**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 10-K**

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| **(Mark One)** |       | ** **                                                                                    |
|----------------|------------|-----------------------------------------------------------------------------------------------|
|           |       |                                                                                          |
| **x**          | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|           |       |                                                                                          |
|           |       | **For The Fiscal Year Ended December 31, 2006**                                               |
| ** **     |       | ** **                                                                                    |
| **OR**         |
|           |       |                                                                                          |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the Transition period from                 to**

### **COMMISSIONFILE NUMBER 333-122935-02**

**REEFGLOBAL ENERGY VII, L.P.**

(Exact name of registrant as specified in its charter)

| **Nevada**                       |   | **20-3963203**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

| **1901 N. Central Expressway, Suite 300, Richardson, TX 75080-3610** |
|----------------------------------------------------------------------|
| (Address of  principal executive offices including zip code)         |
|                                                                 |
| **(972)-437-6792**                                                   |
| (Registrant’s  telephone number, including area code)           |

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

Securitiesregistered pursuant to Section 12(g) of the Act:

**General and Limited Partnership Interests**

(Title of Class)

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.      Yes  o  No  x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.  Yes  o  No  x

Note – checking the boxabove will not relieve any registrant required to file reports pursuant toSection 13 or 15(d) of the Exchange Act from their obligations under thosesections.

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x  No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Largeaccelerated filer  o     Acceleratedfiler  o        Non-accelerated filer  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)      Yes  o  No  x

No market currentlyexists for the limited and general partnership interests of the registrant.

As of March 30, 2007, theregistrant had 48.620 units held by the managing general partner, 741.001 unitsof additional general partner interest and 182.783 units of limited partnerinterest outstanding.

##### Documents incorporated by reference:  **None**

 

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REEF GLOBAL ENERGY VII,L.P.

FORM 10-K

TABLE OF CONTENTS
| **Part I**   | ** ** | ** **                                                                                                          | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| Item  1.     |       | Business                                                                                                            |       |
| Item  1A.    |       | Risk Factors                                                                                                        |       |
| Item 1B.     |       | Unresolved Staff  Comments                                                                                          |       |
| Item  2.     |       | Properties                                                                                                          |       |
| Item 3.      |       | Legal Proceedings                                                                                                   |       |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders                                                                |       |
|         |       |                                                                                                                |       |
| **PART II**  |       |                                                                                                                |       |
| Item 5.      |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       |
| Item 6.      |       | Selected Financial  Data                                                                                            |       |
| Item 7.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       |
| Item 7A.     |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |
| Item 8.      |       | Financial  Statements and Supplementary Data                                                                        |       |
| Item 9.      |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |       |
| Item 9A.     |       | Controls and  Procedures                                                                                            |       |
| Item 9B.     |       | Other Information                                                                                                   |       |
|         |       |                                                                                                                |       |
| **PART III** |       |                                                                                                                |       |
| Item 10.     |       | Directors and  Executive Officers of the Registrant                                                                 |       |
| Item 11.     |       | Executive  Compensation                                                                                             |       |
| Item 12.     |       | Security Ownership  of Certain Beneficial Owners and Management and Related Stockholder Matters                     |       |
| Item 13.     |       | Certain  Relationships and Related Transactions                                                                     |       |
| Item 14.     |       | Principal  Accounting Fees and Services                                                                             |       |
|         |       |                                                                                                                |       |
| **PART IV**  |       |                                                                                                                |       |
| Item 15.     |       | Exhibits and  Financial Statement Schedules                                                                         |       |

 

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**PART I**

**ITEM 1.****                          BUSINESS.**

**Introduction**

ReefGlobal Energy VII, L.P. (the Partnership) is the second in a series of Nevadalimited partnerships comprising a program called Reef Global Energy Ventures II(the Program). The Partnership was formed in the state of Nevada on December29, 2005.  The Partnership purchasesworking interests in oil and natural gas prospects and participates in thedrilling of wells on those prospects. The primary purposes of the Partnershipare to generate revenue from the production of oil and natural gas, distributecash to the partners, and provide tax benefits. Reef Oil & Gas Partners,L.P. (Reef) is the managing general partner of the Partnership.

ThePartnership was formed to drill, complete and own working interests in oil andnatural gas wells located primarily onshore in the continental United States.However, the Partnership may acquire interests in drilling prospects in suchlocations as its managing general partner deems advisable. To date, thePartnership has acquired interests in 12 prospects on which it expects to drill19 wells.  These prospects are located inTexas, Louisiana, and Wyoming. The Partnership expects to drill approximately22-25 wells in total with its available capital. The Partnership will acquire working interests primarily in onshoreprospects generated by Reef Exploration, L.P. (RELP), an affiliate of Reef, andwill also purchase working interests in oil and natural gas prospects generatedby third parties. The Partnership will generally purchase a minoritynon-operated working interest in the prospects it purchases from third parties.Working interests acquired may be assigned to other public partnerships in thisProgram, to private drilling partnerships managed by Reef, and to thirdparties. Reef may also retain, for its sole benefit, a working interest in aprospect and participate in the drilling and development of the prospect on thesame basis as the Partnership.  In suchcases where the percentage ownership of the Partnership and Reef affiliated entitiesis large enough in a prospect, RELP may be elected as operator of theprospect.  As of the date of this report,RELP operates three Partnership prospects upon which 10 wells are expected tobe drilled.

Theattainment of the Partnership’s business objectives, including the generationof revenue from Partnership operations, the distribution of cash to thepartners and the provision of tax benefits, will depend upon many factors,including:

·                                          Reef’sability to select productive prospects;

·                                          the drilling andcompletion of wells in an economical manner;

·                                          thesuccessful management of prospects;

·                                          the level ofoil and natural gas prices in the future;

·                                          the degree ofgovernmental regulation over the production and sale of oil and natural gas;

·                                          the future economicconditions in the United States and throughout the world; and

·                                          changesin the Internal Revenue Code (the Code).

Accordingly,there can be no assurance that the Partnership will achieve its businessobjectives.  In addition, distributionsto partners will decrease over time due to the fact that oil and natural gaswells are depleting assets, and production rates will decline over the life ofan individual well.  Distribution levelswill also be highly dependent upon oil and natural gas prices. Distributionswill be partially sheltered by the percentage depletion allowance.

**Acquisition and Drilling of Undeveloped Prospects**

ThePartnership will acquire interests in prospects internally generated by RELP,or generated by and purchased from third parties. To date, the Partnership hasacquired interests in 12 prospects. A “prospect” is generally defined as acontiguous oil and gas leasehold estate, or lesser interest in a leaseholdestate, upon which drilling operations may be conducted. A prospect may be characterizedas “exploratory” or “developmental” based upon the type of well to be drilledon the prospect.  A development well is awell drilled within a proved area of an oil or gas reservoir. Generally anexploratory well is any well that is not a development well, including wellsdrilled to find and produce oil or gas in an unproven area, wells drilled tofind a new reservoir in a field previously found to be productive of oil orgas, or wells drilled to extend a known reservoir.

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Prospectsare evaluated utilizing data generated by RELP or provided by unaffiliatedthird parties to RELP. This data may include well logs, production records fromRELP’s and others’ wells, seismic, geological and geophysical information, andsuch other information as may be available and useful. Partnership prospectsare evaluated by petroleum engineers, geophysicists, geologists, and othertechnical consultants employed by RELP on the Partnership’s behalf.

ThePartnership prospects are acquired pursuant to an arrangement in which thePartnership purchases part of the working interest.  A working interest bears a specified portionof the costs of development, operation and maintenance.  A working interest is subject to landowners’royalty interests and may be subject to other royalty interests payable tounaffiliated third parties. At its discretion, the Partnership may acquire lessthan 100% of the working interest provided that costs are reducedproportionately.  The Partnership’slimited partnership agreement (the Partnership Agreement) prohibits Reef or anyof its affiliates from retaining any overriding royalty interest, that is, anyroyalty interest that would be paid out of the Partnership’s working interest,in any working interest purchased by the Partnership. The Partnership will be anon-operator working interest owner in all prospects purchased by thePartnership. Working interests in prospects purchased by the Partnership mayalso be owned by other public partnerships in this Program or by privatedrilling partnerships managed by Reef. Reef may, for its sole benefit, alsoretain a portion of the working interest in a prospect and participate in thedrilling and development of the prospect on the same basis as the Partnership.If the total working interest in any prospect either retained or sold to thisPartnership or other affiliated partnerships is large enough, RELP may beelected operator of the prospect. RELP serves as operator for three of the 12prospects which have been purchased by this Partnership.

Inacquiring interests in leases, the Partnership may pay such consideration andmake such contractual commitments and agreements, as Reef deems fair,reasonable and appropriate.  The term “lease”means any full or partial interest in:

·                                          undevelopedoil and gas leases;

·                                          oil and gasmineral rights;

·                                          licenses;

·                                          concessions;

·                                          contracts;

·                                          fee rights;or

·                                          otherrights authorizing the owner to drill for, reduce to possession and produce oiland gas.

Leases will be acquiredby the Partnership directly from unaffiliated persons or from Reef or itsaffiliates. All leases that are transferred to the Partnership from Reef or itsaffiliates will be transferred at cost, unless Reef has reason to believe thatcost is materially more than the fair market value of such property, in whichcase the price will not exceed the fair market value of the property.

 

The actual number,identity and percentage of working interests or other interests in prospects tobe acquired by the Partnership will depend upon, among other things, availablepartnership capital, the latest geological and geophysical data, potentialtitle or spacing problems, availability and price of drilling services, oftubular goods and of services, approvals by federal and state departments oragencies, agreements with other working interest owners in the prospects, farm-ins,and continuing review of other prospects that may be available. The Partnershipattempts to minimize drilling risk to the partners by the diversity createdfrom participating in numerous drilling opportunities. This Partnership expectsto participate in the drilling of a total of 22-25 wells with its availablecapital.

 

**Consulting Agreements for Prospect Acquisitions**

** **

Reefentered into two agreements (the CMI Agreements) with Challenger Minerals Inc. (CMI),a subsidiary of GlobalSantaFe Corporation and a screener of oil and gasprospects in the Gulf of Mexico and North Sea regions. The first agreementprovided, among other things, that CMI would present a minimum of 50 prospectsper year in the Gulf of Mexico region to Reef, and that Reef would have theoption to purchase up to 7.5% of the interest made available to CMI. Reef paidCMI a fee of $225,000 per year under the terms of this agreement. Reef allowedthis three year agreement to expire effective January 31, 2006.

 

Underthe terms of the second agreement, Reef was allowed to acquire up to 5% of theinterest made available to CMI in all offshore prospects located in the NorthSea region that were identified and initially reviewed by CMI during the termof the agreement.  Reef paid CMI a fee of$75,000 per year under the terms of this three year agreement.  CMI was notobligated to present Reef with a specific number of prospects under the NorthSea Agreement, and under certain circumstances further described in the NorthSea Agreement. Reef could be excluded from participation in certain prospects.Reef allowed this agreement to expire effective November 30, 2006.

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Reefhas also entered into an agreement with Access Exploration Corp. (AEC) for theperiod from October 1, 2004 thru October 2, 2007. Under terms of the agreement,Reef has the option to participate for up to 10% of the interest made availableto AEC in any Gulf of Mexico developmental project screened by AEC, and toparticipate for up to 12.5% of the interest made available to AEC in any Gulfof Mexico exploration projects screened by AEC. There is no minimum number ofprospects which AEC is required to screen and present to Reef forparticipation. As part of this agreement, AEC will make available to Reef 5% ofthe interest made available to AEC in all projects outside the Gulf of Mexico.Reef will pay AEC the sum of $100,000 per year during the three year term ofthis agreement for the services rendered by AEC.

 

Reefmay enter into additional agreements with other third party consultants toscreen exploration and development projects in areas where such consultantshave expertise in an effort to provide the Partnership with access to thehighest quality prospects, thereby reducing overall risk to the Partnership.

 

Projectsapproved for acquisition by Reef under these agreements will be assigned tothis Partnership as well as other limited partnerships formed as part of theProgram. Initially, each partnership formed as a part of the Program willreimburse Reef a portion of the actual consulting fees paid on an estimatedbasis. Upon the completion of the Program’s offering in 2007, the actualconsulting fees paid during the period by Reef will be allocated to eachpartnership formed based upon total capital contributions, and each partnershipformed will either receive an additional assessment or refund of fees. Under nocircumstances will the partnerships reimburse any amount in excess of theactual fees paid by Reef and affiliates as consulting fees under these and anyfuture agreements entered into during the term of the Program. The Partnershiphad accrued a $150,736 estimated payment to Reef as of the end of December,2006. This amount has been capitalized as geological and geophysical costs inaccordance with the full cost method of accounting for oil and gas properties.The amount was paid to Reef during the first quarter of 2007.

 

**Drilling and Completion Phase of Operations**

** **

When the combinedprospect ownership of the Partnership and any other Reef affiliated entities,if any, total less than a 50% working interest in a prospect, it is probablethat the majority owner of the prospect will select the operator for the wellsdrilled on the prospect. Reef will monitor the operator’s performance andactivity, will represent the Partnership in decision making with regard to thePartnership’s prospects, and will otherwise represent the Partnership withregard to the activities of the Partnership. When RELP serves as operator of a prospect, it will receive operatorfees during the drilling and production phase of operations at the competitiverate in the area where the prospect is located. Typically, these are charged as a monthly fee per well as agreed to inan operating agreement signed by the Partnership and participating thirdparties in the well. When RELP does serve as operator on any Partnership wells,it does so pursuant to a model form operating agreement issued by the AmericanAssociation of Petroleum Landmen and an accounting procedure for jointoperations issued by the Council of Petroleum Accountants Societies of NorthAmerica.  RELP is currently the operatoron three Partnership prospects upon which 10 wells are expected to be drilled.

* *

When RELP serves as theoperator, it contracts the drilling of the well to an independent third party,and the resulting costs of the well to the Partnership are determined by theactual third party costs, plus RELP’s monthly charges for supervision,engineering, geology, accounting and other services for the area where the wellis located. Under no circumstances will RELP, Reef, or any other affiliate actas contractor or subcontractor in connection with the drilling of anyPartnership well.

