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Should I boil some of it up and place the some king oyster plug spawn in between layers in a plastic container? If this colonizes fully can I break up this block of mycellium into chunks and place it in between layers of pasteurised cardboard in a laundry basket in a dark room?
Any other tips? Will this produce many king oysters or should I add some pasteurized hardwood chips in the laundry basket as well?
My experience with oysters is that they're pretty resilient. As long as they have enough water, light, and oxygen they'll do fine, so you may not want to store them in a dark room. You could also add hardwood chips or not. Why don't you try and report back to us?
Yes it should work. Like miltonics mentioned oyster mycelium is pretty tenacious. At the moment I have some mycelium growing on unpasteurized cardboard from stem butts off some oysters I grew to which I've since added hardwood chips a few times. It's all just wrapped loosely inside a plastic grocery bag and no contamination issues. It's actually a continuation of the phone book grow I posted here since I used the stem butts from this grow: http://www.permies.com/permaculture-forums/7152_0/fungi-/oysters-and-phonebooks