Ok,
If for arguments sake over a 1hr flat water time trial I could average 5min 15sec per km. I want to improve my "average race speed" so we all know that interval training is neccessary.

If I do intervals of a minute and a half. Should my target pace for those intervals be only slightly faster (say 5 or 10sec/km) than my current pace and have a small rest of say 15 seconds between each and do 20 or 30 of them with the last ones getting really hard to maintain? and try to decrease the rest as the weeks go by?

or should my minute and a half be at say 4min15sec/km pace with longer rest and if I only get 10 or 15 of these out before I blowup then I stop and try again next week?

or some other variant?

I should say I have good general endurance and skills, am 33yo, train 3 times a week. My other sessions are a sprint session of 10x 1min at max speed with 4min recovery and a 2hr down hill paddle.

Good question. I don't think that anyone knows what the correct answer is, or for that matter, if it really matters all that much about the specifics of the training we do. Below is a link to an interesting interval training concept:
http://www.slowtwitch.com/Training/It_s_the_principle_that_matters_263.html

I think most would agree that we can generally categorize training as long, slow endurance training (LSD), race pace training (for 30 min -2hr distance), and max effort sprint training (Max), correct? Generally speaking, of course.

The article above suggests that some athletes would benefit most from time primarily split between: LSD and race pace, or LSD and max sprints, but not race pace and max sprints, nor all three in equal amounts.

Also, some go by speed or time/km while others use Heart rate as the pace setter when going at or near the race pace speed.

The only training pace that you are not including is the (30 min to 2 hr) race pace which is best done with long intervals, i.e. 8 min to 20 min intervals, so that might be a consideration for your other session. Over time you might learn what combinations of training intensities work best for you.

One thing that I think is important to keep in the back of your mind when designing an interval based workout is the amount of rest between intervals.

If the goal is to increase average speed it is important to have sufficient rest between efforts to achieve full recovery. Without enough recovery the ability to reach the desired intensity/speed is compromised by a build up of lactic acid.

If the goal is to increase lactic tolerance which is useful for surges and repeated sprints, the rest between intervals is shorter causing a build up of lactic acid, eventually improving the body's ability to cope with lactic acid.