Table ofContents

 

 

 

**UNITEDSTATES**

**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, 2008** |
|------------|-------------------------------------------------------|

 

**or**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the Transition period from              to               **

 

### **COMMISSION FILE 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  incorporation or organization) |       | (I.R.S. Employer  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)

 

Securities registered pursuant to Section 12(b) of theAct:  **None**

 

Securities registered pursuant to Section 12(g) of the Act:

 

**General and Limited Partnership Interests**

(Title of Class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.Yes o   Nox

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.Yes  o   Nox

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).Yes o   No x

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| Large  accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer o |   | Smaller reporting company x |
|----------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)Yes o   Nox

 

Nomarket currently exists for the limited and general partnership interests ofthe registrant.

 

Asof March 31, 2009, the registrant had 48.620 units of general partnerinterest held by the managing general partner, and 923.784 units of limitedpartner interest outstanding.

 

##### ***Documentsincorporated by reference:  None***

 

 

 

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REEF GLOBAL ENERGY VII, L.P.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008

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  Disclosure 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, Executive Officers and  Corporate Governance                                                            |       |
| 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, and Director Independence                                         |       |
| Item 14.          | Principal Accountant Fees and Services                                                                             |       |
|              |                                                                                                               |       |
| **PART IV**  |                                                                                                               |       |
|              |                                                                                                               |       |
| Item 15.          | Exhibits and Financial Statement  Schedules                                                                        |       |
|              | Signatures                                                                                                         |       |

 

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**PART I**

 
| **ITEM  1.** |   | **BUSINESS** |
|--------------|--------|--------------|

 

**Introduction**

 

ReefGlobal Energy VII, L.P. (the Partnership) is the second in a series of fourNevada limited partnerships comprising a program called Reef Global EnergyVentures II (the Program). The Partnership was formed in the state of Nevada onDecember 29, 2005.  The Partnershippurchased working interests in oil and gas prospects and participated in thedrilling of wells on those prospects. The primary objectives of the Partnershipare to generate revenue from the production of crude oil and natural gas,distribute cash 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 andgas wells located onshore in the continental United States. The Partnershippurchased working interests in six developmental prospects upon which itdrilled twenty-one developmental wells. The Partnership purchased workinginterests in seven exploratory prospects upon which it drilled sevenexploratory wells and one developmental well. These prospects are locatedonshore in Louisiana, New Mexico, Texas, and Wyoming. In 2008, the Partnershipcompleted drilling operations with the capital previously raised by thePartnership. The Partnership will not purchase additional prospects. Inaccordance with the Partnership Agreement, the Partnership may conductadditional drilling operations to fully develop those prospects already ownedby the Partnership.

 

Otherpartnerships formed as a part of the Program also own working interests in someof the prospects owned by this Partnership. Reef has also purchased workinginterests in certain partnership prospects for some of the other partnershipsit manages. In instances where the percentage ownership of the Partnership andReef-affiliated entities in a prospect is large enough, Reef Exploration, L.P.(RELP) or its predecessor OREI, Inc. (OREI) has served as operator of theprospect. During 2006, OREI transferred operator status of all prospectsoperated by OREI to RELP. RELP serves as operator of three developmental andtwo exploratory Partnership prospects. RELP operates eight successful wellslocated on one developmental prospect and operates one successful developmentalwell drilled on one of the Partnership’s exploratory prospects. In this AnnualReport on Form 10-K (Annual Report), we use the term “successful” to referto wells that are drilled, tested, and either capable of or actually producingin commercial quantities. We use the term “unsuccessful” to refer to wells thatdo not meet one or more of these criteria.

 

**Acquisition and Drilling of Undeveloped Prospects**

 

ThePartnership purchased working interests in three developmental and oneexploratory prospect internally sourced by RELP, and three developmental andsix exploratory prospects generated by and purchased from third parties.  A “prospect” is generally defined as a contiguousoil and gas leasehold estate, or lesser interest in a leasehold estate, uponwhich drilling operations may be conducted. A prospect may be characterized as“exploratory” or “developmental” based upon the type of well to be drilled onthe prospect.  A development well is awell drilled within a proved area of an oil or gas reservoir to the depth of astratigraphic horizon known to be productive. Generally an exploratory well isany well that is not a development well, including wells drilled to find andproduce oil or gas in an unproven area, wells drilled to find a new reservoirin a field previously found to be productive of oil or gas, or wells drilled toextend a known reservoir.

 

Prospectswere evaluated utilizing data generated by RELP or provided by unaffiliatedthird parties to RELP. This data included well logs, production records fromother area wells, seismic, geological and geophysical information, and suchother information available and considered useful. Prospects in which thePartnership purchased a working interest were evaluated by petroleum engineers,geophysicists, geologists, and other technical consultants employed by orretained by RELP on the Partnership’s behalf.

 

ThePartnership prospects were acquired pursuant to an arrangement in which thePartnership purchased part of the working interest. A working interest bears aspecified portion of the costs of development, operation and maintenance. Aworking interest is subject to landowners’ royalty interests and may be subjectto other royalty interests payable to unaffiliated third parties. Where thePartnership acquired less than 100% of the working interest, costs were reducedproportionately. The Partnership’s limited partnership agreement (thePartnership Agreement)

 

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prohibitsReef or any of its affiliates from retaining any overriding royalty interest,that is, any royalty interest that would be paid out of the Partnership’sworking interest, in any working interest purchased by the Partnership. ThePartnership is a non-operator working interest owner in all prospects purchasedby the Partnership.