* *

The Partnership normallypays drilling and completion costs as incurred. The Partnership is permitted tomake advance payments where necessary to secure the tax benefits of prepaidintangible drilling costs and where there is a valid business reason. In orderto comply with conditions to secure the tax benefits of prepaid intangibledrilling costs, the operator may not refund any portion of amounts paid in theevent actual costs are less than amounts paid, but may apply any such amountssolely for payment of additional drilling services to the Partnership. A wellthat fails to result in the discovery of oil or natural gas, or that isdetermined to be unable to produce oil or natural gas in commercial quantitieswill be plugged and abandoned in accordance with applicable regulations.Generally, the costs of abandoning a well location include restoration of thewell site to its original condition prior to the drilling of the well.

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**Production Phase of Operations**

** **

For any well capable ofproducing quantities of oil and/or natural gas in commercial quantities,production operations commence once a Partnership well has been completed byinstalling all surface equipment necessary to control the flow of production orto shut down the well, and by installing any storage facilities, gathering, orsales lines required to produce and sell the oil and/or natural gas productionfrom the well.

 

The Partnership intendsto sell oil and/or natural gas production from its wells to refineries, foreigngovernmental agencies, entities controlled by foreign governments, industrialusers, gas brokers, interstate pipelines or local utilities.  In many cases the Partnership will elect tosell its production under marketing arrangements entered into by the operatorof the well. Due to rapidly changing market conditions and normal contractingprocedures, final terms and contracts will not be completed until after thewells have been drilled.

 

The Partnership willattempt to sell the oil and/or natural gas produced from successful wells on acompetitive basis at the best available terms and prices.  Domestic sales of oil will be at marketprices.  Certain international sales may,however, be at prices determined by foreign governments or by entitiescontrolled by foreign governments. Generally, purchase contracts for the saleof oil are cancelable on 30 days’ notice, but purchase contracts for the saleof natural gas may have a term of a number of years and may require thededication of the gas from a well for the life of its reserves.  The Partnership will sell natural gasdiscovered by it at negotiated prices domestically, based upon a number offactors, such as the quality of the gas, well pressure, estimated reserves,prevailing supply conditions and any applicable price regulations promulgatedby the Federal Energy Regulatory Commission (FERC).  International gas sales, like internationaloil sales, may be at prices determined by foreign governments or entitiescontrolled by foreign governments.

 

Historically,the oil and gas market has experienced significant price fluctuations. Pricesare significantly impacted by local weather, supply in the area, availabilityand price of competitive fuels, seasonal variations in local demand, limitedtransportation capacity to other regions, and the worldwide supply and demandbalance for crude oil.

 

ThePartnership does not expect to engage in commodity futures trading or hedgingactivities, or to enter into derivative financial instrument transactions fortrading or other speculative purposes. Accordingly, the Partnership will be atrisk for the volatility in commodity prices inherent in the oil and gasindustry, and the level of commodity prices will have a significant impact onthe Partnership’s results of operations. See “Item 7A. — Quantitative and Qualitative Disclosures About MarketRisk.”

 

The Partnership’s shareof revenue from productive wells will be burdened by and/or subject toroyalties and overriding royalties, monthly operating charges, and otheroperating costs.  These items ofexpenditure involve amounts payable solely out of, or expenses incurred solelyby reason of, production operations.  ThePartnership will deduct operating expenses from the production revenue for thecorresponding period.

 

**Insurance**

** **

The Partnership is anamed insured under blowout, pollution, public liability and workmen’scompensation insurance policies obtained by RELP. Such insurance, however, maynot be sufficient to cover all liabilities. Each unit held by the general partners represents an open-endedsecurity for unforeseen events such as blowouts, lost circulation, stuck drillpipe, etc. that may result in unanticipated additional liability materially inexcess of a general partner’s initial investment in the Partnership.

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The Partnership is anamed insured under various insurance policies and intends to maintain suchpolicies subject to its analysis of their premium costs, coverage and otherfactors.  In the exercise of Reef ’sfiduciary duty as managing general partner, Reef has obtained insurance onbehalf of the Partnership to provide the Partnership with such coverage as Reefbelieves is sufficient to protect the investor partners against the foreseeablerisks of drilling and production.  Reefreviewed the Partnership insurance coverage prior to commencing drillingoperations and periodically evaluates the sufficiency of insurance. In no eventwill the Partnership maintain public liability insurance of less than two timesthe Partnership’s capitalization.****Subjectto the foregoing, Reef may, in its sole discretion, increase or decrease thepolicy limits and types of insurance from time to time as Reef deemsappropriate under the circumstances, which may vary materially.

 

Reef will notify allinvestor general partners of the Partnership at least 30 days prior to anymaterial change in the amount of the Partnership’s insurance coverage.  Within this 30-day period and otherwiseafter the expiration of one year following the closing of the offering of thePartnership, investor general partners have the right to convert their unitsinto units of limited partnership interest by giving Reef written notice oftheir intent to convert.  At any timeduring this 30-day period, upon receipt of the required written noticefrom an investor general partner of his intent to convert, Reef will amend thePartnership Agreement and will file the amendment with the State of Nevadaprior to the effective date of the change in insurance coverage.  This amendment to the Partnership Agreementwill effectuate the conversion of the interest of the former investor generalpartner to that of a limited partner. Effecting conversion is subject to the express requirement that theconversion will not cause a termination of the Partnership for federal incometax purposes.  Investor general partnerswill have limited liability as a limited partner for any Partnership operationsconducted after their conversion date, effective upon the filing of anamendment to the Certificate of Limited Partnership of the Partnership.  However, even after an election ofconversion, the investor partner will continue to have unlimited liabilityregarding partnership activities that occurred while he was an investor generalpartner.

 

**Competition**

** **

There are thousands ofoil and natural gas companies in the United States.  Competition is strong among persons andcompanies involved in the exploration for and production of oil and naturalgas.  Reef expects the Partnership toencounter strong competition in every phase of business.  The Partnership competes with entities havingfinancial resources and staffs substantially larger than those available to it.

 

The national supply ofnatural gas is widely diversified, with no one entity controlling over 5%.  As a result of deregulation of the naturalgas industry enacted by Congress and FERC, natural gas prices are generallydetermined by competitive market forces. Prices of crude oil, condensate and natural gas liquids are notcurrently regulated and are generally determined by competitive market forces.

 

There is competitionamong operators for drilling equipment, goods, and drilling crews. Suchcompetition may affect the ability of the Partnership to develop leasessuitable for development by the Partnership once they are acquired.

 

**Markets**

** **

Themarketing of any oil and natural gas produced by the Partnership is affected bya number of factors that are beyond the Partnership’s control and whose exacteffect cannot be accurately predicted. These factors include:

·                                          theamount of crude oil and natural gas imports;

·                                          theavailability, proximity and cost of adequate pipeline and other transportationfacilities;

·                                          thesuccess of efforts to market competitive fuels, such as coal and nuclearenergy, and the growth and/or success of alternative energy sources such aswind power;

·                                          theeffect of United States and state regulation of production, refining,transportation and sales;

·                                          thelaws of foreign jurisdictions and the laws and regulations affecting foreignmarkets;

·                                          othermatters affecting the availability of a ready market, such as fluctuatingsupply and demand; and

·                                          generaleconomic conditions in the United States and around the world.

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The supply and demandbalance of crude oil and natural gas in world markets has caused significantvariations in the prices of these products over recent years.  The North American Free Trade Agreement eliminatedtrade and investment barriers between the United States, Canada, and Mexico,resulting in increased foreign competition for domestic natural gasproduction.  New pipeline projectsrecently approved by, or presently pending before, FERC, as well asnondiscriminatory access requirements, could further substantially increase theavailability of gas imports to certain U.S. markets.  Such imports could have an adverse effect onboth the price and volume of gas sales from Partnership wells.

 

Members of theOrganization of Petroleum Exporting Countries (OPEC) establish prices andproduction quotas for petroleum products from time to time with the intent ofaffecting the global supply of crude oil and reducing, increasing ormaintaining certain price levels.  Reefis unable to predict what effect, if any, such actions will have on the amountof or the prices received for oil produced and sold from the Partnership’swells.

 

In several initiatives,FERC has required pipelines to develop electronic communication and to providestandardized access via the Internet to information concerning capacity andprices on a nationwide basis, so as to create a national market.  Parallel developments toward an electronicmarketplace for electric power, mandated by FERC, are serving to create multi-nationalmarkets for energy products generally. These systems will allow rapid consummation of natural gastransactions.  Although this system mayinitially lower prices due to increased competition, it is anticipated toexpand natural gas markets and to improve their reliability.

 

**Regulation**

** **

The Partnership’soperations will be affected from time to time in varying degrees by domesticand foreign political developments, federal and state laws and regulations andthe laws of other countries where some of the prospects may be located.

 

*Production.*  In most areas of operations within the UnitedStates the production of oil and natural gas is regulated by state agenciesthat set allowable rates of production and otherwise control the conduct of oiland natural gas operations. Among the ways that states control production isthrough regulations that establish the spacing of wells or limit the number ofdays in a given month during which a well can produce.

 

*Environmental.*  The Partnership’s drilling and productionoperations are also subject to environmental protection regulations establishedby federal, state, and local agencies that may necessitate significant capitaloutlays that, in turn, would materially affect the financial position andbusiness operations of the Partnership. These regulations, enacted to protectagainst waste, conserve natural resources and prevent pollution, couldnecessitate spending funds on environmental protection measures, rather than ondrilling operations. If any penalties or prohibitions were imposed on thePartnership for violating such regulations, the Partnership’s operations couldbe adversely affected.

 

*NaturalGas Transportation and Pricing.*  FERC regulates the rates for interstatetransportation of natural gas as well as the terms for access to natural gaspipeline capacity. Pursuant to the Wellhead Decontrol Act of 1989, however,FERC may not regulate the price of gas. Such deregulated gas production may besold at market prices determined by supply and demand, Btu content, pressure,location of wells, and other factors. Reef anticipates that all of the gasproduced by the Partnership’s wells will be considered price-decontrolled gasand that the Partnership’s gas will be sold at fair market value.

 

*Proposed Regulation.*Variouslegislative proposals are being considered in Congress and in the legislaturesof various states, which, if enacted, may significantly and adversely affectthe petroleum and natural gas industries. Such proposals involve, among otherthings, the imposition of price controls on all categories of natural gasproduction, the imposition of land use controls, such as prohibiting drillingactivities on certain federal and state lands in protected areas, as well asother measures. At the present time, it is impossible to predict whatproposals, if any, will actually be enacted by Congress or the various statelegislatures and what effect, if any, such proposals will have on thePartnership’s operations.

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*ForeignRegulation.*  Reefrelies heavily on local experts and personnel, including attorneys andaccountants, for advice and assistance in complying with the laws andregulations of foreign jurisdictions when prospects are located in suchjurisdictions.

 

**Employees**

 

The Partnership has no employees,and is managed by its managing general partner, Reef. On January 2, 2006, OREIInc. (OREI), an affiliate of Reef, transferred all of its employees to RELP, anew Reef affiliate formed during 2005. RELP employs a staff includinggeologists, geophysicists, petroleum engineers, landmen and accountingpersonnel who administer all of the Partnership’s operations. The Partnershipreimburses RELP for direct and administrative services at cost.  See “Item 11 – Executive Compensation.”

 

**ITEM 1A.**                 RISK FACTORS

**Oil andgas drilling is a speculative activity involving numerous risks and substantialand uncertain costs which could adversely affect the Partnership.**

** **

Drilling for oil andnatural gas involves numerous risks, including the risk that no commercially productiveoil and/or natural gas reserves will be discovered. There can be no assurancethat wells drilled by the Partnership will be productive or recover all or anyportion of the investment in such wells. Drilling and completion costs aresubstantial and uncertain, and drilling operations may be curtailed, delayed,or cancelled due to a variety of factors beyond our control, includingshortages or delays in the availability of drilling rigs and crews, unexpecteddrilling conditions, title problems, pressure or irregularities in formations,equipment failures or accidents, adverse weather conditions, and compliancewith environmental and other governmental regulations. Our drilling activitiesmay not be successful and, if unsuccessful, will have an adverse effect on thePartnership’s results of operations and cash flow available for distribution tothe partners. Unexpected costs incurred in the drilling of certain wells maylimit the total number of wells the Partnership is able to drill with thecapital raised by the Partnership, thus increasing the overall risk of thePartnership’s drilling program.

 

**Oil andnatural gas prices are volatile.**

** **

The financial condition,results of operations, and the carrying value of our oil and natural gasproperties depend primarily upon the prices received for our oil and naturalgas production. Oil and natural gas prices historically have been volatile andlikely will continue to be volatile given current geopolitical conditions. Cashflow from operations is highly dependent upon the sales prices received fromoil and natural gas production. The prices for oil and natural gas are subjectto a variety of factors beyond our control. These factors include:

 

·                                          thelevel of consumer demand for oil and natural gas;

·                                          thedomestic and foreign supply of oil and natural gas;

·                                          theability of the members of  OPEC to agreeto and maintain oil price and production controls;

·                                          theprice of foreign oil and natural gas;

·                                          domesticgovernment regulations and taxes;

·                                          theprice and availability of alternative fuel sources;

·                                          weatherconditions, including hurricanes and tropical storms in and around the Gulf ofMexico;

·                                          marketuncertainty;

·                                          politicalconditions in oil and natural gas producing regions, including the Middle East;and

·                                          worldwideeconomic conditions.

 

These factors and thevolatility of the energy markets make it extremely difficult to predict pricemovements. Also, oil and natural gas prices do not necessarily move in tandem.Declines in oil and natural gas prices would not only reduce revenues and cashflow available for distributions to partners, but could reduce the amount ofoil and natural gas that can be economically produced from successful wellsdrilled by the Partnership, and, therefore, have an adverse effect upon financialcondition, results of operations, oil and gas reserves, and the carrying valueof the Partnership’s oil and natural gas properties.

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The Partnership, whilenot prohibited from engaging in commodity trading or hedging activities in aneffort to reduce exposure to short-term fluctuations in the price of oil andnatural gas, currently does not expect to engage in such activities.Accordingly, the Partnership will be at risk for the volatility in oil andnatural gas prices, and the level of commodity prices will have a significantimpact upon the partnership’s results of operations.

