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They used local peat
In the past driftwood was avidly collected and used for building and furniture rather than burned; heat was provided by peat cut from ground outside the settlement and dried through the summer in peat drying huts that are dotted around the landscape.
Also
A couple of generations ago the faroese were still living in their turf-roofed, peat-fired, tarred wooden houses and were wearing their national costume as they had done for centuries.
North Atlantic Maritime Cultures: Anthropological Essays on Changing Adaptations