Given two different strings S1 and S2 (S1 != S2) is it possible that:
SHA1(S1) == SHA1(S2)
is True?
The goal I am trying to achieve is to hash some sensitive ID string (possibly joined together with some other fields like parent ID), so that I can use the hash value as an ID instead (for example in the database).
Example:
Resource ID: X123
Parent ID: P123
I don't want to expose the nature of my resource identifies to allow client to see "X123-P123".
Instead I want to create a new column hash("X123-P123"), let's say it's AAAZZZ. Then the client can request resource with id AAAZZZ and not know about my internal id's etc.
What you describe is called a collision. Collisions necessarily exist, since SHA-1 accepts many more distinct messages as input that it can produce distinct outputs (SHA-1 may eat any string of bits up to 2^64 bits, but outputs only 160 bits; thus, at least one output value must pop up several times). This observation is valid for any function with an output smaller than its input, regardless of whether the function is a "good" hash function or not.
Assuming that SHA-1 behaves like a "random oracle" (a conceptual object which basically returns random values, with the sole restriction that once it has returned output v on input m, it must always thereafter return v on input m), then the probability of collision, for any two distinct strings S1 and S2, should be 2^(-160). Still under the assumption of SHA-1 behaving like a random oracle, if you collect many input strings, then you shall begin to observe collisions after having collected about 2^80 such strings.
(That's 2^80 and not 2^160 because, with 2^80 strings you can make about 2^159 pairs of strings. This is often called the "birthday paradox" because it comes as a surprise to most people when applied to collisions on birthdays. See the Wikipedia page on the subject.)
Now we strongly suspect that SHA-1 does not really behave like a random oracle, because the birthday-paradox approach is the optimal collision searching algorithm for a random oracle. Yet there is a published attack which should find a collision in about 2^63 steps, hence 2^17 = 131072 times faster than the birthday-paradox algorithm. Such an attack should not be doable on a true random oracle. Mind you, this attack has not been actually completed, it remains theoretical (some people tried but apparently could not find enough CPU power)(Update: as of early 2017, somebody did compute a SHA-1 collision with the above-mentioned method, and it worked exactly as predicted). Yet, the theory looks sound and it really seems that SHA-1 is not a random oracle. Correspondingly, as for the probability of collision, well, all bets are off.
As for your third question: for a function with a n-bit output, then there necessarily are collisions if you can input more than 2^n distinct messages, i.e. if the maximum input message length is greater than n. With a bound m lower than n, the answer is not as easy. If the function behaves as a random oracle, then the probability of the existence of a collision lowers with m, and not linearly, rather with a steep cutoff around m=n/2. This is the same analysis than the birthday paradox. With SHA-1, this means that if m < 80 then chances are that there is no collision, while m > 80 makes the existence of at least one collision very probable (with m > 160 this becomes a certainty).
Note that there is a difference between "there exists a collision" and "you find a collision". Even when a collision must exist, you still have your 2^(-160) probability every time you try. What the previous paragraph means is that such a probability is rather meaningless if you cannot (conceptually) try 2^160 pairs of strings, e.g. because you restrict yourself to strings of less than 80 bits.