1) would require tossing the entire game into the bin and starting from scratch as its build on a height map. Not just terrain, but everything as its all based on interaction in such a world. Obviously not going to happen as what you're actually asking is for them to make an entirely new game.

2) flowing water in a environment that can be manipulated is currently beyond what consumer PC hardware can handle. Even the simplistic Minecraft fakes it with radiant blocks of water. Which is why you don't see it in games where you can manipulate environments. It would require tracking of every single point of water that exist, and not just in loaded chunks but in the entire world, all at once. Billions of points of active data that would then have to respond to any terrain manipulation. That's still years and several generations if hardware away.