Have you tested with a portable fuel tank and another hose?-----You can likely make the fuel piston flapper.-----Are the check valves in air motor body working ?-----Is there a PRESSURE pulse from the crankcase ?
oil is mixed with the gas.-----Some oil / gas mixture goes right through the motor.----I say it is normal.----Was there any water INSIDE the gearcase that drained out with the gear oil ?
If adjustment at shift lever is correct , take lower unit apart.----Inspect bronze bushing above pinion.---Inspect bottom bearing surface on driveshaft.---Insoect forward gear and clutch dog.