Dual-shell reactors using hydrothermal flames as internal heat source were proposed for supercritical water gasification (SCWG) and oxidation (SCWO) of oily sludge to achieve fast preheating and avoid corrosion, salt plugging, and overheating. The SCWG and SCWO systems with hydrogen-rich syngas and electricity outputs, respectively, were established and simulated using Aspen Plus 11. Simulation models were validated by comparing with experimental products and temperature profiles. The maximum exergy destruction coefficients of 28.01% and 24.31% appear in the combustion reactor for both the SCWG and SCWO systems, respectively, indicating the indirect preheating method with hydrothermal flame is critical to the energy efficiency. The increase of reaction temperature promotes hydrogen but inhibits methane formation in the SCWG, and more steam but less syngas is output at higher reaction temperatures. Although more steam and electricity outputs are present at higher reaction temperatures for the SCWO, more fuel input is required. Lower exergy efficiencies are obtained at higher reaction temperatures in both the SCWG and SCWO systems for more energy is output as low grade steam. Less fuel input is required for both the SCWG and SCWO systems at higher feed concentrations, and higher exergy efficiencies can be obtained. The net treatment cost for the SCWG and SCWO systems are 119.19 and 215.47 USD/t, respectively, indicating the SCWG is more economically competitive compared with the SCWO.