stopping gasket leaks

Yes and yes.

Yes baby powder or chalk dust is fine- yes you need to clean it before applying powder- keep the speed down or you will blow the powder off

After a couple hundred miles last weekend, we observed oil at the bottom of the engine. The half moons were dry and we observed nothing else from above. I believe it may be the shaft seals for the alternator and the ignition. The gaskets for the two covers for these are only dust and exterior protection, not oil gaskets. I'll remove the covers and clean up the oil mess and replace the seals. In the Clymer manual I do not find instructions on how to only remove the seals. Of course the alternator must be remove and the ignition. I'll search KZF for a procedure on how to do this, but does anyone have tips or instructions, again removing the seals for the shaft at each end. Thx.

The easiest way to remove seals in situ is drive self tapper or dry wall screws into the face of the seal on opposites sides and work them seal out with  two pairs of pliers

Before you go thru the hassle or continue thinking it's the LH and/or RH crankshaft seals. Neither of those seals, if leaking, would explain why original posted photo of having oil on the cylinder/head fins. Oil won't defy the laws of gravity and be sitting where originally shown. Unless someone spilled some from a can somehow? 

Yes there still could be something from above, but a careful check of half moons, head and other gasket areas in the upper did not confirm leaks. But I will continue with this. We'll see what's in the left and right chambers behind the covers. I am preparing to replace shaft seals by finding the procedure and instructions, then ordering what I need and probably cleaning and installing the new. Thx.

I'm back on this issue and hope to fix this fall or at least over the winter. After riding the bike myself a couple weeks ago and more closely examining for leaks, I believe the leaks are coming from the upper engine. I removed the generator and ignition covers and there is no oil anywhere inside. None of the four half moons have any oil on or near them so I don't believe they're leaking. Also, I see no oil on the gasket for the cam shaft cover. The head gasket and cylinder gaskets are wet in spots so I believe they are the issue. See attached photos.1st pic is left side overall, 2nd head gasket, 3rd cylinder gasket and 4th show dry half moons. Does my assessment appear to be correct?

This will be a big job since the whole upper has to come apart. I have not had a motorcycle engine apart so a bit nervous to go ahead, but I think I can do it with advise, the manual and being careful as long as I can acquire a complete upper engine gasket/0-ring etc. kit. I believe i should replace all gaskets and seals. Yes?
1) Is there anyone in the Minneapolis/St Paul area who has worked on any KZ?
2) Where can I buy a gasket kit?
3) Any tips or tricks and cautions? I know the cam chain has to be held up with a wire so it doesn't drop in the engine.
4) Any special tools required besides a torque wrench?

Appreciate very much advise and help. This bike is in great shape as you can see and I really want it repaired so it can be ridden a little each year. One of my other sons is interested in learning to ride and this is a great starter bike. Another son who rode this in June and July when the leaks started is now riding and bought Harley Road Glide. Thx much!

It's possible that the oring is leaking in between the head and the cylinder. Taking the head off isn't that hard if you know what you're doing, just follow the manual. The main issue is getting the camshafts back in time. You'll probably need a valve cover gasket, cylinder head gasket,  and the two orings. When the head is off is a good time for a valve job!

If you remove the head you will also need a base gasket, once the pressure is released it's unlikely to seal

OEM gaskets are superior to aftermarket "gasket kits".  You may want to dig out the PN's needed then search places like eBay, Partzilla, or your favorite dealership source.  Only buy aftermarket if OEM is unobtainable

If you take the pistons out of the barrel you will have to hone the liners and install new rings. Trying to reuse used rings on reassembly will most likely cause some smoke out of the exhaust from poor sealing.
If you remove only one C clip from the piston then you only have to buy 4 new clips, don't reuse the old clips.

All gaskets are installed dry except where pointed out in the factory service manual. If you don't have a hard copy digital ones are available and it is highly recommended to read it as all the fastener torques and assembly/disassembly procedures are listed with descriptions and pictures.

I recently took a 750 engine apart because of a base gasket leak and I was able to keep the pistons in the bores. Its very tricky and time consuming to do but it can be done, saves $$ on new rings. That engine only had about 500 miles on it since it had a top end rebuild. Once gaskets start to leak there is no other cure than a rebuild.

On a Z1 motor, a leak from the tach drive assy. in the head can mimic leaks elsewhere, especially the camchain tunnel O-ring, due to the way oil is moved around by the wind blast and gravity.  Quick & easy fix with a seal and one O-ring.
We're not familiar enough with 650 engines to know if similar behavior is likely.  Worth a look before major effort.

Good Ridin'
slmjim & Z1BEBE