You do not need to use the water passages, but in a cold area it might be a good idea. No idea about drilling the head though. Or you could use a hot-air intake for winter time to prevent carb-icing.

Start with either 20-weight oil, or ATF. Nissan recommended 20W or 10W30 Elephant Oil, but any brand of motor oil will work. Others have reported success with ATF (automatic transmission fluid), sewing machine oil (generally 10W), or motorcyle oil. The lighter oils tend to run the carb on the lean side.

More details: club wiki