A technique for the dynamic generation of flow based PEBI (perpendicular-bisectional) grids is presented and applied. The procedure includes a fine scale flow solution, the generation of an initial streamline–isopotential grid, grid optimization, and upscaling. The grid optimization is accomplished through application of a hybrid procedure with gradient and Laplace smoothing steps, while the upscaling is based on a global– local procedure that makes use of the global solution used in the grid determination step. The overall procedure is successfully applied to a complex channelized reservoir model involving changing well conditions. The gridding and upscaling procedures presented here may also be suitable for use with other types of structured or unstructured grid systems.