The 3.5 has a major risk problem. That said it is a gamble of sorts. Although the engine may be less likely to bend a rod burning vegatable oil as the compression burn or instantainious pressure is less. The pressure just develops more gradually. Little is really understood for sure on why these engines bend rods. Yet there has been endless speculation.
One clue is that there is very little material between the cylinder bores compared to the three litre block. In all likelyhood it is just a three litre with an overbore but they may have gone too far.
Thats why a diesel is quieter on vegatable oil. It has to do with the rate of flame spread being slower or longer if you wish than diesel.
A rebuild of these blocks is basically not a good ideal. Since the earlier 3 litre block is an exact fit I think. A person owning a 3.5 should try to locate a three litre and put it into storage.
They have no abnormal lower end problems. A few site members have done this conversion. Plus when running vegatable oil it never hurts to have a spare injection pump around if it is compatable from the three litre is beyond my knowledge.
Your newer head on that 3.5 engine fits the 3 litre well and is of an updated design from the original three litre heads. You could find a used 3 litre engine and have the lower block rebuilt or use as is if a good one was found. This is how I would look at it. Again if I was to take that gamble I would have a spare three litre lower block on hand. You can always sell the head off it especially if it is one of the later heads to defray some of your cost. In the senario you eventually sell that car and your engine does survive.
The including of the three litre block in the sale should increase the value. Those three litre blocks will be in short supply at some point is another consideration. If you are determined to run vegatable oil at least it could have one possible benefit with this engine. Make sure you understand the use of alternative fuels well prior to doing it. I personally am not a fan of vegatable oil but try to keep an open mind. Best of luck in whatever you decide to do.
It is very important to try to get an answer of how much oil the present owner adds between oil changes or the average amount of miles before he has to add a quart. The less use the better as oil consumption on this engine is directly corelated to the rod problem. That is the warning usually that the problem is underway although the engine will sound fine. Last but not least your present 82 three litre is not the right one for a swap. 1986 and up is what it takes. .