I'm trying to figure out if this is just a return line to the pan or if I am drilling and tapping into a passage. It looks to me like its just a return line.
The whole reason for doing this modification is to convert the engine from "bypass" filtering to full oil flow, where all the oil going to the bearings is filtered before getting from the oil pump to the engine. That's why the first operation described involves plugging the original oil passageway. The second hole, the one that's drilled and tapped from scratch, is where the oil goes that's supplying the main bearings, so yes, its location is critical. You're taking all the oil pump output, and routing it through the filter, then putting it back into the block to supply oil to the bearings. NO restriction is needed, and a filter capable of carrying the full output of the oil pump without dropping pressure excessively will need to be used. The original bypass type filter WILL NOT work after the modification is made- - - -you'll need to fit an aftermarket remote filter mount set up for a spin-on filter. I prefer to use an adapter with a bypass valve built in, in case the filter gets clogged enough to start affecting oil pressure. Most bypass valves work anytime there's a 5-7 PSI drop across the filter media, routing oil past the filter anytime it gets clogged. The third hole that's described in the tech tip is the new connection point for the oil pressure gauge line, downstream of the filter.
Later-model 261 engines, the ones with the 1/2" NPT oil line ports, are set up for full-flow filtering from the factory, and MUST be used with this type of filter, or a 1/2" flex line needs to be connected between the ports to prevent the bearings from being starved for oil if the filter is not used.
Follow the tech tip instructions to the letter- - - -they're all there for a reason!
Jerry