I've been trying to think how I would implement something like that, and my guess is that it works the same way player type models are skinned, but extending it to the whole game area/level. You have your model and you have an associated texture, at design time you can layer as many textures as you like. I think this would all be stored in an xml type file at design time ( this is also so that it can support undo/redo as well as position, alpha etc ). Then when generating the "skin" for the level, it merges/blends all the textures from the information within the xml file and creates one ginormous texture which the level will be skinned with and this can include "Real Relief" type information to make the rocks and the like look fantastic. So this acts like a uber detailed base texture. Then on top of that you render your buildings and other movable objects like characters/blades of grass/trees that move in the wind. IIRC the level he showed off does not include blades of grass that move only cars racing around the track. things like animated models etc would affect the overall performance, which I don't think is what he is referring do.

I think it's mentioned somewhere that this MegaTextures are streamed during gameplay which is how he gets around the fact that you can't load a 100,000 x 100,000 texture into GPU memory.

I've just found out that there is a thread about it over on gamedev, so I'm off to read it.