It seems like it would have been substantially cheaper to just use their own quest/ai system and just add individual npc factions to it.
The result, however, is as man-power intensive as every quest-based themepark MMOs. The engine is cheap, but you need lots of quest writers.
The video of the DE city seemed to hint at basically a Sims-type agent AI. Basically, each agent (NPC) has a set of potential desires (seeks resource X, social contact, rest, conflicts, safety), and a set of personality traits that define the relative importance of those. The set is determined at creation with a base values depending, say, on faction, race and class (not just player-playable classes, but internal ones), with random variations added. Then, the desires grow at their natural rate for the personality trait (greedy NPCs have their desire for wealth grow fast, non-greedy ones don't, or even don't have one), and the NPC then determines which desire wins out, based to desire intensity and proximity. That gives you lots of NPCs that act in various ways.
High-level combat stuff like the faction war we saw is basically a variant of that, coupled with a spawning system. You trigger a conflict, which adds a set of campaign-related traits (seek that specific enemy, occupy/clear territory) that some of your NPCs are going to have, plus strategic agents. For instance, a camp is an agent (like an NPC), which is going to seek out a location that offers the best combo between its desire for control (need the area to be controlled), resources (to build or to exploit), social (can't be too close to other camps). If attacked and "destroyed", it's going to flee and try to reestablish itself somewhere. And, in turn, it generates desires in the NPCs around it.
You can get a lot of very interesting behaviour with a simple desire-field model.