Another possibility that occurs to me is that it was a demo reel of some sort – from what I recall it at least aspired to feature-film production values, with location filming and some Hensonesque creature effects, etc.

And it just got out somehow into the wild? (I see from IMDb that Welles was involved only as narrator. It would make much more sense if it had been a project of his, which were always ending up half-completed or abandoned or reconstructed decades after the fact. Yes, I am still feeling bitter about The Deep.)