Hydrothermal upgrading is a promising technology for heavy oil, yet the impact of reservoir conditions on the catalytic effect of catalysts and the pathway are not clear. In this study, the effect of the formation environment on the catalytic upgrading process was investigated through simulating the reservoir conditions (2000 mD permeability, 25 % porosity) for catalytic hydrothermal cracking of heavy oil. Under the hydrothermal upgrading conditions(240 ℃, 24 h, 50 wt%, 0.1 wt% nano-Fe2O3), 9.15 % of the heavy component(5.1 % resin and 4.05 % asphaltene) was converted to light component. The content of hydrocarbons below C17 in the saturated fraction increased from 36.29 % to 59.85 %. The structure of the asphaltene was disrupted resulting in a lower level of asphaltene stacking, and NC/NH ratio increased 13.61 % compared to heavy oil. In addition, the reservoir condition with quartz as the supporting medium improved the catalytic ability of iron oxide nanoparticles. When injected into the reservoir medium, nano-size facilitated dispersion on the surface of the proppant and inhibited the aggregation of nanoparticles, which ensured the continuous operation of the active sites on the surface of the catalyst. Electron transfer of Fe2+/Fe3+ catalyzed the heterolytic cleavage of covalent bonds of H2O/heavy oil molecules was the mechanism for heavy oil upgrading. These findings demonstrated the feasibility of in-situ upgrading of heavy oil through the use of nano-catalysts under reservoir conditions.