Altela, a company that claims it can make the water extracted during oil and gas drilling drinkable, is seeking $26 million in a second round of funding.

At the Dow Jones Environmental Ventures conference in San Mateo, Calif., this week, CEO Ned Godshall said the Albuquerque, N.M.-based company hopes to close the round in the third quarter.

In May, the company announced that it had snagged $7.1 million from CCS Income Trust and other investors (see Investors High on Water). The company has raised a total of $10 million in funding so far.

Altela plans to use the new financial infusion to expand its manufacturing capacity and to grow its sales beyond the United States and Canada.

Founded in 2005, Altela has developed a water-purifying and desalination system that uses thermal distillation, an energy-intensive process of heating dirty or salty water and then capturing fresh water as vapor rises from the mixture.

Thermal distillation isn't new. "It's what I call a 10th-grade science experiment," Godshall said.

But the company claims it has figured out how to make the process more energy efficient, making three gallons of water using the energy it normally would take to make one.

Godshall wouldn't reveal how the company does it. But he said the technology is made of a cheap plastic material, which helps keep costs down, and the whole system fits into a single shipping container that is trucked in and dropped off at a drilling site.

Today, oil and gas companies have to use big rigs to haul away the salty polluted water from drilling. The companies then have a few ways in which they can dispose of the water, including injecting it into specially created wells.

By using Altela's technology, oil and gas companies can cut nine out of 10 truck trips, Godshall said, making the company's approach cheaper and more environmentally friendly.

In spite of a rapidly growing demand for water, a market in the billions of dollars and venture capitalists calling water-treatment technologies the Next Big Thing, water investments have been scarce for years (see Parched for VC Funding, VCs Say Water Industry Should Take Lessons From Energy and Hedge Fund Picks: Solar, Energy Storage, Water ... and Biofuels).

But those tides are starting to change (see Water Investment Picks Up and Water Investment Drought Over?). Among the water-purification companies that have scored funding in the last year are Ioteq, Purfresh and Cascade EcoSolutions. Desalination companies Seven Seas Water, Advanced Desalination Technologies, Tampa Bay Water and Stonybrook Purification also have raised cash.

Most of those desalination technologies use membranes to filter out impurities.

But Godshall claims membrane technology can't handle high levels of salt. "Reverse osmosis pretty much peters out at the level of sea water," he said, adding the brackish water that surfaces when drilling for oil and gas is saltier than the oceans.

Quos, which counts Vinod Khosla among its backers, also uses no membrane. Ioteq and Purfresh also don't use membranes, but are targeting a different market - food.

Godshall claims that Altela-treated water has 20 times less salt then a glass of tap water and is pure enough to drink, something he said he has done many times.