1" is really close to the bottom for the intake valves. I've been really happy with 2".
If you are not using an ash pan under your coal grate, 2" is good, or if you have an ash tray, 2" above it or so.
Lid vent holes aren't necessary if you wish to use the 1" bung hole instead.
I think grinding the lids off is a great idea. When I fit my weber to my barrel, I was able to grind the outside down a bit at a time till it fit perfectly.
I'd think about washing it out good before you go grinding that lid off.