselves a little bit.”

At present, only Koyo and Deep Seawater are using the service mark. Other companies have agreements to use the mark on their products and pay royalties but have not begun production yet.

The Energy Cost

As the state boasts of the proliferation of bottled water plants, it seems to pay little attention to one of the downsides Daniel had warned of: the high energy costs of processing the seawater to the point it can be potable.

The energy bills for the bottlers are huge – and that is not counting the costs that the state pays (reimbursed by the bottlers) for electricity used in pumping water up from the ocean floor. NELHA’s monthly electricity use comes to about 300,000 kilowatt hours, most of which (around 250,000) is for pumping both shallow seawater and deep seawater to tenants. Aquaculture users account for some fraction of this, but the lion’s share of the deep seawater, the costliest to pump, goes to the bottlers.

Once the deep seawater arrives at the bottling plants, energy costs continue to mount. Deep Seawater predicts that in just its second year of production, it will consume 264,000 kilowatt hours per month, an amount that comes close to matching NELHA’s energy costs in pumping the water. By year 10, it projects using 500,000 kWh per month of utility-generated power, plus 300,000 kWh per month of power it generates from its own power plant. (In an early proposal to the NELHA board, it estimated its potential energy needs at 3,600,000 kWh per month – equal to the amount of electricity produced by 4 megawatts of installed capacity.)

Altogether, the added burden placed by the bottlers on Hawai`i’s energy capacity is substantial even if the precise dimensions are known only to the bottlers themselves. Curtis Beck, customer service representative for HELCO, the island’s electric utility, said he could not disclose the specific demands of any given bottler or even of bottlers in the aggregate, since one customer – Koyo – represents such a large part of the aggregate. To disclose the aggregate, he said, would be tantamount to revealing Koyo’s use, and that would infringe on customer privacy rights.

NELHA CEO Baird said he could not speak to the issue of the bottlers’ energy use. “I don’t know whether or not they do” consume large amounts of energy, he said. “I’ve tried to get HELCO to tell me what the plants use, but they won’t give me that information.”

— Patricia Tummons

Volume 17, Number 1 July 2006

Leave a Reply

Your email address will not be published. Required fields are marked *