Don't store your knives in leather sheaths. Better for the knife, better for the sheath, problem solved.
This,not for long periods of time,anyhow,like over a month.
Not so much for inexpensive sheath knife,but as far as a custom knife goes,the knife will actually stretch the leather of the sheath,making it a loose fit. You can correct this by wetting the sheath and letting it air dry ,without the knife in it.
You should not use leather oils on knife sheaths,you do not want to soften the leather for this application ( a knife sheath )
Carbon & Damascus custom hand made knives should never be stored in a sheath.
As far as the green crud,polish with simichrome or the like. Oil does not hurt,but can stain some lighter colored handle materials.
Lemon oil is great on wood ,bone & antler & I do not think it'd hurt any metal if used as a protectant of " patina" or corrosion,although not really the best for that.
AG Russell carries a product called " Rust Free" ,it is a clear liquid designed to protect metals against rust / patina when in storage,for collectors.