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I’m glad it’s running now. They sound great, don’t they? I LOVE those engines! The holes you show are water drain holes, to prevent freeze damage, a particularly handy feature in NORWAY! This is a 1960 two-stroke engine, so not a whole lot of concern was given to the fact that some of the fuel mix doesn’t burn and goes out through the exhaust, resulting in some oil in the water. If it makes you feel any better, the worst of this usually happens at start up, because of the choke use, and also, prior to getting the mixture adjustments dialed in correctly….which you will do even more accurately, once it’s on a boat. Don’t worry: On an actual boat, you may see a very small amount of oil in the water, but nothing even close to like your test tank.
Long live American manufacturing!