Water in any lubrication system is bad news. In hydraulic systems, it can result in vaporous pump cavitation, corrosion and valve stiction, while in circulating lube oil systems it can cause oil film strength loss, rusting and other serious mechanical problems.
The effects of water on the oil are often overlooked. Excessive water contamination can result in premature oil oxidation and promote the buildup of sludge and varnish. In ester-based fluids, it can result in the hydrolytic destruction of the base fluid resulting in the formation of corrosive acids. In some circumstances, water can also strip additives from the oil through water washing or hydrolysis resulting in premature oil degradation.
For these reasons, the best strategy when it comes to water is to monitor and control the root cause of the water ingression. This can be achieved by ensuring that all seal and breathers are in good shape (consider using desiccant style breathers), lube tank hatches are closed and sealed properly and that top-up oil is stored and handled properly.
Water can exist in three phases in an oil, free, emulsified and dissolved. Free and emulsified water cause the most damage so a good rule of thumb is to keep moisture levels below the saturation point so that all the water is in the dissolved state. For typical mineral-based industrial oils, this is typically 200-300 ppm.
The most effective way of achieving this is to use a vacuum dehydration unit. These systems are capable of removing free and emulsified water as well as up to 70-80% of the dissolved water. For a typical hydraulic fluid, this can mean water levels as low as 30-50 ppm (0.003-0.005%). Alternatively, many companies are reporting success with vapor extraction devices mounting on tank tops. Some of these devices work similar to air conditioners in removing humid air from tank headspaces.