Water's ability to short an L18650 cell?
Can water bridge the connection and cause a short?


It can bridge the connections, but if that causes a short depends on the relative resistance of the bridge compared to the internal resistance of the battery.  With relatively pure water, the resistance over the 65mm length of the cell will be enormous (many thousands of ohms).  Clearly this will not cause a short.  If dropped into salt water, the resistance will be much less, tens to hundreds of ohms.  However, the internal resistance of a 18650 cell is a tiny fraction of an ohm, so no, even very salty water is unlikely to cause a short unless the circuit brings the positive and negative supply lines extremely close together.  


  And if water were to somehow breach the seal on a project is it possible for it to react the same way, ie a short with a spark and heat, presenting a possible fire hazard?


To cause a fire, you need to heat up the circuit enough that it combusts.  Bridging the wires of a circuit with water is unlikely to heat up the circuit much because most of the resistance is in the water, and so therefore most of the heating is in water too.  Since water cannot be raised above 100C, the maximum heating is limited.  

Damage from water immersion is generally not thermal, but chemical.  Water is a great solvent, and when a voltage is formed across a volume of water, ions are stripped from the terminals of the circuit and dissolved into the water.  This corrodes the metal of the circuit, breaking contacts and destroying the device.  

This video demonstrates the effect using cola (salt water essentially):  https://www.youtube.com/watch?v=FOgsjd5Uxt4