To meet the growing energy demand worldwide, oil and gas exploration and production activities have increased rapidly both in onshore and offshore areas. The produced oil from the ocean bed is transported onshore either by ship or pipeline. This has increased the risk of oil spill in the coastal area. In order to prepare an emergency preparedness plan and to assess the magnitude of risk involved in transporting and offloading oil, oil spill simulation studies play an important role. This paper describes a simulation of oil spill in coastal bay of Arabian Gulf where new developments are taking place using MIKE 21 model. The developments include a diesel based thermal power plant near Sir Baniyas Island, which is an ecological fragile area. Based on the project activity, two probable scenarios, one for diesel leak (250 m3/h) for 1 h and the other for instantaneous spill (500 m3) are considered. The MIKE 21 model was calibrated for hydrodynamics using measured field data followed by diesel-spill simulation to track its movement in the Arabian Gulf. The results for both leak and instantaneous spill indicate that spilled diesel will not move towards the Sir Banyas Island and more than 45% of the diesel will be evaporated within 48 h of oil spill. Based on the results, a clean up and contingency plan is proposed to mitigate the adverse impacts arising due to diesel spill in the study area.