Vapor‐dominated geothermal reservoirs produce saturated or superheated steam, and vertical pressure gradients are close to vapor static. These observations have been generally accepted as providing conclusive evidence that the liquid saturation must be rather small (<50%) in order that liquid may be nearly immobile. This conclusion ignores the crucial role of conductive heat transfer mechanisms in fractured reservoirs for vaporizing liquid flowing under two‐phase conditions. We have developed a multiple interacting continuum method (MINC) for numerically simulating two‐phase flow of a homogeneous fluid in a fractured porous medium. Application of this method to reservoir conditions representative of The Geysers, California, and results from an analytical approximation show that, for matrix permeability less than a critical value (≈2.5 to 5 microdarcies), the mass flux of water from the matrix to the fractures will be continuously vaporized by heat transported due to conduction. This gives rise to production of superheated steam even when the matrix has nearly full liquid saturation. Simple estimates also show that heat‐driven steam/water counterflow can maintain a nearly vapor static vertical pressure profile in the presence of mobile liquid water in a reservoir with low vertical matrix permeability. The implication of these findings is that the fluid reserves of vapor‐dominated geothermal reservoirs may be larger by a factor of about 2 than has generally been believed in the past.