I'd just chalk it up to the effects of alcohol and not put too much into it. In my experience people - myself included - do tell the truth when drunk, but also tend to put more drama and emotion into it than they really feel. So a one-time interest in you (which is maybe not too surprising since you were close once at a time when you both were single?) gets sentimentally blown up to a big lost romance thing once the beer glasses are on... He can't possibly know what his life would have been like with you instead of her, so that part, IMNSHO is nonsense.

It's awkward to hear this stuff, I know, but it's even more awkward for him, so if you can just grin, thank him for the compliment and let it go you'll be fine.