I've installed hundreds of universal O2 sensors with no problems.... maybe you just had a defective one. As for the reference air supply, Bosch states that it gets it sample from the main electrical connector. They also recommend not using anything like dielectic grease as this can block the air from the sensor wire.
I've never heard or read of adding holes at the connection site.... I would think moisture would migrate into the wire and casue corrosion.
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