Those engines are very robust and durable, I bought a 240D with the engine in pieces in the trunk, put it together and then accidentally ran it out of oil due to a ruptured oil pan which caused the pistons to seize in the bores due to the heat. After it cooled, replaced the oil pan, filled with oil and drove it daily for years with zero problems.

My guess is the head gasket was damaged due to the heat. The location of the oil leak is common. I'd suggest first doing a compression test to know what you have and then pulling the head to replace the head gasket along with all new bolts. Resurfacing the head necessitates removing the pre chambers which requires special tools or some ingenuity. When the head is off leak test the valves and address as necessary and replace the valve seals.

Removing the head on that motor has a few oddities I'd suggest getting a Haynes manual or the like. There are some hidden small bolts and the injection pump can get out of time if you aren't careful. Invest time in understanding the job first, it will pay off.

How many miles are on the engine?

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"Rudeness is a weak man's imitation of strength" - Eric Hoffer

Thanks Sugar Bear. There's 225k on the car. It was well maintained on the oil side of things. I noticed no difference in sound or performance before/after, I doubt I have done serious damage, but I do have a diesel compression tester, so I can make that happen. Looks like I need to get some paper OM616 manuals. I have read those available online and have a paper Haynes, but there's nothing like the real thing. Thanks for the tip on the bolts and valve checks. I can fill the bores with Varsol and check for leaks while the head's off.

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1983 240D 4-speed manual