During the drilling process and transport of crude oil, water mixes with the petroleum. At oil terminals, the water settles to the bottom of storage tanks. This drainage water is contaminated with emulsified oil and water-soluble hydrocarbons and must be treated before it can be released into the environment. In this study, we tested the efficiency of a continuous flow, two-stage bioreactor for treating drainage water from an Israeli oil terminal. The bioreactor removed all of the ammonia, 93% of the sulfide and converted 90% of the total organic carbon (TOC) into carbon dioxide. SYBR Gold staining indicated that reactor 1 contained 1.7 × 108 bacteria and 3.7 × 108 phages per millilitre, and reactor 2 contained 1.3 × 108 bacteria and 1.7 × 109 phages per millilitre. The unexpectedly high mineralization of TOC and high concentration of phage in reactor 2 support the concept of a phage-driven microbial loop in the bioremediation of the drainage water. In general, application of this concept in bioremediation of contaminated water has the potential to increase the efficiency of processes.