Ouch! That looks bad!
I'm not finding much about splash lubrication in my 6, 8, 12 and 16V71 manual other than cam end oiling.
So, I'm wondering if, it being a 2 cylinder engine, they may have lubed those differently?
I've never worked on the smaller model Detroit's so I'm probably just ignorant of something like this one being equipped with "oil slingers" or something similar.
Oil slingers are used in older car and many small engine applications so something like that is a possibility.
And, I do know of instances where oil sllngers weren't put back during a rebuild. I didn't know what they were the first time I saw them.
Was this engine worked on recently?
If so, then that might be a possibility.
I'm afraid that she's going to have to come apart for a new liner/piston kit and be assessed by someone more knowledgeable than me about what's causing this. With all that metal loose, it's not looking good for other components like pump, bearings,.crank and cam either.
I'm sorry I can't be of any help with this one.