The pixel art was made primarily in a 382x216 scale, while the viewport was twice that at 764x432. I think the Submarine's pixels were actually on that scale instead of the smaller scale. Should have been pixel "perfect" in that it scaled evenly, but when the rotation occurs there is some distortion that happens that coincidentally looked like water.
Bubbles are actually just GPU Particles! I spawn them along the X axis below the screen and apply negative X velocity to have them move left.