My guess for the water is paper towels or some sort of other paper product. Look at the way it bunches and flows near the bow of the largest ship.
Thanks everyone!
Burgundavia, you are spot on!
I used toilet paper! (don't misread, I did NOT use used toilet paper!!!

)
Rip it up in chunks, stick it on with a mix of PVA and water and push it in ripples with something like sculpting tools!
Not too hard, great effect and easy to paint!
@Dr Mathias:crackingly nice VSF entry, I love it! I'm a sucker for steamtanks and this one is great! Congrats!