 

**We aresubject to substantial operating risks that may adversely affect the results ofoperations.**

** **

There are numeroushazards involved in the drilling and operation of oil and natural gas wells,including blowouts involving possible damages to property and third parties,bodily injuries, mechanical failures, explosions, uncontrollable flows of oil,natural gas or well fluids, fires, formations with abnormal pressure, pollution,releases of toxic gas and other environmental hazards and risks. ThePartnership could suffer substantial losses as a result of any of these risks.The Partnership is not fully insured against all risks inherent to the oil andgas business. Uninsured liabilities would reduce the funds available to thePartnership, may result in the loss of Partnership properties and may createliability for the additional general partners. Although the Partnershipmaintains insurance coverage in amounts Reef deems appropriate, it is possiblethat insurance coverage may be insufficient. In that case Partnership assetsmay have to be sold to pay personal injury and property claims and the cost ofcontrolling blowouts or replacing damaged equipment rather than for drilling activities.

 

**We cannotcontrol activities on non-operated properties.**

** **

The Partnership willpurchase minority non-operated working interests in many of the prospects itacquires. As a result, the Partnership will have limited ability to exerciseinfluence over and control the risks associated with operations of theseproperties. The failure of an operator of our wells to adequately performoperations, an operator’s breach of the applicable agreements, or an operator’sfailure to act in ways that are in our best interest could reduce ourproduction and revenues. The success and timing of drilling and developmentactivities on properties operated by others depends upon a number of factorsoutside of our control, including the operator’s

 

·                                          timingand amount of capital expenditures;

·                                          expertiseand financial resources;

·                                          inclusionof other participants in drilling wells; and

·                                          useof technology.

 

In addition, thePartnership could be held liable for the joint interest obligations of otherworking interest owners, such as nonpayment of costs and liabilities arisingfrom the actions of the other working interest owners. Full development ofprospects may be jeopardized in the event other working interest owners cannotpay their share of drilling and completion costs.

 

**Highdemand for drilling contractors, field services and equipment, and the abilityof suppliers to meet demand may limit our ability to drill and produce our oiland natural gas properties.**

 

Due to current industrydemands, drilling contractors, well service providers and related equipment andpersonnel are in short supply. This is causing escalating prices, delays indrilling and other exploration activities, and the possibility of poor servicecoupled with potential damage to downhole reservoirs and personnel injuries.Such pressures will likely increase the actual cost of services, extend thetime to secure such services, and add costs for damages due to any accidentssustained from overuse of equipment and inexperienced personnel.

 

**We facestrong competition from larger oil and natural gas companies.**

** **

The oil and gas industryis highly competitive. Competition is encountered in all aspects of Partnershipoperations, including the acquisition of prospects for drilling and requisitionof drilling and service contractors. Many of our competitors are larger,well-established companies with substantially larger operating staffs andgreater capital resources than those of the Partnership, Reef and itsaffiliates. We may not be able to conduct our operations successfully, evaluateand select suitable prospects, obtain drilling and service contractors,consummate transactions, and obtain technical, managerial and otherprofessional personnel in this highly competitive environment.

8

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Specifically, largercompetitors may be able to pay more for prospects and competent personnel thanthe Partnership, Reef and its affiliates. In addition, such competitors may beable to expend greater resources on the existing and changing technologies thatwill be increasingly important to success. Such competitors may also be in abetter position to secure drilling and oilfield services, as well as equipment,on a more timely basis or on more favorable terms.

** **

**Oil andnatural gas reserve data are estimates based upon assumptions that may beinaccurate and existing economic and operating conditions that may differ fromfuture economic and operating conditions.**

** **

Upon the successfuldrilling of Partnership oil and gas wells, Securities and Exchange Commission(SEC) rules will require the Partnership to present annual estimates ofreserves. Reservoir engineering is a subjective and inexact process ofestimating underground accumulations of oil and natural gas that cannot bemeasured in an exact manner, and is based upon assumptions that may varyconsiderably from actual results. Accordingly, reserve estimates may be subjectto upward or downward adjustments. Actual production, revenues and expenditureswith respect to reserves will likely vary from estimates, and such variancescould be material.

** **

**If thePartnership acquires prospects outside the United States, it will be subject tocertain risks of international operations.**

 

The Partnership mayacquire interests in oil and natural gas prospects located outside the UnitedStates. To date the partnership has not purchased any foreign prospects. If thePartnership were to acquire prospects outside of the United States, it will besubject to risks generally associated with conducting business in foreigncountries, such as:

 

·                                          foreignlaws and regulations that may be materially different from those of the UnitedStates;

·                                          changesin applicable laws and regulations;

·                                          challengesto or failure of title;

·                                          laborand political unrest;

·                                          foreigncurrency fluctuation;

·                                          changesin foreign economic and political conditions;

·                                          exportand import restrictions;

·                                          tariffs,customs, duties and other trade barriers;

·                                          difficultiesin staffing and managing foreign operations;

·                                          longertime periods in collecting revenues;

·                                          difficultiesin collecting accounts receivable and enforcing agreements;

·                                          possibleloss of properties due to nationalization or expropriation; and

·                                          limitationson repatriation of income or capital.

 

In addition, in the eventof a dispute, the Partnership may be subject to the exclusive jurisdiction offoreign courts and agencies, or may not be successful in obtaining jurisdictionover foreign persons in state or federal courts in the United States. ThePartnership also may be hindered or prevented from enforcing its rights againstforeign governments and their agencies because international law may grantforeign governments and their agencies immunity from our courts or prohibit thePartnership from bringing suit in their courts.

 

**Reef and its affiliates havesponsored ventures in the past that have produced dry holes and abandonedwells.**

* *

Reef Global Energy Ventures II is the second publicdrilling program sponsored by Reef as the managing general partner, and ReefGlobal Energy VII, L.P. is the second in a series of limited partnershipsoffered under that Program. Reef and its affiliate, RELP, have sponsored 61ventures from 1996 to the present. Among these ventures, (i) eight werededicated almost exclusively to the purchase of interests in already producingreserves, (ii) one was dedicated primarily to the purchase of interests inalready producing reserves but has the ability to use up to 20% of capitalraised for development purposes, and (iii) two were dedicated to both thepurchase of interests in producing wells and the use of up to 50% of capitalraised for development of proven reserves. We refer to the programs described in clauses (i) and (ii) of thepreceding sentence as “income fund” ventures and to the programs described in(iii) as “income and development fund” ventures. We have also sponsored 50drilling ventures since 1996. Together, these ventures have drilled 107 wells(94 by drilling ventures and 13 by income fund and income and development fundventures). Of the wells drilled by Reef and its affiliates’ ventures, 47 wereexploratory wells and 60 were developmental wells. Forty-one of the wellsdrilled were dry holes, and four wells were completed but were non-commercial.Of the 62 wells that were commercial, 44 are still owned by Reef or itsaffiliates’ ventures and are currently producing, one is awaiting connection toa pipeline, five have been plugged and abandoned, seven have been sold and fiveare currently shut-in. Using this data, approximately 57.9% of the wellsdrilled by these ventures were completed as commercially producing and 42.1%were dry holes (including the four wells that were completed but failed tobecome commercial producers). Approximately 4.7% of the wells drilled by ourventures were subsequently abandoned.

9

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**The Partnership has limited external sources of funds, which couldresult in a shortage of working capital.**

* *

  The Partnership intends to utilizesubstantially all available capital for the drilling and completion of wellsand acquisition of prospects. The Partnership only has nominal funds available forpartnership purposes until there are revenues from Partnership operations.  The Partnership Agreement permits thePartnership to borrow money only after drilling has been completed and alladditional general partnership interests have been converted into limitedpartnership interests.  Any futurerequirement for additional funding will have to come, if at all, from thePartnership’s revenues or from borrowings. Reef cannot assure the partners thatPartnership operations will be sufficient to provide the Partnership withnecessary additional funding.  Reef isprohibited under the Partnership Agreement from loaning money to thePartnership, and Reef cannot assure the partners that the Partnership will beable to borrow funds from third parties on commercially reasonable terms or atall.

 

**Other partnerships Reef sponsors will compete with the Partnership forprospects, equipment, contractors, and personnel.**

 

Reef plans to offerinterests in other partnerships to be formed for substantially the samepurposes as those of the Partnership. Therefore, a number of partnerships withunexpended capital funds, including those partnerships to be formed in futureoil and gas programs sponsored by Reef, may exist at the same time.  Due to competition among the partnerships forsuitable prospects and availability of equipment, contractors, and Reef’spersonnel, the fact that partnerships previously organized by Reef and itsaffiliates may still be purchasing prospects when the Partnership is attemptingto purchase prospects may make the completion of prospect acquisitionactivities by the Partnership more difficult.

 

**The Partnership Agreement limits Reef’s liability to each partner andthe Partnership and requires the Partnership to indemnify Reef against certainlosses.**

 

Reefwill have no liability to the Partnership or to any partner for any losssuffered by the Partnership, and will be indemnified by the Partnership againstloss sustained by it in connection with the Partnership if:

·                                          Reefdetermines in good faith that its action was in the best interest of thePartnership;

·                                          Reefwas acting on behalf of or performing services for the Partnership; and

·                                          Reef’sactions did not constitute negligence or misconduct.

 

**Drilling exploratory wells is riskier than drilling developmentalwells.**

 

Many of the wells drilledby Reef and its affiliates since 1996 have been exploratory wells. Drillingexploratory wells involves greater risks of dry holes and loss of the partners’investment than the drilling of developmental wells.  Drilling developmental wells generallyinvolves less risk of dry holes, although sometimes developmental acreage ismore expensive and subject to greater royalties and other burdens onproduction. To date, the Partnership has purchased seven exploratory prospectswith available capital, one of which is productive, a second which is beingcompleted, four of which were unsuccessful, and one which is currentlydrilling.

 

**The Partnership may be required to pay delay rentals to holdproperties, which may deplete Partnership capital.**

 

Oiland gas leases generally require that the property must be drilled upon by acertain date or additional funds known as delay rentals must be paid to keepthe lease in effect.  Delay rentalstypically must be paid within a year of the entry into the lease if noproduction or drilling activity has commenced. If delay rentals become due on any property the Partnership acquires,the Partnership will have to pay its share of such delay rentals or lose itslease on the property.  These delayrentals could equal or exceed the cost of the property.  Further, payment of these delay rentals couldseriously deplete the Partnership’s capital available to fund drillingactivities when they do commence.

10

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**The Partnership may incur liability for liens against itssubcontractors.**

 

Although Reef will try todetermine the financial condition of nonaffiliated subcontractors, ifsubcontractors fail to timely pay for materials and services, the properties ofthe Partnership could be subject to materialmen’s and workmen’s liens.  In that event, the Partnership could incurexcess costs in discharging such liens.

 

**Shut-in wells and delays in production may adversely affectPartnership operations.**

 

Production from wellsdrilled in areas remote from marketing facilities may be delayed untilsufficient reserves are established to justify construction of necessarypipelines and production facilities. In addition, production from wells may bereduced or delayed due to seasonal marketing demands. Wells drilled for the Partnershipmay have access to only one potential market. Local conditions, includingclosing businesses, conservation, shifting population, pipeline maximumoperating pressure constraints, and development of local oversupply ordeliverability problems could halt sales from Partnership wells.

 

**Theproduction and producing life of Partnership wells is uncertain.**

*** ***

Production will decline.It is not possible to predict the life and production of any well. The actuallives could differ from those anticipated. Sufficient oil or natural gas maynot be produced for a partner to receive a profit or even to recover hisinitial investment. In addition, production from the Partnership’s oil andnatural gas wells, if any, will decline over time, and does not indicate anyconsistent level of future production. This production decline may be rapid andirregular when compared to a well’s initial production.

 

**Extreme weather conditions mayadversely affect drilling operations and distributions.  **

 

The Partnership mayconduct drilling operations in the Gulf of Mexico region of Louisiana andTexas. This region is susceptible to extreme weather conditions, especiallythose associated with hurricanes. In the event of a hurricane and related stormactivity, such as windstorms, storm surges, floods and tornados, Partnershipoperations in the region may be adversely affected. The occurrence of ahurricane or other extreme weather may harm or delay the Partnership’s drillingoperations or distribution of revenues, if any.

 

**Our dependence on third partiesfor the processing and transportation of oil and gas may adversely affect thePartnership’s revenues and, consequently, the distribution of net cash flows toinvestor partners.  **

 

We rely on third partiesto process and transport the oil and gas produced by the Partnership’ssuccessful wells. In the event a third party upon whom we rely is unable toprovide transportation or processing services, and another third party isunavailable to provide such services, the Partnership may have to temporarilyshut-in successful wells, and revenues to the Partnership and distributions toinvestor partners related to those wells may be delayed.

 

**FORWARD-LOOKING STATEMENTS**

** **

This Report on Form 10-Kcontains forward-looking statements that involve risks anduncertainties.  You should exerciseextreme caution with respect to all forward-looking statements made inthis Report.  Specifically, the followingstatements are forward-looking:

 

·                                          statementsregarding the Partnership’s overall strategy for acquiring prospects, includingits intent to diversify the Partnership’s investments;

·                                          statementsestimating any number or specific type or size of prospects the Partnership mayacquire or size of the interest the Partnership may acquire in such prospects;

11

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·                                          statementsregarding the state of the oil and gas industry and the opportunity to profitwithin the oil and gas industry, competition, pricing, level of production, orthe regulations that may affect the Partnership;

·                                          statementsregarding the plans and objectives of Reef for future operations, including,without limitation, the uses of Partnership funds and the size and nature ofthe costs the Partnership expects to incur and people and services thePartnership may employ;

·                                          anystatements using the words “anticipate,” “believe,” “estimate,” “expect” andsimilar such phrases or words; and

·                                          anystatements of other than historical fact.

 

Reef believes that it isimportant to communicate its future expectations to the partners.  Forward-looking statements reflect thecurrent view of management with respect to future events and are subject tonumerous risks, uncertainties and assumptions, including, without limitation,the factors listed above in the section captioned “RISK FACTORS.” Although Reef believes that the expectationsreflected in such forward-looking statements are reasonable, Reef cangive no assurance that such expectations will prove to have been correct.  Should any one or more of these or otherrisks or uncertainties materialize or should any underlying assumptions proveincorrect, actual results are likely to vary materially from those describedherein.  There can be no assurance thatthe projected results will occur, that these judgments or assumptions will provecorrect or that unforeseen developments will not occur.

 

Reef does not intend toupdate its forward-looking statements. All subsequent written and oral forward-looking statementsattributable to Reef or persons acting on its behalf are expressly qualified intheir entirety by the applicable cautionary statements.

