I suspect what's happening (after looking at the .TIS) is that the fireplace has several different "tiles" it automatically cycles through to create an illusion of animation, and for whatever reason BGII is handling them psychotically. Any ideas how to fix this?
The original AR0719 has 232 tiles in the tileset. Tiles 221-232 are the extra ones relevant to the fireplace. When we try to resave the original area under a new name, we get the area crash. The reason is IETME is rebuilding the tileset, but with only the standard 220 tiles. The WED, however, retains the references to display tiles 221-232 where tile 91 and 108 would be. Like you guessed, this is how BG displays the burning fire, rather than a nice second overlay layer like we would expect. BG2 encounters this, can't find the tiles, and crashy crashy. When you reuse the AR0719 tileset, it has the extra tiles, but I haven't gotten this or other BG areas with fireplaces I've tried to work. Why this is happening, I can't figure out. Tutu manages to use copies of these areas in the BG2 engine and they don't have the distortion.
The only way I can tell to overcome it at the moment is to not reuse the WED. Export a bitmap of AR0719 with one of the area tools, then build the area from scratch using that bitmap, redefining wallgroups, etc. yourself. The downside is you have to give up the animated fireplace, though if you were willing to put in the time and suffering, the extra tiles could probably be extracted and built into a proper overlay.