The mechanical oil seal, seals the aluminum transfer case on its OD and the OD of the rotating hardened spacer behind the pulley. Nothing more! It doesn't seal the shaft.
The small O-ring (1/2mm) seals the OD of the middle shaft or the ID of the spacer.
If the front pulley is loose your leak more then likely is caused by the oil coming between the spacer ID and not the mechanical seal.
The chamfer on the inside diameter of the spacer faces toward the bearing and the O-ring seals against the inner bearing race surface and the OD of the middle shaft and the chamfer of the spacer! The o-ring is a static seal (Doesn't move). Although it rotates with the shaft and other parts it's just being squeezed.
If the assembly loosened up the o-ring is no longer squeezed and the oil can/will leak.
Transfer case oil level should be checked with the bike level. There is a small sight port below the slotted fill plug. When fluid runs out of this port the transfer case is full
Lastly, the mechanical seal in question can be replaced after removing the front pulley from the outside as you put it [
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I suggest you read the following thread & check for loose pulley by relaxing the pulley belt:
http://www.rswarrior.com/forums/topic.asp?ARCHIVE=true&TOPIC_ID=21669