Basement – How to extend ductwork a few feet due to soffit

Sealing basements so water doesn't come in starts from the outside using curtain drains to lower the water table. For bitumen or any other wall sealer to work effectively, it's applied to the outside of the wall.

Drylock is of questionable benefit, IMHO. It's definitely not a solution to a leaky basement...but it sounds like you've done some regrading already which should help with that.

The reason basements are often musty isn't so much from water from the outside but condensation. Basements are humid and cool, so the walls tend to be perpetually wet. The goal, then is to insulate the walls so help prevent that moist air from hitting the cool wall.

When using fiberglass, that's permeable to the air, so the solution is traditionally to put up a plastic vapor barrier. However, if water does leak in from outside, you've now trapped it.

As such, I strongly recommend going with the Building Sciences corporations recommendation of using XPS foam board against the wall and no additional vapor barrier. The XPS acts as a moisture retarder, yet will let moisture eventually dry through from one side to the other.

I went in to much more detail (including my recommendation to use metal framing rather than wood) with this answer here: https://diy.stackexchange.com/a/8644/1209

When finished, the other objective is to try and reduce the humidity in the basement. If you can bring the basement space into being part of the conditioned space, that's ideal. Alternatively, keep that dehumidifier running.

To answer the specific questions:

Is drylock sufficient to use R-15 batt? Or should I skip it entirely?

In terms of creating an insulated finished space, Drylock is of no use. The purpose of a vapor barrier is to prevent moist air from getting to a surface to condense on. The concrete wall will still be cool regardless of Drylock.

If not then should I put in EPS/XPS? (again Drylock?)

Yes to the EPX/XPS (see my linked answer above).

Would I really need more than that?

Code should dictate what is required. Check your local authorities regarding the amount of insulation you need. EPX/XPS will get you more R-value per inch than fiberglass.

In terms of comfort, the biggest culprits in a basement will be air infiltration, the upper exposed part of the foundation, and the space between the floor joists. Focus on those as well.