Have you played Morrowind? It's like Oblivion, but even more RPG. More challenging without just increasing numbers. No stupid level scaling to make the world more immersive. The character actually has to work to become a crazy powerful god. There's actually some real cultural differences in different parts of the world. There are obvious differences in architecture, foods, speech, and other things when you're in, say an Imperial city and a Telvanni city, or a Redoran city, or an ashlander village. Each group has their own culture, and each is explained well by their past.
The factions have actual interactions that make sense. For example, the Telvanni and Mages Guild are bitter rivals, so joining one will make relations difficult with the other. The Thieves Guild occasionally has you steal from other factions, and can ruin your relationship with them if you're caught. In the Fighters Guild, one branch of the quest line will have you attempt to destroy the Thieves Guild, which will naturally make it hard to do anything with them (and part of the Thieves Guild quest line involves assassinating the Fighters Guild members pushing for the guild war). Being high up in the Thieves Guild will make you more attractive to the Morag Tong, since they both place high value on stealth and getting into hard-to-reach places.
It was also even less forgiving, which made for more immersion. If you killed somebody vital to the main quest, they were dead. It warned you so you could reload a different save, but it didn't stop you from doing it. And even if that happened, you could still beat the game. If you found certain rare books, you could find legends on how to find certain items which would allow you to, with very great difficulty, still beat the game through other means. You could become powerful enough to kill Gods, and the game would let you. Sure, it would ruin some stuff, but you could do it.
It didn't hold your hand, it gave you a giant world and let you do what you wanted, but you had to live with the consequences.
Also, if you can't tell, Morrowind is my favorite game of all time.