When the pin is pushed in it blocks the passage between the oil pump and main galley and diverts oil pump output to that square, 1/2" NPT pipe plug just below the pin in your picture. Filter output needs to intersect the main oil galley which can be identified as a bulge down the entire length of the block with the oil pressure fitting right on top of it. Do some more research before taking cutting tools to this part of the block.
My 2 cents:
That pin is likely hardened steel which may not drill easily. If the pin is drilled successfully going too far can ruin the block.
There is a possibility that the multi decade interference fit will result in a cracked block attempting to move the pin if patience is absent that day.
And finally why bother with any of this considering there is a distinct possibility that using it as is with a finer element bypass filter than is available in a spin on will result in cleaner oil altogether.Full flow filtering is truly at the discretion of the spring/disc inside the spin on filter that can and will let dirty oil go on by.
