This is in case if you're using a custom race mod if the unofficial Oblivion patch does not fix it
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Changelogs
Version 1.0
somewhat of an fix for custom race mods
And what does this small addon/mod do you may ask ?
It's somewhat of a small fix for custom race mods, what this mod/add does is that it places each enemy REF spawns in other spots rather than next to the cage where the player spawns in.
Where to install the esp: "Oblivion\Data"
While it may not trigger some dialogues at the start, but you will still be able to complete this quest nonetheless with any custom race mods out there, so have fun.