** **

**ITEM 1B.**                 UNRESOLVED STAFFCOMMENTS

**None**

** **

**ITEM 2.****                          PROPERTIES.**

**Drilling Activities andProductive Wells**

 

The primary focus of thePartnership’s operations will be onshore in the continental United Stares.However, there are no restrictions regarding project locations.  To date, the partnership has purchasedinterests in 12 prospects, of which seven are in Texas, four in Louisiana, andone in Wyoming. As of December 31, 2006, the Partnership had completed thedrilling of three wells. One of the wells is located in Cameron Parish,Louisiana, one of the wells is located in San Patricio County, Texas, and oneof the wells is located in Lavaca County, Texas. Subsequent to December 31,2006, the Partnership has drilled or is currently drilling 13 wells. Of the 13wells, five wells are located in Glasscock County, Texas, two wells are locatedin Lavaca County, Texas, one well is located in Galveston County, Texas, onewell is located in San Patricio County, Texas, one well is located in TerreboneParish, Louisiana, one well is located in St. Mary Parish, Louisiana, one wellis located in Iberville Parish, Louisiana, and one well is located in ParkCounty, Wyoming. Seven prospects upon which seven wells will be drilled areclassified as exploratory, and five prospects upon which 12 wells will bedrilled are classified as developmental. Upon completion of drilling, a wellwill be considered “productive” if it is capable of producing oil and/ornatural gas in commercial quantities. The Partnership expects to drill a totalof 22-25 wells with its available capital.

 

During 2006, thePartnership completed drilling operations on two exploratory wells and onedevelopmental well. All three wells were unsuccessful and have been plugged andabandoned.  Subsequent to December 31,the Partnership has completed drilling operations on four exploratory and sevendevelopmental wells. One of the exploratory wells began production in March2007 and a second is being completed. Two were unsuccessful and have been pluggedand abandoned. Five developmental wells are currently being completed, one iscurrently being tested, and one is awaiting completion operations. The fivewells currently being completed are expected to be productive wells.  One exploratory well and one developmentalwell are currently being drilled.

12

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During 2007, thePartnership expects to complete the drilling of all 19 wells located on the 12prospects currently owned by the Partnership. The Partnership expects topurchase interests in additional drilling prospects and drill approximately22-25 wells in total with the available Partnership capital.

 

As of December 31, 2006,the Partnership had not completed any successful wells and therefore had noproved reserves. The costs associated with the three unsuccessful wells drilledin 2006 have been expensed as property impairment cost.

 

**Title toProperties**

 

The Partnership’sinterests in producing and non-producing acreage will be in the form ofassigned direct interests in leases held by the Partnership or by Reef onbehalf of the Partnership. Such properties will be subject to customary royaltyinterests and could be subject to liens incident to operating agreements, liensfor current taxes and overriding royalty interests and other burdens.  The Partnership believes that none of theseburdens will materially interfere with the use of such properties in theoperation of the Partnership’s business and that it will obtain satisfactorytitle to all of its leases. Title will be held by the Partnership or by Reef onbehalf of the Partnership.

** **

**ITEM 3.****                         ****LEGAL PROCEEDINGS.**

ThePartnership is not, and has not been, a party to any legal proceedings.

** **

**ITEM 4.****                         ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS.**

None.

**PART II**

** **
| **ITEM 5.** | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.** |
|-------------|-------------------------------------------------------------------------------------------------------------------------|

** **

As of December 31, 2006, the Partnership had onemanaging general partner, 173 limited partners, and 708 additional generalpartners. Reef holds a total of 48.620 general partner units and the generaland limited investor partners hold 741.001 general partner units and 182.783limited partner units. No established trading market exists for the units.

 

Cash which, in the sole judgment of the managing generalpartner, is not required to meet the Partnership’s obligations will bedistributed to the partners at least quarterly in accordance with thePartnership Agreement.

 

Limited and additional general partnership interestsare transferable, subject to certain restrictions contained in the PartnershipAgreement; however, no assignee of a unit in the Partnership can become asubstituted partner without the written consent of both the transferor andReef.

 

The Partnership hasadopted a unit repurchase program. Under the terms of the program, the managinggeneral partner is obligated to purchase up to 5% of the units in thePartnership in the sixth through tenth years after the Partnership closesunless changes in oil and gas pricing meet certain criteria specified in theprospectus supplement, however, the managing general partner’s obligation topurchase units is limited to $500,000 per year in the aggregate for allpartnerships sponsored as a part of the Reef Global Energy Ventures II Program.The Partnership did not repurchase any units in 2006 or 2005.

 

**Use of Proceeds**

 

In connection with theRegistration Statement filed on form S-1 (No. 333-122935) and declaredeffective July 7, 2005, Reef filed a final prospectus for the Program on July8, 2005. On November 15, 2005, Reef filed a prospectus supplement describingthe Partnership and commenced the offering of units in the Partnership. Allsales of Partnership units were made through the Program’s dealer-manager, ReefSecurities, Inc., and a number of soliciting dealers. The offering terminatedApril 28, 2006. Under the terms of the offering, a minimum of 40 Partnershipunits at a price of $25,000 per unit were required to be sold in order to formthe Partnership. Upon meeting this requirement, the Partnership was formed onDecember 29, 2005.

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During the offeringperiod that terminated on April 28, 2006, the Partnership sold 923.784 units toinvestor partners, consisting of 182.783 units of limited partner interest and741.001 units of additional general partner interest. Reef purchased 48.620 generalpartner units, equaling 5.00% of the total Partnership units sold. Totaloffering proceeds were $24,127,769. Reef will also contribute 1% of allleasehold, drilling, and completion costs as incurred. As of December 31, 2006,Reef had paid $8,803 and accrued an additional $40,437 which was paid duringthe first quarter of 2007 in connection with this obligation.

 

All units except thosepurchased by Reef paid a 15% management fee to Reef to pay for the Partnershiporganization and offering costs, including sales commissions. These coststotaled $3,464,188, leaving capital contributions of $20,712,821 available forPartnership oil and gas operations. As of December 31, 2006, the Partnershiphad expended $9,000,326 on property acquisitions and prepayments and $69,556 ongeneral and administrative expenses.

 

The Partnership intendsto utilize all available Partnership capital for oil and gas activities during2006 and 2007.

 

**ITEM 6.****                         ****SELECTED FINANCIAL DATA.**

The selected financialdata presented below has been derived from the audited financial statements ofthe Partnership.

 
|                                                        | ** ** | **December 31,** | ** ** | **Period from  Inception  (December 29,  2005) to  December 31** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**              | ** ** | **2005**                                                                             | ** ** |
|                                                   |       |                  |       |                                                                                 |       |
| Oil and gas  sales revenue                             |       | $                     | —     |                                                                                 | —     |   |
| Interest income                                        |       | 691,667               |       | 1,212                                                                                |       |
| Costs and  expenses                                    |       | 1,894,563             |       | 50,475                                                                               |       |
| Partnership net  loss                                  |       | (1,202,896            | )          | (49,263                                                                              | )          |
|                                                   |       |                  |       |                                                                                 |       |
| Allocation of  net loss:                               |       |                  |       |                                                                                 |       |
| Managing general  partner                              |       | (12,240               | )          | (73                                                                                  | )          |
| General partner  units                                 |       | (956,084              | )          | (38,450                                                                              | )          |
| Limited partner  units                                 |       | (234,572              | )          | (10,740                                                                              | )          |
| Net loss per  managing partner unit                    |       | (251.74               | )          | (20.58                                                                               | )          |
| Net loss per  general partner unit                     |       | (1,290.26             | )          | (729.60                                                                              | )          |
| Net loss per  limited partner unit                     |       | (1,283.33             | )          | (719.23                                                                              | )          |
|                                                   |       |                  |       |                                                                                 |       |
| Total assets                                           |       | 21,786,620            |       | 1,594,304                                                                            |       |
| Distributions to  managing general partner             |       | (45,578               | )          | —                                                                               |       |
| Distributions to  investor partners                    |       | (249,422              | )          | —                                                                               |       |
| Distributions  per general partner unit                |       | 270.00                |       | —                                                                               |       |
| Distributions  per limited partner unit                |       | 270.00                |       | —                                                                               |       |
| Distributions  per managing  general partner unit |       | 937.43                |       | —                                                                               |       |
|                                                        |            |                       |            |                                                                                      |            |  |

 

14

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** **
| **ITEM 7.** | **MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS.** |
|-------------|---------------------------------------------------------------------------------------------|

** **

**CriticalAccounting Policies**

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires us to make estimates and assumptions that can affect the reporting ofassets, liabilities, equity, revenues, and expenses. We base our estimates onhistorical experience and various other assumptions that are believed to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions. We are also required toselect among alternative acceptable accounting policies. See Note 2 to thefinancial statements for a complete list of significant accounting policies.

 

**Oil and Gas Properties**

* *

The Partnership follows thefull cost method of accounting for crude oil and natural gas properties. Underthis method, all direct costs and certain indirect costs associated withacquisition of properties and successful as well as unsuccessful explorationand development activities are capitalized. Depreciation, depletion, andamortization of capitalized crude oil and natural gas properties and estimatedfuture development costs, excluding unproved properties, are based on theunit-of-production method using proved reserves.  Proved gas reserves are converted toequivalent barrels at a rate of 6 Mcf to 1 Bbl. Net capitalized costs of crudeoil and natural gas properties, as adjusted for asset retirement obligations,are limited to the lower of unamortized cost or the cost ceiling, defined asthe sum of the present value of estimated future net revenues from provedreserves based on un-escalated prices discounted at 10 percent, plus the costof properties not being amortized, if any, plus the lower of cost or estimatedfair value of unproved properties included in the costs being amortized, ifany. Excess costs are charged to property impairment expense. No gain or lossis recognized upon sale or disposition of crude oil and natural gas properties,except in unusual circumstances. The Partnership held no productive oil and gasassets as of December 31, 2006 and 2005. The Partnership recognized propertyimpairment expense totaling $1,825,482 during 2006 because the initial threewells drilled by the Partnership during 2006 were all unsuccessful wells.

 

The estimate of proved oil and gas reserves used to determineproperty impairment expense, and also utilized in the Partnership’s disclosuresof supplemental information regarding oil and gas producing activities,including the standardized measure of discounted cash flows, will be preparedby a petroleum engineer employed by RELP utilizing the period end prices andcosts as promulgated by the SEC. Reserve engineering is a subjective andinexact process of estimating underground accumulations of oil and natural gasthat cannot be measured in an exact manner. The accuracy of any reserveestimate is a function of the quality of available data and of engineering and geologicalinterpretation and judgment. Accordingly, reserve estimates may be subject toupward or downward adjustments. Actual production, revenues andexpenditures with respect to reserves will likely vary from estimates, and suchvariances could be material. As of December 31, 2006 and 2005 the Partnershiphad no proved reserves.

 

The determination of depreciation,depletion and amortization expense recognized in the financial statements isalso dependent upon the estimates of proved oil and gas reserves and will becomputed using the units-of-production method based upon this estimate ofproved reserves. The Partnership has no productive oil and gas properties as ofDecember 31, 2006 and 2005 and therefore has no depreciation, depletion, andamortization expense for the year ended December 31, 2006 and the period frominception (December 29, 2005) to December 31, 2005.

 

The Partnership will follow Statement ofFinancial Accounting Standards No. 143, "Accounting for Asset RetirementObligations," for all productive oil and gas wells drilled by thePartnership. This statement requires the Partnership to estimate the fair valueof asset retirement obligations (dismantlement and abandonment of oil and gaswells and site restoration) in the period in which the asset is placed inservice. The liability recognized is offset by a corresponding increase in thecarrying value of the asset. Each period the liability is accreted to its netpresent value with a corresponding charge to accretion expense, and theadditional asset cost is amortized using the units-of-production method. Uponsettlement of the obligation a gain or loss is recognized to the extent actualcharges are less than or exceed the liability recorded. The Partnership has noproductive oil and gas properties at December 31, 2006 and 2005 and thereforerecognized no asset retirement obligation for the year ended December 31, 2006and the  period from inception (December 29,2005) to December 31, 2005. For a discussion of risk factors that couldimpact the Partnership's financial results, please see Item 1A of this Reporton Form 10-K.

15

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**Overview**

 

ReefGlobal Energy VII, L.P. is a Nevada limited partnership formed to explore,develop, acquire and produce crude oil, natural gas, and natural gas liquidsfor the benefit of its investor partners. The Partnership's primary purposesare to generate revenues from the production of oil and gas, distribute cashflow to investors, and provide tax benefits to investors. The majority of thePartnership’s proceeds will be used to purchase prospects upon which thePartnership will conduct drilling operations.

 

During2006, the Partnership purchased interests in 12 prospects upon which it expectsto drill 19 wells. Seven wells will be classified as exploratory wells, and 12as developmental wells. The Partnership expects to acquire interests inadditional prospects during 2007 and drill approximately 22-25 wells in totalwith its available capital. The Partnership expects to operate solely in theUnited States, although there are no restrictions regarding prospect locations.The Partnership currently has seven prospects in Texas, four in Louisiana, andone in Wyoming.  OREI, an affiliate ofReef, has expertise and has served as a well operator primarily in Texas andLouisiana since its inception in 1987. During 2006 OREI transferred itsemployees to RELP, and also transferred well operator status to RELP.

 

ThePartnership will focus on acquiring a mix of both oil and gas prospects. Thepartnership will focus on projects in Louisiana and Texas where geologicfactors are well known, where pipeline and other infrastructure is highlydeveloped, enabling the project operator to quickly complete successful wellsand establish cash flows, and where there is a highly competitive market forsale of the partnership’s production. The Partnership will acquire internallygenerated prospects as well as prospects reviewed and developed by consultantsand other independent and major oil and gas industry participants.Participation in prospects developed by third parties will allow thePartnership to benefit from the expertise of these entities and increase thediversity and therefore lessen the overall drilling risk to the investors.

 

ThePartnership does not operate in any other industry segment. Should any prospectin which the Partnership purchases an interest be determined to warrantadditional development activity, the Partnership may pay for such developmentwith the original Partnership capital, or may borrow an amount up to 25% of thePartnership’s aggregate capital contributions without the consent of theinvestor partners, provided the lender agrees it will have no recourse againstindividual investor partners. The Partnership is prohibited from issuingadditional cash calls to investor partners. Borrowings for developmentalactivity in excess of 25% of the Partnership’s aggregate capital contributionsrequire approval of the investor partners. The Partnership is not allowed toborrow funds during the drilling phase of Partnership operations. Should thePartnership elect to borrow monies for additional development activity onPartnership properties, it will be subject to the interest rate risk inherentin borrowing activities. The Partnership is permitted but is not expected toengage in commodity futures trading or hedging activities, and therefore issubject to commodity price risk.   See"Item 7A—Quantitative and Qualitative Disclosures About Market Risk."

