is it possible to completely overhaul oblivion, or possibly make a new game altogether with it? Because that would be awesome.

Yes, it is. The only limit is pretty much just that you can't change the type of gameplay, like making a flight simulator or something. So it has to be an "oblivion-like" game. For the rest the only limitation is pretty much just your imagination.

People actually have created a "new" game with it, http://www.nehrim.de/startEV.html.