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That's an O2 Sensor. It should be plugged into the exhaust manifold. There are two BEFORE the catalytic converter and two AFTER the catalytic converter. The DME (engine computer in BMW speak) can't accurately determine how the engine should run if it's not getting accurate data (or in this case, NO DATA) from an O2 Sensor. An UPSTREAM O2 Sensor error means BEFORE the Catalytic Converter.

On a standard EXHAUST Manifold, they are easily seen on the passenger side of the engine.
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