 

**Liquidity and Capital Resources**

 

The Partnership wasfunded with initial capital contributions totaling $24,127,769. Reef purchased48.620 units, or 5% of the total units sold, for $1,033,179. Investor partnerspurchased 741.001 general partner units and 182.783 limited partner units for$23,094,590. Reef has also contributed $49,240 in connection with itsobligation to pay 1% of all leasehold, drilling, and completion costs.Syndication and organization costs totaled $3,464,188, leaving capitalcontributions of $20,712,821 available for Partnership activities. ThePartnership was formed on December 29, 2005, and the last partner was admittedto the Partnership on April 28, 2006.

 

Because the Partnershipis not allowed to borrow funds during the drilling phase of operations, the$20,712,821, plus any additional contributions made by Reef in connection withthe 1% obligation mentioned above, is the total amount available to thePartnership for drilling and administrative costs.  As of December 31, 2006, the Partnership hadexpended $9,000,326 on property acquisitions and prepayments and $69,556 ongeneral and administrative expenses. Please see Item 1A of this Report on Form10-K for a list of risk factors that could impact the Partnership. ThePartnership began distributing to investors the interest income earned by thePartnership in August 2006, and will distribute the net cash flow formsuccessful wells drilled by the Partnership when received. These funds will notbe available for drilling activities.

16

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The Partnership hadworking capital of $13,068,928 at December 31, 2006, which includes interestincome earned on funds during and subsequent to escrow.

 

The Partnership expectsto utilize the available capital contributions for lease acquisition anddrilling activities during 2007. The Partnership will purchase interests inadditional prospects during 2007 and expects the Partnership to participate indrilling approximately 22-25 wells in total. The Partnership has currentlybudgeted $16.42 million of the $20.71 million available in connection with the12 prospects it has purchased to date. Drilling activities will be conductedsolely with the $20.71 million capital raised by the Partnership.

 

Until initial drillingoperations are completed it is not known whether any borrowings will berequired for additional developmental activities.  The Partnership is prohibited from issuingadditional partner assessments.

 

**Resultsof Operations**

 

**Comparisonof Year Ended December 31, 2006 to the Period from Inception (December 29,2005) thru December 31, 2005**

 

The Partnership beganoperations in December 2005. The 2005 net loss of $49,263 shown in thefinancial statements represents a charge of $50,000 for organization expensesand $475 for other general and administrative expenses, partially offset byinterest income earned by partner capital contributions. The Partnership didnot purchase any prospects or engage in any oil and gas activities during 2005.

 

During 2006, the fundPartnership purchased working interests in 12 prospects, upon which thePartnership expects to drill 19 wells. The partnership has seven exploratoryprospects upon which it expects to drill seven wells, and five developmentalprospects upon which it expects to drill twelve wells. Actual drillingoperations began during the third quarter. During 2006, drilling operationswere completed on two exploratory wells and one developmental well. The wellswere all deemed non-commercial and have been plugged and abandoned. The costsincurred in the drilling of these three wells, totaling $1,825,482, have beenexpensed as property impairment cost during 2006.  The Partnership also incurred general andadministrative expenses totaling $69,081, which include $5,203 inadministrative costs provided by Reef, and $59,792 in legal, accounting, andprinting costs related to SEC filings. We expect legal, accounting, andprinting costs incurred during 2007 to approximate those incurred during 2006,but the Partnership will see a significant increase in other general andadministrative costs during 2007 as production activities from successful wellsbegin. Interest income during 2006 totaled $691,667, resulting in a net lossfor 2006 of $1,202,896. Interest income for 2007 is expected to decline by asmuch as 60-70%, depending upon how quickly partner capital contributions areexpended on drilling operations.

 

The Partnership hascompleted drilling activities on 11 additional wells as of March 30, 2007. Twowells were non-commercial and were plugged and abandoned. One well beganproducing oil and gas production during March 2007, and six additional wellsare expected to begin production operations during the second quarter of 2007.One well is currently testing, and one well is awaiting completion operations.The Partnership does not expect any significant revenues from productive wellsuntil the second half of 2007.

 

**Off-BalanceSheet Arrangements**

 

ThePartnership does not participate in transactions that generate relationshipswith unconsolidated entities or financial partnerships, such as entities oftenreferred to as structure finance or special purpose entities (SPEs), whichwould have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes.  As of December 31, 2006 and 2005, thePartnership was not involved in any unconsolidated SPE transactions.

17

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**ContractualObligations Table**

 

The15% management fee due Reef for organization and syndication costs, includingsales commissions, is payable in two parts. Reef initially received an amount,not to exceed 13.5%, to recover actual commissions and organization andsyndication costs. As of December 31, 2006, the Partnership is obligated to payReef $1,028,110, representing the portion of the management fee inexcess of actual commissions and organization and syndication costs, from theoil and gas cash flows available for partner distributions at a rate not toexceed $1 million per year. As of December 31, 2006, the Partnership had noproductive oil and gas assets and the initial date of repayment is unknown. Atsuch time as the Partnership has cash flows from productive oil and gas assets,the timing of the payment of the additional management fee is solely at thediscretion of the managing general partner.

** **

**ITEM 7A.****                ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

**InterestRate Risk**

** **

The Partnership Agreementallows borrowings from banks or other financial sources of an amount up to 25%of the aggregate capital contributions to the Partnership without investorapproval, and allows borrowings in excess of 25% of the total capital contributionsto the Partnership with the consent of investor partners. Borrowings are notallowed during the initial drilling phase of the Partnership, but only foradditional development drilling and facilities costs on Partnership prospectsalready drilled. Should the Partnership elect to borrow monies for additionaldevelopment activity on Partnership properties, it will be subject to theinterest rate risk inherent in borrowing activities. Changes in interest ratescould significantly affect the Partnership’s results of operations and theamount of net cash flow available for partner distributions. Also, to theextent that changes in interest rates affect general economic conditions, thePartnership will be affected by such changes. 

** **

**CommodityPrice Risk**

** **

The Partnership does notexpect to engage in commodity futures trading or hedging activities or enterinto derivative financial instrument transactions for trading or otherspeculative purposes.  The Partnershipexpects to sell a vast majority of its production from successful oil and gaswells on a month-to-month basis at current spot market prices. Accordingly, thePartnership is at risk for the volatility in commodity prices inherent in theoil and gas industry, and the level of commodity prices will have a significantimpact on the Partnership's results of operations.

** **

**ExchangeRate Risk**

** **

The Partnership currentlyhas no income from foreign sources or operations in foreign countries thatwould subject it to currency exchange rate risks. The Partnership has notpurchased, and does not currently expect to purchase any prospects locatedoutside of  the United States.

** **

**ITEM 8.****                         ****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA.**

The Partnership'sfinancial statements and supplementary data are set forth in a separate sectionto this Report, beginning on page F-1.

18

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| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE.** |
|-------------|--------------------------------------------------------------------------------------------|

** **

None

**ITEM 9A.****                ****CONTROLS AND PROCEDURES.**

**Evaluation of Disclosure Controls and Procedures**

** **

As the ManagingGeneral Partner of the Partnership, Reef maintains a system of controls andprocedures designed to provide reasonable assurance as to the reliability ofthe financial statements and other disclosures included in this report, as wellas to safeguard assets from unauthorized use or disposition. As of the end ofthe period covered by this report, Reef's Principal Executive Officer and ChiefFinancial Officer have evaluated the effectiveness of the design and operationof the Partnership's disclosure controls and procedures (as defined in Rule13a-15(e) of the Securities and Exchange Act of 1934) with the assistance andparticipation of other members of management. Based upon that evaluation,Reef's Principal Executive Officer and Chief Financial Officer concluded thatas of December 31, 2006, our disclosure controls and procedures were effectiveat a reasonable assurance level for gathering, analyzing and disclosing theinformation the Partnership is required to disclose in the reports it files underthe Securities Exchange Act of 1934 within the time periods specified in theSEC's rules and forms.

 

**Changes in Internal Controls**

There have been no changes in Reef's internal controlsover financial reporting that occurred during our last fiscal quarter that havematerially affected or are reasonably likely to materially affect our internalcontrol over financial reporting.

 

****ITEM 9B.********                ********OTHER INFORMATION.****

****None.****

 

**PART III**

** **

**ITEM 10.****                  ****DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT.**

The Partnership has nodirectors or executive officers; it is managed by Reef Oil & Gas Partners,L.P.

** **

**Reef Oil & Gas Partners, L.P. and Reef Exploration, L.P.**

** **

The Manager, officers and key personnel of the managing generalpartner, their ages, current positions with the managing general partner and/orRELP, and certain additional information are set forth below:

 
| **Name**            | ** ** | **Age** | ** ** | **Positions and  Offices Held**                                                  |
|---------------------|------------|---------|------------|----------------------------------------------------------------------------------|
| Michael J.  Mauceli |       | 50      |       | Manager of Reef  Oil & Gas Partners GP, LLC; Chief Executive Officer of RELP |
| Kellam Colquitt     |       | 59      |       | Chief Operating  Officer of RELP                                                 |
| H. Walt Dunagin     |       | 49      |       | Executive Vice  President—Land Manager of RELP                              |
| Laura S. Klein      |       | 47      |       | Drilling  Engineering Manager of RELP                                            |
| John M. Dees        |       | 53      |       | Vice  President—Operations and Engineering of RELP                          |
| Daniel C. Sibley    |       | 55      |       | Chief Financial  Officer of Reef and of RELP                                     |
| David M. Tierney    |       | 54      |       | Controller—Reef  Global Energy Ventures                                     |

 

**Michael J. Mauceli** is the Manager and a memberof Reef Oil & Gas Partners, GP, LLC, which is the general partner of Reef,and he also serves as the Chief Executive Officer of RELP. Mr. Mauceli has beenthe principal executive officer of Reef since its formation in February 1999.He has served in this position with RELP since January 2, 2006 and previouslyserved in this position with its predecessor entity, OREI, since 1987.  Mr. Mauceli attended the University ofMississippi where he majored in business management and marketing as well asthe University of Houston where he received his Commercial Real Estate License.He entered the oil and gas business in 1976 when he joined Tenneco Oil &Gas Company.  Mr. Mauceli moved to Dallasin 1979, where he was independently employed by several exploration anddevelopment firms in planning exploration and marketing feasibility ofprivately sponsored drilling programs.

19

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**Kellam Colquitt**joined RELP as ChiefOperating Officer on February 14, 2006. Mr. Colquitt has over thirty-five yearsof experience in the oil and gas industry. He is a 1971 graduate of Texas A&M University with a degree in geology.Prior to joining RELP, Mr. Colquitt served as Vice President-Exploration ofVintage Petroleum, Inc. in Tulsa Oklahoma from 2001-2006. He also served as theGeneral Manager-Exploration of Vintage Petroleum, Inc. from 2000-2001. Prior tothat, Mr. Colquitt was employed from 1995-2000, first as VicePresident-International Exploration Western Hemisphere and later as VicePresident-U.S. Operations for Ranger Oil Limited.  He is a member of the American Association ofPetroleum Geologists, the Houston Petroleum Club, the Tulsa Geological Society,and the Houston Geological Society.

** **

**H. Walt Dunagin** is Executive VicePresident—Land Manager of RELP. He has held this position with RELP sinceJanuary 2, 2006 and previously served in the same position with its predecessorentity, OREI, since 1990. He is a 1979 graduate of the University ofMississippi. Mr. Dunagin began his career doing independent land work for ExxonCo. U.S.A.  Since that time he hasperformed land work in Alabama, Mississippi, Louisiana, North Dakota, Montana,Oklahoma and Texas. For six years prior to joining OREI, he was directlyinvolved in the sale of producing properties for Mobil, Texaco, Oryx Energy andAmerican Exploration Company. He has been a Certified Professional Landmansince 1986 and is a member of the American Association of Petroleum Landmen,Dallas Association of Petroleum Landmen and the International Association ofPetroleum Negotiators.

 

**Laura S. Klein** is Drilling EngineeringManager of RELP.  She has held thisposition with RELP since January 2, 2006 and previously served in the sameposition with its predecessor entity, OREI, since 2000. She is a 1981 graduateof the Colorado School of Mines with a Bachelor's degree in PetroleumEngineering. Since receiving her degree, Ms. Klein has accumulated 25 years ofexperience as a drilling/completion engineer and as a worldwide rig operationssupervisor. From 1996 until joining OREI, she held the position of Senior StaffDrilling Engineer with Mobil's International Drilling Services Unit and oversawprojects in Russia, China, Italy and the North Sea. Ms. Klein also managedrecruiting and training for Mobil's worldwide drilling organization. Ms.Klein's professional affiliations include the Society of Petroleum Engineers,the American Association of Drilling Engineers and the American Society ofTraining and Development.

** **

**John M. Dees, P.E.** is VicePresident-Operations and Engineering of RELP. From 1994 to 2004, Mr. Deesserved as a petroleum engineering consultant with Dees Well Completions. Mr.Dees has over 30 years of industry experience. Mr. Dees has conducted wellcompletion engineering and production operations for RELP since January 2,2006, and was previously with RELP's predecessor entity, OREI, since 2003, whenhe joined it in a consulting capacity. He holds a Bachelor of Science degree inChemistry from Southwestern Oklahoma State University and a Masters inPetroleum Engineering from the University of Oklahoma. Prior to consulting forReef, Mr. Dees worked for Halliburton Services in fracturing fluids, fracturingresearch engineering, and field operations engineering, as well as for numerousoil and gas companies, including Getty Oil, Sun E&P, and Oryx Energy. Mr.Dees has published several peer-reviewed technical papers and was the inventorof several U.S. and international patents on extreme overbalancing perforatingstimulation and resin formation sand control. Mr. Dees is a member of theAmerican Chemical Society and the Society of Petroleum Engineers.

 

**Daniel C. Sibley**became Chief FinancialOfficer of Reef in December 1999. He has served in the same position for RELPsince January 2, 2006 and has served in this position with RELP’s predecessorentity, OREI, since 1998. Mr. Sibley was employed as a Certified PublicAccountant with Grant Thornton from 1977 to 1980. From 1980 to 1998, he wasinvolved in the private practice of law. He received a B.B.A. in accountingfrom the University of North Texas in 1973, a law degree (J.D.) from theUniversity of Texas in 1977, and a Master of Laws-Taxation degree (L.L.M.) fromSouthern Methodist University in 1984.

