Every WIP I've seen on sheaths like that have been as Dave described (or cut in half with a saw instead of split). The wood is split/cut in half, then the profile is drawn onto one half of the wood and carved out with a narrow chisel/engraver until the blade fits properly, and then the two halves are glued back together (sometimes with hidden wooden pins, if I remember correctly). Once the wooden half is shaped, a wide groove is carved around the mouth of it to provide a place to mold the leather half around to help hold the wood in place, along with gluing it.
Now, after saying all this, I warn you that I have never actually done it, I have merely seen it done in posts on other forums.
Good luck! Can't wait to see what you come up with!
~Noah