1. No water in Intercooler hose from turbo to Intercooler.
2. Water in the:

• A: Intercooler Air passage.
  B: Hose from intercooler to intake manifold.
  C: Intake manifold.
  D: Cylinders.

Internal leakage in the intercooler between liquid and air passages.

Look at the weep hole on the bottom of the intercooler, is it plugged up?
Could be years worth of condensation that could not drain out.

If it sat for years condensation will build up anywhere air can access. Check the cylinder walls carefully for corrosion before you invest too much in the motor. Intercooler water is surely condensation. The intercooler temperature equilibrates fast, as it’s a heat exchanger.

Does it show for certain a blown head gasket? We cannot say for certain that it is blown by looking at picture. One cannot see three dimensions in a two dimensional picture. It only takes a couple thousands of a inch for water to weep past the gasket. We can infer when the damage is substantial but...

I will go with 95% that your head gasket blew with a coolant to cylinder blow.

Look how nice and clean #4 is scoured clean compared to the others, both the piston and the valve train above.

The other 5% is Ms Pac-Man in cylinder 3 ate everything in cylinder 4 and just moved on to cylinder 3....

water was definitely getting in number 4 by how clean the valves and piston are. . You will have to make sure the metal loss under the gasket is taken care of. maby compression is bad in 4 due to prolong=ed operation with water. looks like you ran it a long time this way. might be needing an engine ...

Cylinder head off, clean, skim, check flat. New Volvo head gasket, good to go

About 20 hours of work being careful

You give the manifold stud work to the machine shop. With the head off, that’s easy work for them

You never reuse cylinder head bolts or gaskets.

So far, couldn't find a scratch or groove by fingertip and nothing is catching on a fingernail. I can feel some parts on each cylinder towards the top where there is a full-circle slight bump or change in diameter. Probably just the cylinder wear I guess. I was talking about the head gasket but it ...