 

**David M. Tierney** has been employed by RELPsince January 2, 2006 and was previously with its predecessor entity, OREI,since March 2001.  Mr. Tierney is theController of the Reef Global Energy Ventures partnerships. Mr. Tierneyreceived a Bachelor's degree from Davidson College in 1974, a Masters ofBusiness Administration from Tulane University in 1976, and is a TexasCertified Public Accountant. Mr. Tierney has worked in public accounting, andhas worked in the oil and gas industry since 1979. From 1992 through 2000 heserved as controller/treasurer of an independent oil and gas explorationcompany.

20

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**Audit Committee and Nominating Committee**

** **

Becausethe Partnership has no directors, it does not have an audit committee, an auditcommittee financial expert or a nominating committee.

 

**Code of Ethics**

** **

Because the Partnership hasno employees, it does not have a code of ethics.  Employees of the Partnership's managinggeneral partner, Reef, must comply with Reef's Code of Ethics, a copy of whichwill be provided to investor partners, without charge, upon request made toReef Oil and Gas Partners, L.P., 1901 N. Central Expressway, Suite 300,Richardson, Texas 75080, Attention: Daniel C. Sibley.

 

**ITEM 11.****                   EXECUTIVECOMPENSATION.**

 

Thefollowing table summarizes the items of compensation to be received by Reef asthe managing general partner from the Partnership.

 
| **Recipient**                               | ** ** | **Form of  Compensation**                                                                            | ** ** | **Amount**                  |
|---------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-----------------------------|
| Managing General Partner                    |       | Partnership interest (excluding any partnership  interest resulting from the purchase of units) |       | 10% interest                |
| Managing General Partner                    |       | Management fee                                                                                       |       | 15% of  subscriptions       |
| Managing General Partner and its Affiliates |       | Direct and administrative costs                                                                      |       | Reimbursement at  cost      |
| Affiliate of the Managing General Partner   |       | Operator's per-well charges                                                                          |       | Competitive  prices         |
| Managing General Partner and its Affiliates |       | Payment for equipment, supplies, marketing, and  other services                                      |       | Cost or  competitive prices |

 

Reef's “partnershipinterest,” as described in the table above, refers only to its interest asmanaging general partner and does not include the interest Reef has as theresult of its purchase of units in the Partnership, nor the 1% interest Reefhas as the result of its payment of 1% of all lease costs, intangible drillingand development costs, and well completion costs.  Reef purchased 5.00% of the outstandingPartnership units. Reef received a 10% interest as managing general partner ofthe Partnership and a 1% interest as a result of Reef’s payment of 1% of alllease costs, intangible drilling and development costs, and well completioncosts for a total of an 11% interest. This 11% interest is not represented by partnership units.  Reef has a total interest in the Partnershipof 15.45%.

 

Reef will receive amanagement fee equal to 15% of the Partnership subscriptions exclusive of theunits purchased by Reef. From this amount Reef pays all of the Partnership'sorganization and offering costs, including sales commissions. The managementfee is payable to Reef in two parts. Reef initially receives an amount not toexceed 13.5% to cover actual sales commissions and actual organization andsyndication costs. The remainder of the management fee is paid to Reef from thenet cash flow available for partner distributions, at a rate not to exceed $1million per year. The total management fee owed Reef is $3,464,188. Of thisamount, $2,436,078 has been paid to Reef to cover actual sales commissions andorganization and syndication costs, and $1,028,110 has been accrued as anaccount payable to be paid to Reef from net cash flow of the Partnership. ThePartnership recorded $3,414,188 of this amount as syndication costs, and$50,000 as organization costs.

 

Reef will be reimbursedfor direct costs and all documented out-of-pocket expenses incurred on behalfof the Partnership, including administrative costs. During the year endedDecember 31, 2006, the Partnership reimbursed Reef $217,183 for technicalservices costs which have been capitalized as project costs, and $5,203 foradministrative costs included as general and administrative expenses. Therewere no reimbursable costs incurred by Reef for the period ending December 31,2005.

21

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Operators fees will bepayable only if RELP or another Reef affiliate serves as operator of aPartnership prospect. Under such circumstances, such affiliate will receivefees at the competitive rate in the area during the drilling and productionphase of operations. Often these are charged as a monthly fee per well. Duringthe year ended December 31, 2006 and the period from inception (December 29,2005) to December 31, 2005, the Partnership paid no operator fees. RELP willserve as operator of three Partnership prospects upon which drilling will takeplace during 2007.

 
| **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|-----------------------------------------------------------------------------------------------------|

 

The following table setsforth information as of December 31, 2006 concerning all persons known by Reefto own beneficially more than 5% of the interests in the Partnership. Unlessexpressly indicated otherwise, each partner exercises sole voting andinvestment power with respect to the units beneficially owned.

 
| Person or Group              | ** ** | **Number of Units  Beneficially  Owned** | ** ** | **Percent of Total  Partnership Units  Outstanding** | ** ** | **Percentage of  Total Partnership  Interests  Beneficially  Owned** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| Reef Oil & Gas Partners, L.P. (1)  |       | 48.620                                             |       | 5.00                                                                | %          | 4.45                                                                           | %          |
| Reef Oil &  Gas Partners, L.P. (1) |       | —                                             |       | —                                                              |       | 11.00                                                                          | %          |

 

----

(1) Reef Oil & GasPartners, L.P.’s address is 1901 N. Central Expressway, Suite 300, Richardson,Texas 75080.

 

The managing general partnerreceives a 10% interest in the Partnership as compensation for forming thePartnership, and also holds a 1% interest in the Partnership as a result of paying1% of all leasehold, drilling and completion costs. In addition to this 11%interest not represented by Partnership units, Reef purchased 5% of the 972.404Partnership units and, therefore, holds 5% of the 89% interest in thePartnership (4.45%) held by the unit holders.

 

**ITEM 13.**                   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

** **

Reef is the managinggeneral partner of the Partnership. Along with its affiliates, Reef has entered into agreements with, andreceived compensation from, the Partnership for services it performs for thePartnership. See Item 11. – Executive Compensation.

** **

**ITEM 14.**                   PRINCIPAL ACCOUNTING FEES AND SERVICES.

** **

The Partnership incurredprofessional audit and tax fees from its principal auditor BDO Seidman, LLP, asdisclosed in the table below:

 

|                | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Audit fees     |       | $        | 44,425     |     | $          | 30,824 |   |
| Tax  fees |       | $        | 615        |     | —     |   |
|                |            |          |            |          |            |  |  |

 

Fees for tax services are forreview of the Partnership’s tax return.

22

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**PARTIV**

 

**ITEM 15.**                   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

 
| (a)    |   | 1. Financial  Statements                                 |   |   |
|--------|--------|----------------------------------------------------------|--------|--------|
|   |   |                                                     |   |   |
|   |   | Report of  Independent Registered Public Accounting Firm |   |   |
|   |   | Balance Sheets                                           |   |   |
|   |   | Statements of Operations                                 |   |   |
|   |   | Statements of  Partnership Equity                        |   |   |
|   |   | Statements of Cash Flows                                 |   |   |
|   |   | Notes to Financial  Statements                           |   |   |
|   |   |                                                     |   |   |
|   |   |                                                     |   |   |
|   |   | 2. Financial  Statement Schedules                        |   |   |
|   |   |                                                     |   |   |
|   |   | 3. Exhibits                                              |   |   |

 

A list of the exhibitsfiled or furnished with this report on Form 10-K (or incorporated by referenceto exhibits previously filed or furnished by us) is provided in the ExhibitIndex in this report.  Those exhibits incorporatedby reference herein are indicated as such by the information supplied in theparenthetical thereafter. Otherwise, the exhibits are filed herewith.

23

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| Date:      |       | April 11, 2007 | ** ** | **REEF  GLOBAL ENERGY VII, L.P.**               |
|------------|------------|----------------|------------|-------------------------------------------------|
|       |       |           | ** ** | ** **                                      |
| ** ** | ** ** | ** **     | ** ** | ** **                                      |
|       |       |           |       | Reef Oil &  Gas Partners, L.P.              |
|       |       |           |       | Managing General  Partner                       |
|       |       |           |       |                                            |
|       |       |           |       | By:   Reef Oil & Gas Partners, GP, LLC |   |
|       |       |           |       |                                            |
|       |       |           |       | By:                                             | /s/ Michael J.  Mauceli |   |
|       |       |           |       |                                            | Michael J.  Mauceli |
|       |       |           |       |                                            | Manager (principal executive officer) |
|            |            |                |            |                                                 |  |  |  |

 

----

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.
| Signature               | ** ** | **Title**                                                    | ** ** | **Date**       |
|-------------------------|------------|--------------------------------------------------------------|------------|----------------|
|                    |       |                                                         |       |           |
| /s/ Michael J.  Mauceli |       | Manager and  Member of the general partner of Reef           |       | April 11, 2007 |
| Michael J.  Mauceli     |       | Oil & Gas  Partners, L.P.*(Principal Executive Officer)* |       |           |
|                    |       | * *                                                     |       |           |
| /s/ Daniel C.  Sibley   |       | Chief Financial  Officer (*Principal Financial Officer*      |       | April 11, 2007 |
| Daniel C. Sibley        |       | *and  Principal Accounting Officer*)                         |       |           |

 

----

Reef Global Energy VII,L.P.

 

FinancialStatements

 

For the Year EndedDecember 31, 2006 and the Period from Inception (December 29, 2005) to December31, 2005

 

**Contents**

 
| Report of Independent  Registered Public Accounting Firm |   |   |
|----------------------------------------------------------|--------|--------|
|                                                     |   |   |
| Audited Financial Statements                             |   |   |
|                                                     |   |   |
| Balance  Sheets                                          |   |   |
| Statements  of Operations                                |   |   |
| Statements of  Partnership Equity                        |   |   |
| Statements  of Cash Flows                                |   |   |
| Notes to Financial  Statements                           |   |   |

 

----

Report ofIndependent Registered Public Accounting Firm

 

The Partners

Reef Global Energy VII, L.P.

 

We have audited theaccompanying balance sheets of Reef Global Energy VII, L.P. as of December 31,2006 and 2005, and the related statements of operations, partnership equity,and cash flows for the year ended December 31, 2006 and the period frominception (December 29, 2005) to December 31, 2005. These financial statementsare the responsibility of the Partnership’s management. Our responsibility isto express an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Partnership is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Partnership’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Reef Global Energy VII, L.P. at December31, 2006 and 2005, and the results of its operations and its cash flows for theyear ended December 31, 2006 and the period from inception (December 29, 2005)to December 31, 2005, in conformity with accounting principles generallyaccepted in the United States of America.

 

BDO Seidman, LLP

 

 

Dallas, Texas

April 4, 2007

F-1

----

**ReefGlobal Energy VII, L.P.**

**Balance Sheet**

 
| **December 31,**                                   | ** ** | **2006**       | ** **     | **2005**      | ** ** |
|---------------------------------------------------------|------------|----------------|----------------|---------------|------------|
| ** **                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| **Assets**                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| ** **                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| **Current assets:**                                     | ** ** | ** **     | ** **     | ** **    | ** ** |
| Cash and cash  equivalents                              | ** ** | **$**          | 14,571,339     | ** **    | **$**      | 1,517,486 | ** ** |
| Accounts  receivable from affiliates                    |       | 40,437         |           | 75,641        |       |
| Accrued interest  receivable                            |       | —         |           | 1,177         |       |
| **Total current assets**                                | ** ** | **14,611,776** | ** **     | **1,594,304** | ** ** |
| ** **                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| ** **                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| **Property and equipment:**                             | ** ** | ** **     | ** **     | ** **    | ** ** |
| Oil and gas  properties, full cost method of accounting |       | 1,825,482      |           | —        |       |
| Drilling in  progress                                   |       | 3,211,249      |           | —        |       |
| Prepaid drilling  costs                                 |       | 3,963,595      |           | —        |       |
| Accumulated  depreciation and depletion                 |       | (1,825,482     | )              | —        |       |
| **Net property and equipment**                          | ** ** | **7,174,844**  | ** **     | —        | ** ** |
| ** **                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| **Total assets**                                        | ** ** | **$**          | **21,786,620** | ** **    | **$**      | **1,594,304** | ** ** |
| ** **                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| **Liabilities and Partnership  Equity**                 | ** ** | ** **     | ** **     | ** **    | ** ** |
| ** **                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| **Current liabilities:**                                | ** ** | ** **     | ** **     | ** **    | ** ** |
| Accounts payable                                        | ** ** | **$**          | —         | ** **    | **$**      | 475 | ** ** |
| Accounts payable  to affiliates                         |       | 1,542,848      |           | 80,263        |       |
| **Total current liabilities**                           | ** ** | **1,542,848**  | ** **     | **80,738**    | ** ** |
|                                                    |       |           |           |          |       |
| **Non-current liabilities:**                            | ** ** | ** **     | ** **     | ** **    | ** ** |
| Accounts payable  to affiliates                         |       | 1,028,110      |           | —        |       |
| **Total non-current liabilities**                       | ** ** | **1,208,110**  | ** **     | **—**    | ** ** |
| ** **                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| **Partnership Equity**                                  | ** ** | ** **     | ** **     | ** **    | ** ** |
| General partners                                        |       | 14,591,765     |           | 1,120,386     |       |
| Limited partners                                        |       | 3,599,369      |           | 317,612       |       |
| Managing general  partner                               |       | 1,024,528      |           | 75,568        |       |
| **Partnership equity**                                  | ** ** | **19,215,662** | ** **     | **1,513,566** | ** ** |
| ** **                                              | ** ** | ** **     | ** **     | ** **    | ** ** |
| **Total liabilities and partnership equity**            | ** ** | **$**          | **21,786,620** | ** **    | **$**      | **1,594,304** | ** ** |

 

