Simulation study has been conducted by developing a dynamic model of water-wet naturally fractured reservoir (NFR) having slab type matrix blocks, as a worst case for tertiary gas injection (TGI) in a watered-out reservoir. The comparative study has been conducted by neglecting and then taking into consideration the effect of diffusion on oil production and recovery. Further the study is extended to analyze the effect of capillary pressure existence in fracture network. The obtained results show the promising results to opt for gas injection as a tertiary recovery method in case of watered-out, slab type matrix block system existing in water-wet naturally fractured reservoir.