a simple gravity separation CAN and will separate oil and water normally to 1% bs&w; but the issue is how much time it takes for the separation? depending on the oil API, viscosity and emulsification quality one must design/decide the need of the separation time. however. since oil can change over time of operation (change of production zone, wells in operation, life of the field etc) the water content and the oil quality would change and hence oil industry has decided, based on experience, certain norms.
oil-water separation is essentially breaking the emulsion and moving the bulk of water to the heavier phase. it can be achieved thermally alone if the emulsion is easily breakable; at times additional demulsification methods (using demulsifier chemicals,., electric field etc ) are used.
typically a 3-phase gravity (thermal) separator moves the feed to 4-12% of bs&W; typically a second stage may get 3~6%; after that we use what is called electrostatic dehydration (where the oil-water emulsion is forced through an electric field)
[ Aside:. I have designed an oil train for a russian pipe line where the oil is stabilized and dehydrated to 1% without any extra effort. (the information about the oil-water emulsion came from russian design institute which conducted extensive tests.)
i have also been involved in an emulsion breaking train where oil is washed with fresh-water to achieve salt content of 10 ptb; ironically, there is something called emulsion inversion or reversal where excess water is added so that the trains separate oil from oil+water emulsion (bulk phase would be water!); i have been party to design of such a system where a huge amount of water is recycled to achieve the inversion,....]
coming to electrostatic dehydration, typically it can be a third stage where some degassing is also done using a piggy (double vessel) degasser.; it can also be a separate dehydrator; the dehydrator may also function as desalter if the salt content of the residual water is controlled; to achieve this de-salted water may be mixed with oil to reduce the salt content of the water and the mixed oil-water emulsion is dehydrated. There have been advances in this field and retrofitting of v-type electrostatic coalescing is carried out nowadays in the first and 2nd stage also;
regards
neelakantan