Method for producing oil from a subsurface formation containing both oil and water is disclosed. The oil and water are separated downhole within the well with the separated water being conveyed through a well bore and discharged into a disposal formation without raising it to the surface of the well, unless the pressure in the dispersal formation is excessive. The oil is separately conveyed through the well bore to the surface. Separation of the oil and water is carried out be a separator assembly which includes an outer shell having an upper end fitted for connection to a pump intake, a lower end having perforations for admitting formation fluid, a centrally disposed collector tube extending through the shell and dividing the shell into a central flow passage and an annular flow passage, and a laminated filter element disposed in the annular flow passage and convolutely wound around the collector tube. The filter element includes first and second semipermeable membrane sheets which are wettable only to water, a porous substrate sheet interleaved between the first and second semipermeable membrane sheets, and a perforated spacer element interleaved between the adjacent semipermeable layers and wound in convolute relation therewith. Formation fluid is pumped through the space provided by the spacing element with the water phase permeate being collected and conveyed through the collector tube and the remaining crude oil phase fluid being conveyed through the spaces between the semipermeable layers.