This study presents three-dimensional (3D), thermal mathematical model of the simultaneous flow of two-phase immiscible fluids that can be used as a practical tool for the simulation study and analysis of adjacent to wells flow phenomena controlling productivity. Based on the model, the corresponding near wellbore 3D numerical model is developed subsequently, which can be used for conducting analysis of time dependent development and dynamics of the oil-water interface (OWI) around the well producing from a bottom-water reservoir. The specialized simulation tool for analyzing near-well flow has been applied to simulate the effects of relative permeability modification (RPM) (or disproportionate permeability reduction (DPR)), well completion (single or dual – with the bottom water drainage) and a barrier injected around the well bore on water coning. This study presents a mechanistic study of gel injection process, the effect of gel treatment for in-situ permeability modification on two-phase flow, and posttreatment production forecasts. Model was also applied for simulating production tests with and without artificial impermeable barrier, the effect of DWS technology on water coning performance and some combination of above processes (methods). We propose a generalized version of the LET correlation for relative permeability approximation which takes into account gel – reservoir fluid transition zone. We also propose using a new formula for approximation of Leverett J-function.