The ability of both bare and surface-modified hematite nanoparticles to reduce the viscosity and upgrade the quality of heavy crude oil via aquathermolysis reaction was investigated in this study. The surface of hematite nanoparticles was modified using oleic acid to improve its hydrophobicity. First, a desulfurization study of thiophene was carried out to study the effect of hydrophobicity on the catalytic activity of the nanoparticles. Results showed that the catalytic activity could be improved by changing hydrophobicity of the nanoparticles from hydrophilic to slightly more hydrophobic. However, reduction of catalytic activity was observed when more oleic acids were attached due to blockage of the catalytic sites. In such a relatively mild aquathermolysis reaction, both untreated and surface-modified hematite nanoparticles were able to reduce effectively the viscosity of heavy crude oil by 61.52% and 74.33%. Additionally, the amount of large hydrocarbon molecules such as asphaltene and resin fractions were significantly reduced to form light oil which is proven by the increment of saturated and aromatic fractions.