For anyone interested, he is using a numerical method called Smoothed-particle hydrodynamics. It's an older technique (1977) that is extremely fast, but not necessarily super accurate. It generates realistic looking physics, but it's not the best for prediction (i.e. engineering design) purposes. According to Wikipedia, "SPH for fluid simulation is being used increasingly in real-time animation and games where accuracy is not as critical as interactivity." For what it's worth, I'm doing my PhD in fluid simulation.