Sorry I didn't see this sooner!!
I'm going to have to guess, but I'd say the pressure relief is right in the oil pump. You'll have to pull the pan to get to the pump. As for the water in teh oil, an oil cooler is a good place to start. The engine is a dry sleeve engine, not wet sleeves so at least you don't have to worry about bad O-rings on teh bottom of a sleeve.......
Haven't had mine apart since 1998 when I put it in the truck. MIne is the original 354, no turbo, no cooler. I'd be chasing the shop that did the work................