Bear in mind, if you cut the barrel back to 16.5" you may need to drill out the gas port as well otherwise it will short cycle due to the gas escaping too quickly because of the shortened barrel. Now, I'll add a couple other things into the mix.
1. On Echo1's pic, the 3rd rifle down, if that is the one you are referring to he simply cut the barrel down and added a Prince50 Paratrooper clamp-on front sight. It is aftermarket and bolts onto the rifle without any machine work needed to the barrel.(other than cut and crown)
2. If you cut right behind the FSB where it steps up, that is approximately 17.25". It is a safe in-between length so you don't have to mess with the gas port. You can still take an annular cutter to hand-machine down the barrel(CNC makes the kit up to 2" in depth) and do your modified FSB if you desire, or you can simply crown it there and buy the aftermarket front sight I mentioned.
And yes, I believe the pins are 3mm and yes, if you can lock down your action and get your position marked properly a round end mill bit in a drill press can work if you can lock the depth to get consistent passes so as to get a correct position to 12 O'clock and depth.