Longer context lengths will massively help, but game engines will also provide structure to the LLM. If you instruct an NPC to pick up a weapon and there isn't any, the engine will return an error to the LLM saying there's no weapon, and the LLM will write the character saying "What do you mean? There's no weapon."
Another reason extremely long context lengths may not be fully necessary is that engines can store information in a database, update it based on further interactions, etc
