Question

If Mg lies above Al ie, Mg is more reactive than Al...

Then why does Al replace Mg from MgO (magnesium oxide)

And is used extract magnesium from magnesium oxide

Answer 1

Mg does not lie above Al . Mg is to the left of Al.
For Aluminium to replace Magnesium from MgO , very high temperature and Pressure is required. With the help of the high temperature and pressure Al is able to replace Mg even though it is less reactive than Mg.