According to officials, the fire broke out at two fuel storage tanks.
Fire-fighting operations are still on and no casualties had been reported so far.
According to port officials, the fire broke out around 5 in the evening at tank number 13 and 14, which have storage capacity of around 10 to 15 lakh litres each.
Butcher Island has an oil terminal used by the port authorities to offload it from oil tankers. The crude oil is stored in oil containers on the island.
The fire is visible from the Gateway of India in Mumbai which is around 8km away.