*See accompanying notes to financial statements.*

F-2

----

**ReefGlobal Energy VII, L.P.**

**Statements of Operations**

 
| ** **                                  | ** ** | **2006**      | ** **     | **Period from  inception  (December 29,  2005) to  December 31,  2005** | ** ** |
|---------------------------------------------|------------|---------------|----------------|---------------------------------------------------------------------------------------------|------------|
|                                        | ** ** | ** **    | ** **     | ** **                                                                                  | ** ** |
| **Costs  and expenses:**                    | ** ** | ** **    |           |                                                                                        |       |
| Organization expenses                       | ** ** | **$**         | —         | ** **                                                                                  | **$**      | 50,000 | ** ** |
| General and administrative expenses         |       | 69,081        |           | 475                                                                                         |       |
| Property impairment expense                 |       | 1,825,482     |           | —                                                                                      |       |
| **Total  costs and expenses**               | ** ** | **1,894,563** | ** **     | **50,475**                                                                                  | ** ** |
|                                        | ** ** | ** **    |           |                                                                                        |       |
| **Other  income:**                          | ** ** | ** **    | ** **     | ** **                                                                                  | ** ** |
| Interest income                             |       | 691,667       |           | 1,212                                                                                       |       |
| **Total  other income**                     | ** ** | **691,667**   | ** **     | **1,212**                                                                                   | ** ** |
| ** **                                  | ** ** | ** **    | ** **     | ** **                                                                                  | ** ** |
| **Net  loss**                               | ** ** | **$**         | **(1,202,896** | **)**                                                                                       | **$**      | **(49,263** | **)** |
|                                        | ** ** | ** **    |           |                                                                                        |       |
| Net loss per  general partner unit          | ** ** | **$**         | **(1,290.26**  | **)**                                                                                       | **$**      | **(729.60** | **)** |
| Net loss per  limited partner unit          | ** ** | **$**         | **(1,283.33**  | **)**                                                                                       | **$**      | **(719.23** | **)** |
| Net loss per managing  general partner unit | ** ** | **$**         | **(251.74**    | **)**                                                                                       | **$**      | **(20.58** | **)** |

 

*See accompanying notes to financial statements.*

F-3

----

**ReefGlobal Energy VII, L.P.**

**Statements of Partnership Equity**

**For theYear Ended December 31, 2006 and the Period**

**fromInception (December 29, 2005) to December 31, 2005**

 
| ** **                                       | ** ** | **General partners** | ** ** | **Limited partners** | ** ** | **Managing general  partner** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                                       | ** ** | **Units**                 | ** ** | **Amount**                | ** ** | **Units**                          | ** ** | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** |
| Partner  contributions, net of syndication costs |       | 52.700                    |       | $                         | 1,158,836  |                               | 14.932     |       | $          | 328,352 |   | 3.560 |   | $ | 75,641 |   | 71.192 |   | $ | 1,562,829 |   |
| Net loss                                         |       | —                    |       | (38,450                   | )          | —                             |       | (10,740    | )          | — |   | (73 | ) | — |   | (49,263 | ) |
| Balance at  December 31, 2005                    |       | 52.700                    |       | $                         | 1,120,386  |                               | 14.932     |       | $          | 317,612 |   | 3.560 |   | $ | 75,568 |   | 71.192 |   | $ | 1,513,566 |   |
|                                             |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2005                    |       | 52.700                    |       | $                         | 1,120,386  |                               | 14.932     |       | $          | 317,612 |   | 3.560 |   | $ | 75,568 |   | 71.192 |   | $ | 1,513,566 |   |
| Partner  contributions, net of syndication costs |       | 688.301                   |       | 14,627,534                |       | 167.851                            |       | 3,565,680  |       | 45.060 |   | 1,006,778 |   | 901.212 |   | 19,199,992 |   |
| Partner  distributions                           |       | —                    |       | (200,071                  | )          | —                             |       | (49,351    | )          | — |   | (45,578 | ) | — |   | (295,000 | ) |
| Net loss                                         |       | —                    |       | (956,084                  | )          | —                             |       | (234,572   | )          | — |   | (12,240 | ) | — |   | (1,202,896 | ) |
| Balance at  December 31, 2006                    |       | 741.001                   |       | $                         | 14,591,765 |                               | 182.783    |       | $          | 3,599,369 |   | 48.620 |   | $ | 1,024,528 |   | 972.404 |   | $ | 19,215,662 |   |
|                                             |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Distribution  amount per partnership unit        |       |                      |       | $                         | 270.00     |                               |       |       | $          | 270.00 |   |   |   | $ | 937.43 |   |   |   |   |   |

 

*See accompanying notes to financial statements.*

F-4

----

**ReefGlobal Energy VII, L.P.**

**Statements of Cash Flows**

 
| ** **                                                                       | ** ** | **2006**       | ** **     | **Period from  inception  (December 29,  2005) to  December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------|----------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | ** **     | ** **     | ** **                                                                                  | ** ** |
| **Operating  Activities**                                                        |       |           |           |                                                                                        |       |
| Net loss                                                                         | ** ** | $              | **(1,202,896** | **)**                                                                                       | $          | **(49,263** | **)** |
| Adjustments for  non-cash transactions:                                          | ** ** | ** **     |           |                                                                                        |       |
| Property  impairment                                                             |       | 1,825,482      |           | —                                                                                      |       |
| Adjustments to  reconcile net loss to net cash provided by operating activities: | ** ** | ** **     |           |                                                                                        |       |
| Changes in  operating assets and liabilities:                                    |       |           |           |                                                                                        |       |
| Accounts receivable                                                              |       | 1,177          |           | (1,177                                                                                      | )          |
| Accounts payable                                                                 |       | (475           | )              | 475                                                                                         |       |
| Accounts payable to affiliates                                                   |       | (80,263        | )              | 80,263                                                                                      |       |
| **Net  cash provided by operating activities**                                   | ** ** | **543,025**    | ** **     | **30,298**                                                                                  | ** ** |
|                                                                             |       |           |           |                                                                                        |       |
| **Investing  Activities**                                                        |       |           |           |                                                                                        |       |
| Property  acquisition and development                                            |       | (7,457,478     | )              | —                                                                                      |       |
| **Net  cash used in investing activities**                                       | ** ** | **(7,457,478** | **)**          | —                                                                                      | ** ** |
| ** **                                                                       |       |           |           |                                                                                        |       |
| **Financing  Activities**                                                        |       |           |           |                                                                                        |       |
| Partner capital  contributions                                                   |       | 22,445,763     |           | 1,690,809                                                                                   |       |
| Syndication  costs                                                               |       | (2,182,457     | )              | (203,621                                                                                    | )          |
| Distributions to  partners                                                       |       | (295,000       | )              | —                                                                                      |       |
| **Net  cash provided by financing activities**                                   | ** ** | **19,968,306** | ** **     | **1,487,188**                                                                               | ** ** |
|                                                                             | ** ** | ** **     |           |                                                                                        |       |
| **Net  increase in cash and cash equivalents**                                   | ** ** | **13,053,853** | ** **     | **1,517,486**                                                                               | ** ** |
| Cash and cash  equivalents at beginning of period                                |       | 1,517,486      |           | —                                                                                      |       |
| **Cash  and cash equivalents at end of period**                                  | ** ** | **$**          | **14,571,339** | ** **                                                                                  | **$**      | **1,517,496** | ** ** |
|                                                                             | ** ** | ** **     |           |                                                                                        |       |
| Non-cash  investing transactions:                                                | ** ** | ** **     |           |                                                                                        |       |
| Increase in  property included in accounts payable to affiliates                 | ** ** | **$**          | 1,542,848      | ** **                                                                                  | **$**      | — | ** ** |
| Non-cash  financing transactions:                                                | ** ** | ** **     |           |                                                                                        |       |
| Managing partner  capital contributions included in receivables from affiliates  | ** ** | **$**          | 40,437         |                                                                                        | $          | 75,641 |   |
| Syndication costs  included in non-current accounts payable to affiliates        | ** ** | **$**          | 1,028,110      |                                                                                        | —     |   |

 

*See accompanying notes tofinancial statements.*

F-5

----

ReefGlobal Energy VII, L.P.

Notes to Financial Statements

December 31, 2006

 

**1. Organization and Basis of Presentation**

 

ReefGlobal Energy VII, L.P. (the Partnership) is the second in a series of Nevadalimited partnerships comprising a program called Reef Global Energy Ventures II(the Program), pursuant to an S-1 Registration Statement declared effective bythe Securities and Exchange Commission (the SEC) on July 7, 2005. In order tobe formed, each partnership is required to sell a minimum of 40 partnershipunits at $25,000 per unit, including units purchased by the managing generalpartner. Each partnership to be formed as a part of the Program will offer aminimum of 1,000 and a maximum of 2,000 units for sale. The Program isauthorized to sell up to 1,600 limited partner units and 6,400 general partnerunits during the period beginning July 8, 2005 through July 7, 2007. ReefGlobal Energy VII, L.P. offered 1,200 units for sale ($30,000,000), consistingof up to 240 limited partner units and up to 960 general partner units.Investor funds are held in escrow and are subject to reimbursement withinterest if the minimum number of units is not sold. The Program filed aprospectus supplement with the SEC on November 15, 2005 describing thePartnership, and commenced offering units in the Partnership. Upon reaching theminimum subscription level, the Partnership was formed on December 29, 2005.The Partnership offering closed April 28, 2006, with sales to outside investorstotaling 182.783 limited partner units and 741.001 general partner units.

 

ThePartnership is a Nevada limited partnership formed under the Nevada UniformLimited Partnership Act. Reef Oil & Gas Partners, L.P. (Reef) serves as thePartnership’s managing general partner. Partnership interests are held by themanaging general partner and investor partners who are general and limitedpartners (investor partners). The managing general partner received a 10%interest in the Partnership as compensation for forming the Partnership, andalso holds a 1% interest in the Partnership as a result of paying 1% of allleasehold, drilling and completion costs. This 11% interest is not representedby Partnership units. In addition, Reef purchased 5% of the Partnership unitsand, therefore, holds 5% of the 89% interest in the Partnership (4.45%) held bythe unit holders. The Partnership purchases working interests in exploratoryand developmental drilling prospects and drills oil and gas wells locatedprimarily onshore in the continental United States. Other partnerships formedas a part of this Program may also own interests in the wells purchased by thisPartnership. In instances where the partnerships own a majority workinginterest in a well, the well may be operated by Reef Exploration, L.P. (RELP),an affiliate of the managing general partner. The Partnership began purchasingproperty interests during 2006. As of December 31, 2006, the Partnership haspurchased interests in twelve prospects upon which nineteen wells are expectedto be drilled. The Partnership is continuing to acquire leases and expectsdrilling operations to continue through 2007.

 

Duringthe year following completion of the drilling phase of the Partnership, allgeneral partner units purchased by investor partners will be converted intolimited partner units. Limited partners do not have any rights to convert theirunits to general partner units.

F-6

----

Underthe terms of the partnership agreement, certain expense items are allocateddifferently between the managing general partner and the investor partners.Cash distributions to partners of the net cash flow from interest income andoil and gas sales revenues, less operating, general and administrative, andother costs are distributed 15.45% to the managing general partner (based uponthe 11% interest not represented by units and the 4.45% interest represented byPartnership units) and 84.55% to investor partners.

** **

**2. Summary of Accounting Policies**

 

**Use of Estimates**

** **

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from theseestimates.

 

**Cash and Cash Equivalents**

 

ThePartnership considers all highly liquid investments with maturity dates of nomore than three months from the purchase date to be cash equivalents. Cash andcash equivalents consist of demand deposits and money market investmentsinvested with a major national bank. The carrying value of the Partnership’scash equivalents approximates fair value.

 

**Risks and Uncertainties**

 

Historically,the oil and gas market has experienced significant price fluctuations. Pricesare impacted by local weather, supply in the area, availability and price ofcompetitive fuels, seasonal variations in local demand, limited transportationcapacity to other regions, and the worldwide supply and demand balance forcrude oil.

 

ThePartnership does not expect to engage in commodity futures trading or hedgingactivities and has not entered into derivative financial instrumenttransactions for trading or other speculative purposes. Accordingly, thePartnership will be at risk for the volatility in commodity prices inherent inthe oil and gas industry, and the level of commodity prices is expected to havea significant impact on the Partnership’s results of operations.

** **

**Organization and Syndication Costs**

 

Organization andsyndication costs total 15% of investor capital contributions, except for unitspurchased by the managing general partner, which are purchased net of the 15%cost. Partnership organization costs totaling $50,000 have been expensed in theDecember 31, 2005 financial statements. Syndication costs represent costs incurredin conjunction with the offering of partnership units. These costs, totaling$3,210,567 and $203,621 during 2006 and 2005, respectively, have been recordedas a reduction of the proceeds of the offering.

F-7

----

# **Oil and Gas Properties**

 

The Partnership follows the full cost method of accounting for crudeoil and natural gas properties. Under this method, all direct costs and certainindirect costs associated with acquisition of properties and successful as wellas unsuccessful exploration and development activities are capitalized.Depreciation, depletion, and amortization of capitalized crude oil and naturalgas properties and estimated future development costs, excluding unprovedproperties, are based on the unit-of-production method using proved reserves.  Proved gas reserves are converted toequivalent barrels at a rate of 6 Mcf to 1 Bbl. Net capitalized costs of crudeoil and natural gas properties, as adjusted for asset retirement obligations,are limited to the lower of unamortized cost or the cost ceiling, defined asthe sum of the present value of estimated future net revenues from provedreserves based on un-escalated prices discounted at 10 percent, plus the costof properties not being amortized, if any, plus the lower of cost or estimatedfair value of unproved properties included in the costs being amortized, ifany. Excess costs are charged to property impairment expense. No gain or lossis recognized upon sale or disposition of crude oil and natural gas properties,except in unusual circumstances. During the year ended December 31, 2006, thePartnership recognized property impairment expense of $1,825,482 as a result ofthe initial three wells drilled by the Partnership during 2006 all beingunsuccessful.

#  

# **Restoration,Removal, and Environmental Liabilities**

 

ThePartnership is subject to extensive Federal, state and local environmental lawsand regulations. These laws regulate the discharge of materials into theenvironment and may require the Partnership to remove or mitigate theenvironmental effects of the disposal or release of petroleum substances atvarious sites. Environmental expenditures are expensed or capitalized dependingon their future economic benefit. Expenditures that relate to an existingcondition caused by past operations and that have no future economic benefitare expensed.

 

Liabilitiesfor expenditures of a non-capital nature are recorded when environmentalassessments and/or remediation is probable, and the costs can be reasonablyestimated. Such liabilities are generally undiscounted values unless the timingof cash payments for the liability or component is fixed or reliablydeterminable.

 

Statementof Financial Accounting Standards No. 143, “Accounting for RetirementObligations” (SFAS 143) addresses accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs. SFAS 143 requires that the fair value of a liabilityfor an asset’s retirement obligation be recorded in the period in which it is incurredand the corresponding cost capitalized by increasing the carrying amount of therelated long-lived asset. The liability is accreted to its then present valueeach period, and the capitalized cost is depreciated over the useful life ofthe related asset. SFAS 143 is effective for the Partnership as of itsinception date. As of December 31, 2006 the Partnership had no productivelong-lived assets and therefore had no asset retirement obligation.

