Nibelheim or something in Nibelheim are the most obvious. Otherwise it could be Corel which was burnt to build the Gold Saucer there and rebuilt as a Desert Camp in the mountains. Teh nightmare thing is not really fitting for that, however. It can be seen what happened to Corel and the terrible state of North Corel as "the best solution they have" also shows it. And Barret also knows it. Maybe also Dyne ... but Dyne was not burnt. You can connect this to Corel being burnt but he was in the mountains when he disappeared. And Barret even knew about Dyne because the doctors told him about a similiar surgery on the other arm of a man. Hm. The most obvious really is Nibelheim or something from Nibelheim.