Talk to the log. Find the foreman. Drain the source of the foreman. Report back to the log.
Cast Spirit Vision at the sawmill, and you can see the spirit of the spirit of an elf contained in a livewood. It asks you to help it get revenge on the spirit of the sawmill's foreman.
The spirit of the former Sawmill Foreman, is located in a grave located at X478,Y:374, south-west of the bridge to the Sawmill, and is marked on your map. Cast Source Vampirism on him to kill him. (You can learn the skill in Powerful Awakening)
Return to the livewood to complete the quest. You will receive 25,950XP and a unique shield called "Livewood Shield".