Hmm, maybe an overlay of water could be applied to an object and then set the physics to be the same as the underlying object with regards to collisions... Not sure how one would really go about implementing that, though.
I read in a thread on LOD meshes that the water renders the LOD, not the normal mesh, which makes sense given that Oblivion's water reflection is not that high res to begin with. An OBGE plugin which takes the scene post-render, flips it, and applies it to a surface would sound like a better bet, but I don't know if that's even possible in Oblivion. I mean, how would you define that property on the Nif?