I did a complete re-install.
I ran it without and then with the 1.0.9.1 patch, and the problem still exists in both cases.
I also tried copying over the 'Oblivion - Textures - Compressed' BSA file, still the same problem.
The launcher is configured to use 3 data files - Nehrim.esm, NehrimData.esp, and NehrimEnglish.esp. Before I reinstalled it I am sure there were more than that listed, including oblivion.esm(or esp).
I have an ATI-Radeon 4650HD card with 1gb (latest drivers from 23rd Jan 2011 installed) - CCC is NOT installed, I am using AtiTrayTools with access to CCC set to OFF, and running on XP64 with 4gb RAM.
EDIT - just saw your post on archive invalidation. Anyone have any idea how to use that feature ? I don't want to wreck my main Oblivion game by not knowing what I am doing.