Instructions
Play through the game normally until you successfully repair Gus's faded house.
Walk to the right side of the Center of Town area and speak to the NPC named Gremlin Bennet. Accept the plane ride to the crashed ship when offered.
Jump onto the boat when the plane draws near, then head all the way into the back to find a large valve. Hit the valve with a spin attack.
Walk back to the front of the boat and through the newly-opened door. Open the chest in this room to find the "Small Pete's Log" quest item.
Return the book to Small Pete to clear his name of any wrong-doing, or give the book to Gremlin Shakey to keep Pete ostracized from the town. Either method will finish the quest.