Thanks for the replies.
Update is that I talked again with the dealer and they found no leak an no sign of water and oil mixing -not sure how they tested it. So they say they dont know why the water was empty. and I think it was only the overflow bottle was empty.
Car was driving OK when I took it to the dealer. The test shows TDC error P0016. Dealer changed oil and filter did crank case cleaning, and said the pump is OK. They initially quoted to inspect the timing system for $560, but later after changing the oil and cleaning they thought there is no point. Not sure how they came to this conclusion.
I wanted to get another person opinion, so I drove it to another nearby garage, only 1 mile from the dealer. Still, it was driving normally at this short distance. They said, since the car is driving normally it is probably a faulty sensor, and they would replace it with $300 and while they do that they can check the timing system also if there is something wrong with that.
Any chance it could be only the sensor?
Just so we are clear here, is the following timeline correct?
1. You took it to the dealer because the light came on.
2. They read the code, found P0016.
3. They changed the oil and filter and cleaned the crankcase and recommended a timing inspection.
4. After changing the oil, they said "don't bother with the timing, you need a new engine"
I'm having trouble with #3 and #4 if they didn't find any water in the crankcase. It is OBVIOUS when water gets into oil. The only way their actions make any sense is if they drained the oil and it had water in it, yet you say that they didn't find any sign of water in the oil? There's no reason to clean the crankcase unless they found water.
To me, it sounds like they made a quick diagnosis of the problem initially - maybe they looked into the overflow and didn't see any sign of oil and coolant mixing. However, they changed their minds after seeing the engine oil when it came out. Did they save a sample of the oil to show you? Is the water level in the overflow dropping as you continue to drive it?
P0016 is a camshaft/crankshaft timing error. The ECU thinks the camshaft(s) in bank A are rotated out of their ideal position relative to the crankshaft. Sometimes this can be caused by the variable valve timing actuators going bad (which has happened to others on this forum) or a bad sensor. However, these VVT actuators use oil pressure to run, so if water gets in the oil, the VVT mechanisms can malfunction. I recall a few threads on this forum where a P0016 code ended up being related to water in the oil.
You need to get the story straight from the dealer. If they found water in the oil, I understand why they said you need a new engine.