A VPN Tunnel Guide
A tunnel is a virtual path or route between two end points through the internet. When you’re making a site to site or site to mobile VPN connection, then this is where you are creating a tunnel or a secure tunnel from one gateway to another. So data packets travel securely through a tunnel connection through the internet encapsulated inside ESP headers and trailers and inside a new IP header which travels securely over the internet.
However do not take the word "tunnel" literally, it is just a metaphor. What actually happens between two gateway endpoints is all traffic is encapsulated with security algorithm, and when travelling through the internet cloud they would be secure. The indivudal packets have been manipulated with encryption and intergrity algortihms, to provide a level of security when travelling across an in-secure network.
Also take a look at my VPN tutorial guide which explains the ins and outs of VPN's and VPN implementation.
Wikipedia's guide to VPN