F-8

----

**Income Taxes**

 

ThePartnership’s net income or loss flows directly through to its partners, whoare responsible for the payment of Federal taxes on their respective share ofany income or loss. Therefore, there is no provision for federal income taxesin the accompanying financial statements.

** **

Thebook basis of the Partnership’s assets exceeds the tax basis of the assets byapproximately $5.11 million at December 31, 2006, primarily due to thededuction of intangible drilling costs and prepaid drilling costs for taxpurposes.

 

**New Accounting Pronouncements**

** **

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (“SFAS No. 157). This standard clarifies theprincipal that fair value should be based on the assumptions that marketparticipants would use when pricing an asset or liability. Additionally, itestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. We have not yet determined the impact that theimplementation of SFAS No. 157 will have on our results of operations orfinancial condition, if any. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007.

** **

**3. Transactions with Affiliates**

 

ThePartnership has no employees. RELP, an affiliate of Reef, employs a staffincluding geologists, petroleum engineers, landmen and accounting personnel whoadminister all of the Partnership’s operations. The Partnership reimburses RELPfor technical and administrative services at cost. During the year endedDecember 31, 2006 and the period from inception (December 29, 2005) to December31, 2005, the Partnership incurred technical services costs of $217,183 and $0,respectively, which have been capitalized as project costs, and incurredadministrative services costs of $5,203 and $0, respectively, which have beenexpensed as general and administrative expenses.

 

ThePartnership has accounts receivable from Reef totaling $40,437 and $75,641 atDecember 31, 2006 and 2005. The December 31, 2005 balance due consists of$75,641 for the purchase of 3.560 Partnership units. Reef is required topurchase a minimum of 5% of the units in the Partnership. Reef paid thisbalance during February 2006.

 

Reef,as managing general partner, contributes 1% of all leasehold, drilling andcompletion costs when incurred, in addition to the costs it pays as a result ofpurchasing 5% of Partnership units. The December 31, 2006 balance of $40,437represents the 1% contribution due to the Partnership in connection withproperty costs incurred by the Partnership during the fourth quarter of 2006.Reef paid the balance in full during March 2007.

F-9

----

Accountspayable to affiliates totaled $2,570,958 as of December 31, 2006. RELPprocesses joint interest billings on behalf of the Partnership. The balanceincludes $1,181,862 due RELP in connection with drilling invoices paid by RELPon behalf of the Partnership, and $210,250 for technical services costs. ThePartnership settles its balances with RELP on a quarterly basis.

 

Accountspayable to affiliates as of December 31, 2006 also includes $1,028,110for the unpaid portion of the 15% management fee due Reef for organization andsyndication costs, including sales commissions. The management fee is payablein two parts. Reef initially receives an amount not to exceed 13.5% to recoveractual commissions and organization and syndication costs. This remainingbalance of $1,028,110, representing the portion of the management fee in excessof actual commissions and organization and syndication costs, will be paid to Reeffrom the oil and gas cash flows available for partner distributions, at a ratenot to exceed $1 million per year. The Partnership has no productive propertiesas of December 31, 2006. The Partnership will begin paying this additionalmanagement fee amount when it has productive properties and begins distributionof net revenues to investor partners. The liability has been classified asnon-current since the Partnership currently has no productive properties andthe initial date of repayment is currently unknown.

 

Reefhad entered into, and allowed to expire, two agreements (the CMI Agreements)with Challenger Minerals, Inc. (CMI), a subsidiary of GlobalSantaFe Corporationand a screener of oil and gas prospects in the Gulf of Mexico and North Searegions.  The CMI Agreements allowed Reefthe opportunity to review and selectively participate in exploratory anddevelopmental prospects either originated or previewed by CMI. Reef paid CMIfor the geological and geophysical services provided by CMI under the CMIAgreements. Reef has also entered into an agreement with Access ExplorationCorp (AEC), also a screener of domestic oil and gas prospects both onshore andin the Gulf of Mexico. This agreement allows Reef the opportunity to review andselectively participate in exploratory and developmental prospects previewed byAEC. Reef pays AEC for the geological and geophysical services provided by AECunder this agreement. Reef may enter into additional agreements with otherthird parties to screen exploratory and developmental prospects.

 

Prospectsapproved for acquisition by Reef under these agreements are assigned to thisPartnership as well as other limited partnerships formed as part of theProgram. Each partnership formed as a part of the Program pays Reef an estimatedpayment as reimbursement, on a pro rata basis, of the fees paid by Reef underthese agreements. When the Program’s offering is completed, the actual fees tobe reimbursed by each partnership formed as a part of the Program will becalculated based upon each partnership’s total capital contributions, and eachpartnership formed will either receive an additional assessment or refund offees. Total reimbursement to Reef by the partnerships formed as a part of thisProgram will not exceed the actual fees paid by Reef under these agreements. Asof December 31, 2006, this Partnership accrued an estimated payment to Reef of$150,736, which was paid to Reef during the first quarter of 2007. The paymenthas been capitalized as geological and geophysical costs in accordance with thefull cost method of accounting for oil and gas properties.

F-10

----

TheDecember 31, 2005 accounts payable to affiliates balance of $80,263 consists offunds due Reef for the unpaid portion of the 15% management fee due at December31, 2005 for organization and syndication costs, including sales commissions(see Note 7).

 

**4. Prepaid Drilling Costs**

** **

Asof December 31, 2006, the Partnership has prepaid $3,963,595 in connection withintangible drilling costs to be incurred on wells in which the Partnership hasa working interest and which are drilling at December 31, 2006 or will bedrilled during 2007.

** **

**5. Major Customers**

** **

The Partnership will sell crude oil and natural gas on credit terms torefiners, pipelines, marketers, and other users of petroleum commodities.Revenues will be received directly from these parties or, in certaincircumstances, paid to the operator of the property who disburses to thePartnership its percentage share of the revenues. As of December 31, 2006 and2005, the Partnership had no oil and gas production and, therefore, had nocustomers.

** **

**6. Commitments and Contingencies**

 

ThePartnership is not currently involved in any legal proceedings. See Note 8 fora summary of the Partnership’s drilling and development plans.

 

**7. Partnership Equity**

 

Salesof Partnership units began on November 15, 2005. Proceeds received were placedinto an interest bearing escrow account until the Partnership reached theminimum subscription level of 40 units. The Partnership was formed on December29, 2005 and the sale of Partnership units was closed on April 28, 2006. ThePartnership raised $23,094,590 from the sale of 923.784 Partnership units toinvestor partners. Reef purchased 48.620 units (5%) for $1,033,179. Reef willalso contribute 1% of all leasehold, drilling, and completion costs whenincurred, in addition to paying its pro rata share (4.95%) of the leasehold,drilling, and completion costs paid by the Partnership. As of December 31,2006, Reef had paid $8,803 in connection with this obligation.

 

ThePartnership has $20,672,384 available for Partnership oil & gas operations,net of the management fee of $3,464,188. Of the $3,464,188 management fee,syndication costs were $3,414,188 and organization costs were $50,000.

F-11

----

Reefexclusively manages and controls all aspects of the business of thePartnership. The Partnership agreement prohibits participation by investorpartners in the Partnership’s day-to-day business decisions.

 

**8.Partnership Projects**

** **

As of December 31, 2005, the Partnership had not purchased anyexploratory and developmental prospects. During 2006, the Partnership purchasedinterests in twelve prospects upon which a total of seven exploratory andtwelve developmental wells are expected to be drilled.

 

During 2006, the Partnership completed two exploratory wells and onedevelopmental well. All three of the wells were unsuccessful and have beenplugged and abandoned as of December 31, 2006. The Partnership also had threeexploratory and two developmental wells in progress. The Partnership expects topurchase additional prospects during 2007 and expects drilling operations tocontinue throughout 2007.

 

One developmental prospect purchased by the Partnership, upon whicheight developmental wells are expected to be drilled during 2007, is also ownedby another partnership in the Program, and RELP will serve as operator of theprospect.

** **

**9. Subsequent Events (unaudited)**

** **

Subsequent to December 31, 2006, the Partnership completed drillingoperations on three of the exploratory and one of the developmental wells inprogress at that date. The developmental well is currently being completed andis expected to be productive. One of the exploratory wells was unsuccessful, asecond began production operations in March 2007, and the third is expected tobe completed during the second quarter of 2007 as a productive well.

 

The Partnership has completed the drilling of one exploratory and fivedevelopmental wells subsequent to December 31, 2006. The exploratory well wasunsuccessful, while all five of the developmental wells are undergoing completionoperations and are expected to begin production during the second quarter.

 

**10.Supplemental Information on Oil & Gas Exploration and Production Activities(Unaudited)**

 

**Capitalized Costs**

** **

The capitalized costs of oil and gas properties are as follows:

F-12

----

 

| December 31,                                  | ** ** | **2006**      | ** **    | **2005**   | ** ** |
|----------------------------------------------------|------------|---------------|---------------|------------|------------|
|                                               | ** ** | ** **    | ** **    | ** ** | ** ** |
| **Oil and  gas properties:**                       | ** ** | ** **    | ** **    | ** ** | ** ** |
| Full cost pool                                     | ** ** | **$**         | 1,825,482     | ** ** | **$**      | ** ** | ** ** |
| Drilling in progress                               |       | 3,211,249     |          |       |       |
| Prepaid drilling costs                             |       | 3,963,595     |          | —     |       |
| **Total  oil and gas properties**                  | ** ** | **9,000,326** | ** **    | —     | ** ** |
| Accumulated depreciation, depletion and impairment |       | (1,825,482    | )             | —     |       |
| **Net oil  and gas property**                      | ** ** | **$**         | **7,174,844** | ** ** | **$**      | **—** | ** ** |

 

**CostsIncurred**

** **

Costsincurred in property acquisition, exploration, development, and productionactivities consisted of the following:

 

|                              | ** ** | **2006**   | ** **    | **2005**   | ** ** |
|------------------------------|------------|------------|---------------|------------|------------|
|                         | ** ** | ** ** | ** **    | ** ** | ** ** |
| **Oil and  gas properties:** | ** ** | ** ** |          |       |       |
| Exploration costs            | ** ** | **$**      | 4,594,773     |       | —     |   |
| Development costs            |       | 4,405,553  |          | **—** | ** ** |
| **Total costs incurred**     | ** ** | **$**      | **9,000,326** | ** ** | **—** | ** ** |

 

**11. Supplementary Quarterly Financial Data(Unaudited)**

** **
| Period from Inception  (December 29, 2005) to  December 31, 2005 | ** ** | **4th Qtr** | ** ** | **Totals** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------|------------|------------|------------|
| Total oil and  gas sales                                                                            | ** ** | **$**            | —     | ** ** | **$**      | — | ** ** |
| Loss from  operations                                                                               |       | (50,475          | )          | (50,475    | )          |
| Net loss                                                                                            |       | (49,263          | )          | (49,263    | )          |
| Net loss per  managing general partner unit                                                         |       | (20.58           | )          | (20.58     | )          |
| Net loss per  general partner unit                                                                  |       | (729.60          | )          | (729.60    | )          |
| Net loss per limited  partner unit                                                                  |       | (719.23          | )          | (719.23    | )          |
|                                                                                                     |            |                  |            |            |            |  |  |

 

Net loss allocated to partners other than the managing general partnerdiffers due to the allocation of interest income among the partners.

 

| Year ended December 31,  2006         | ** ** | **1st Qtr** | ** ** | **2nd Qtr** | ** ** | **3rd Qtr** | ** ** | **      4th Qtr      ** | ** ** | **      Totals      ** | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| Total oil and  gas sales                             | ** ** | **$**            | —     | ** **       | **$**      | —           | ** ** | **$**                                                                                    | —     | ** **                                                                         | **$**      | — | ** ** | **$** | — | ** ** |
| Loss from  operations                                |       | (19,153          | )          | (37,339          | )          | (545,482         | )          | (1,292,589                                                                               | )          | (1,894,563                                                                         | )          |
| Net income  (loss)                                   |       | 17,602           |       | 148,668          |       | (319,810         | )          | (1,049,356                                                                               | )          | (1,202,896                                                                         | )          |
| Net income  (loss) per managing general partner unit |       | (55.05           | )          | 587.25           |       | 11.04            |       | (794.98                                                                                  | )          | (251.74                                                                            | )          |
| Net income  (loss) per general partner unit          |       | 19.99            |       | 130.62           |       | (346.78          | )          | (1,094.09                                                                                | )          | (1,290.26                                                                          | )          |
| Net income (loss) per  limited partner unit          |       | 29.92            |       | 127.62           |       | (346.78          | )          | (1,094.09                                                                                | )          | (1,283.33                                                                          | )          |
|                                                      |            |                  |            |                  |            |                  |            |                                                                                          |            |                                                                                    |            |  |  |  |  |  |

 

F-13

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Net loss allocated topartners other than the managing general partner differs due to the allocationof interest income among the partners.

Thethird quarter loss from operations includes property impairment expense of$525,746. The fourth quarter loss from operations includes property impairmentexpense of $1,299,736.

F-14

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**EXHIBITINDEX**
| 3.1    |   | Certificate of Limited Partnership (incorporated by reference to  Exhibit 3.1 to Form 8-A, SEC File No. 000-52540, as filed with  the SEC on March 30, 2007).                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                      |
| 3.2    |   | Form of Limited Partnership Agreement (incorporated by reference  to Exhibit 3.1 to Form S-1, SEC File No. 333-122935, as filed with the SEC on  June 24, 2005).                                                                                          |
|   |   |                                                                                                                                                                                                                                                      |
| 10.1   |   | Letter  Agreement, dated November 7, 2001, by and between Reef Partners LLC and  Challenger Minerals Inc. (incorporated by reference to Exhibit 10.2 of the  Report on Form 10-K of Reef Global Energy Ventures as filed with the SEC on  March 5, 2002). |
|   |   |                                                                                                                                                                                                                                                      |
| 31.1   |   | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                      |
| 31.2   |   | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                      |
| 32.1   |   | Certification of  Chief Executive Officer Pursuant to 18 U.S.C. §1350.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                      |
| 32.2   |   | Certification of  Chief Financial Officer Pursuant to 18 U.S.C. §1350.                                                                                                                                                                               |

 

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