To simulate fluid flow in Naturally Fractured Reservoirs (NFRs), a new Discrete Fracture and Matrix (DFM) simulation technique is developed as a physically more realistic alternative to the dual continuum approach. This Finite-Element Centered Finite-Volume method (FECFVM) has the advantage over earlier FEFVM approaches that it honors saturation discontinuities that can arise at material interfaces from the interplay of viscous, capillary and gravitational forces. By contrast with an earlier embedded-discontinuity DFEFVM method, the FECFVM achieves this without introducing additional degrees of freedom. It also allows to simulate capillary- and other fracture-matrix exchange processes using a lower dimensional representation of fractures, simplifying model construction and unstructured meshing as well as speeding up computations. A further speed-up is obtained by solving the two-phase fluid-flow and saturation transport equations only on “active elements”. This also diminishes round-off and truncation errors, reducing numerical diffusion during the solution of the transport equation. The FECFVM is verified by comparing IMPES operator-splitting sequential solutions with analytical ones, as well as benchmarking it against commercial reservoir simulators on simple geometries that these can represent. This testing confirms that my 2D FECFVM implementation simulates gravitational segregation, capillary redistribution, capillary barriers, and combinations thereof physically realistically, achieving (at least) first-order solution accuracy. Following this verification, the FECFVM is applied to study Gas-Oil Gravity Drainage (GOGD) process in cross-sectional models of layered NFRs. Here, comparisons with dual continua simulations show that these do not capture a range of block-to-block effects, yielding over-optimistic drainage rates. Observations made on individual matrix blocks in the DFM simulations further reveal that their saturation evolution is at odds with the premises of dual continua simulation. For instance, partially-penetrating fractures reverse the drainage pattern from outside-in to inside-out. Saturation changes in the rock matrix also are not necessarily monotonic, but may involve a sequence of drainage and imbibition processes. These phenomena cannot be captured by transfer functions / dual continua models, but my simulator allows their investigation for the first time.