A segregated flow mechanism of oil and water usually takes place in the presence of strong gravity forces in subsurface environments, having specific geometrical and petrophysical properties undergoing simultaneous flow of multiphase fluids. The segregated flow of oil and water is modeled as a two-layer reservoir system, based on the observed data. Accurate estimates or measures of the values of phase mobility of oil and water, in addition to the actual flow capacity of the formation are provided. Reliable reservoir characterizations and reserve estimations are provided based on the in-situ conditions of oil and water in the reservoir.