The present invention relates to a method for separating water and oil from a sludge which contains water, oil and solids which method comprises (1) contacting the sludge with an effective amount of 1 or more surfactants chosen and balanced to form certain types of microemulsions with equal volumes of decane and 3% aqueous NaCl, (2) mixing said surfactants and sludge with sufficient agitation to obtain a uniform mixture, (3) allowing said mixture to stand under gravitational settling or centrifugation to obtain the separation from the bottom sediment of an aqueous phase which may contain solubilized oil with or without an additional floating oil phase, (4) decanting separately the oil and aqueous phases and (5) further treating the aqueous phase with heat and/or NaCl to separate the solubilized oil or further treating the bottom sediment with selected surfactants to release adhering oil.