Yeah, I noticed it. Maybe it has something to do with the plot of the novel? 

And yes, an underwater city would be awesome as hell.

According to OP:

"This pic shows the geological evolution from the currently still played Elder Scrolls IV: Oblivion, thru how it looked like during the Vvardenfell Red Mountain mega-super-eruption as depicted in the Elder Scrolls Novel Inferno City"

Not sure it'd be an underwater city so much as the complete destruction of the Vvardenfell island (and from that pic, all of Morrowind as it looks like Black Marsh has taken over the remaining mainland of Morrowind).

Yup destroyed and also part of it might be drowned, i don't remember what happened in Morrowind but wasn't there a floating island of sort in it?

I'm just glad that the game is set 200 years after Oblivion.Fantasy worlds are usually unconvincing because every 2 months or so an Armaggedon occurs...

Don't remember it well enough to be honest. Might give it a go again at some point just to recap. I suspect we'll see a lot of dark-elf refugees in Skyrim though.

wait they destroyed Morrowind? 

NOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOooooooooooooooooooooooo

or at least Vvardenfell

Not neccessarily practical for an in-games location however, if the creation engine follows ertain trends of the gamebryo one, i.e: Closed cities.

That looks pretty cool...but I consider it unlikely. 

Exploring underwater was a pain before, and that won't have changed with this news...

What IS interesting, however, is how there was Skyrim in Oblivion (really?), and how people expect the areas on the map to remain pretty much identical to what they were before...

Skyirm was visitable but contained nothing. Like most Gamebryo engine games - if you broke outside the map you just got endless expanses of very little.

...why should this area be any different then?

I gave up on Oblivion when I realised it was highly repetitive and the reqard was very little