To give a straight answer to the questions.
Valarian can stay alive and can be killed both ways it can still end in a peacefull ending....
the drop is crap since indeed drops in the sunken citadel aswell so ill say let hem life....
To get a peacefull ending you need atleast 9 points out of 10 points required to get a peacefull ending with the magister and his terror....
The Terror quest has a 10 check point system and with that you can find multiple way of the end of the quest... 1. fight alone 2. fight with ally 3. fight with forsaken ( ment to die and not to win ) and at last 4. the peacefull ending...
I can tell you that valerion is +1 point of that system.... this means killing him can still end peacefull. since you need 9 points at least...
The system needs 10 point this contains: diplomatic talk ( the way you talk to the magister ), trait points, valerian, and check points in game while doing the quest by finding quest related items or stuff that give you extra info to use again the magister....
I don't tell to much but now you know how it works.. there a hand full of people includes me with a peacefull ending.... 90% its a fight ( with still can end in save the world if you win ) its about undermother x2 with to much paralyse and stun... so beware and get maxed protection....
goodluck and use this info wisely.
PS. it will be added in wiki soon... were busy with it ( on paper )