Would this still work if I had to go all the way to Watford Junction, and if
I had to go via Victoria instead of Vauxhall? I don't think that they do
Oyster up to Watford Junction, do they?

Nope, Oyster isn't valid to Watford Jn so you'd need a paper extension
ticket anyway. And it wouldn't work via Victoria either - you'll need
to enter Zone 1 using a route where Oyster pre-pay is valid, which
from South London basically restricts you to the Tube (or Thameslink
via Elephant & Castle, if you can find somewhere to touch in). It's
been mentioned here that Oyster pre-pay will be rolled out over all of
NR in London by 2007, so here's hoping.