Tank does not have to be drained.
As far as the actual smoke machine goes, there are a few theories about them. Here is my take.

The old style smoke machines use "shop air" from a compressor, and a mineral oil based smoke liquid like your party smoke machines. The problem with these were that you were adding air, to a fuel vapor rich environment. Problem?? Heck yes. Adding air bring the AFR close to stoiciometric efficiency. ANY spark or flame near your leak would result in an instant fireball.
The "correct" new style smoke machines use an external Nitrogen tank instead of shop air. Nitrogen is an inert gas therefor will not create said fireball.

The real answer to your questions is, mineral oil based smoke liquid, and a smoke machine from Snap-On or the like. They only produce 1/2 psi so there is no risk of blowing anything out. I use the same machine for finding vacuum/boost leaks.

 

I believe the sealant used by the factory for the cover is the same non-hardening stuff used for windshields. If you are sure it's silicone then someone else had been in there...

 

Can someone confirm exactly what the two hoses that come the T here do. I thought one goes to the sun roof and the other goes to the nipple thats a water drain right inside the gas cap area. Is one of these hoses actually tied into the filler neck somehow? Otherwise I don't see how this could let fumes in if the gas cap is doing its job.

 

I had a leak in my 84 where the black rubber piece goes onto the gas tank. When the tank was full it would plash around and just a faint bit would seep. I removed and sealed with a sealant that was rated for oil/gas resistant. Never had an issue since.