That is the chain tensioner, and probably the o-ring seal is shot. I don't know how to replace this one, I'm not sure if it is a ratcheting type or not. Some of the "real" techs can help.
Should be a simple R&R.
Makes me think I need to check mine -- too much oil on the engine last oil change, all from that area.
1972 220D ?? miles
1988 300E 200,012
1987 300D Turbo killed 9/25/07, 275,000 miles
1985 Volvo 740 GLE Turobodiesel 218,000
1972 280 SE 4.5 165, 000 - It runs!