 

**Consulting Agreements for Prospect Acquisitions**

 

Reefentered 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. Under the terms of theseagreements, Reef had the opportunity to review and selectively participate inexploratory and developmental prospects either originated or previewed by CMI.Reef paid CMI for the geological and geophysical services provided by CMI. Theagreements expired in January and November, 2006.

 

Reefalso entered into an agreement with Access Exploration Corp. (AEC), a screenerof domestic oil and gas prospects both onshore and in the Gulf of Mexico. Thisagreement provided Reef the opportunity to review and selectively participatein exploratory and developmental prospects previewed by AEC. Reef paid AEC anannual fee for the geological and geophysical services provided by AEC. Thisagreement expired in October 2007.

 

Prospectsapproved for acquisition by Reef under these agreements could be assigned tothis Partnership as well as other limited partnerships formed as part of theProgram. Each partnership formed as a part of the Program paid Reef, on a prorata basis, a portion of the fees paid by Reef under these agreements duringthe term of the Program. Total reimbursements to Reef by the partnershipsformed as a part of this Program were equal to the actual fees paid by Reefunder these agreements. The Partnership paid Reef $150,736 as its pro ratashare of these fees. This amount has been capitalized as geological andgeophysical costs in accordance with the full cost method of accounting for oiland gas properties.

 

**Drilling and Completion Phase of Operations**

 

RELPis currently the operator of three developmental and two exploratory prospects,and serves as operator of nine successful wells in which the Partnership has aworking interest. RELP also served as operator for ten unsuccessful Partnershipwells, including eight wells on the Sand Dunes prospect discussed in more detailin Item 2 - Properties. As a well operator, RELP receives operator fees duringthe drilling and production phase of each well at the competitive rate in thegeographical area where the well is located. These fees are charged as a monthly fee per well as agreed to in anoperating agreement signed by the Partnership and participating third partiesin the well. The wells are subject to a model form operating agreement issuedby the American Association of Petroleum Landmen and an accounting procedure forjoint operations issued by the Council of Petroleum Accountants Societies ofNorth America.

 

Onall prospects operated by OREI and later transferred to RELP, drillingoperations were contracted to independent third party drillers, and the costsof the wells to the Partnership were determined by actual third party costs,plus OREI’s or RELP’s monthly operator fees at the competitive rate for thegeographical area where the wells are located.

 

ThePartnership generally pays drilling and completion costs as incurred. Wellsdrilled that failed to result in the discovery of commercial quantities ofcrude oil or natural gas were plugged and abandoned in accordance withapplicable regulations.  Elevendevelopment wells and six exploratory wells drilled by the Partnership wereunsuccessful. Of the eleven unsuccessful developmental wells, eightdevelopmental wells on the Sand Dunes prospect in which the Partnershipparticipated have not been plugged and abandoned at this time.

 

**Production Phase of Operations**

 

Wellscapable of producing quantities of crude oil and/or natural gas in commercialquantities, were completed by installing all surface equipment necessary tocontrol the flow of production or to shut down the well, and by installing anystorage facilities, gathering lines, or sales lines required to produce andsell the crude oil and/or natural gas production from the well. The Partnershipdrilled eleven successful developmental wells and one successful exploratorywell. The successful exploratory well ceased producing during 2007. Threedevelopmental and six exploratory wells were unsuccessful and have been pluggedand abandoned. Eight developmental wells on

 

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theSand Dunes prospect in which the Partnership participated are unsuccessful buthave not been plugged and abandoned at this time.

 

ThePartnership has entered into agreements with third party marketers to sell thecrude oil and/or natural gas produced from successful wells on a competitivebasis at the best available terms and prices. In some cases the Partnership haselected to sell its production under marketing arrangements entered into by theoperator of the well. Generally, purchase contracts for the sale of crude oilare cancelable on 30 days’ notice, but purchase contracts for the sale ofnatural gas may have a longer term.  ThePartnership sells natural gas discovered by it at negotiated pricesdomestically, based upon a number of factors, such as the quality of the gas,well pressure, estimated reserves, prevailing supply conditions and anyapplicable price regulations promulgated by the Federal Energy RegulatoryCommission (FERC).

 

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 has not and does not expect to engage in commodity futures tradingor hedging activities, or enter into derivative financial instrumenttransactions for trading or other speculative purposes. Accordingly, thePartnership is at risk for the volatility in commodity prices inherent in theoil and gas industry, and the level of commodity prices has a significantimpact on the Partnership’s results of operations.  See “Item 7A. Quantitative and QualitativeDisclosure About Market Risk.”

 

ThePartnership’s share of revenue from productive wells is burdened by and/orsubject to royalties and overriding royalties, monthly operating charges, andother operating costs.  These items ofexpenditure involve amounts payable solely out of, or expenses incurred solelyby reason of, production operations.  ThePartnership deducts operating expenses from the production revenue for thecorresponding period.

 

**MajorCustomers**

 

The Partnership sells crude oil and natural gas oncredit terms to refiners, pipelines, marketers, and other users of petroleumcommodities. Revenues are 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. During the year ended December 31,2008, three marketers and one operator accounted for 34.2%, 17.9%, 11.0%, and29.7% of the Partnership’s crude oil and natural gas revenues, respectively.During the year ended December 31, 2007, four marketers and one operatoraccounted for 41.0%, 17.2%, 16.8%, 13.4%, and 10.7% of the Partnership’s crudeoil and natural gas revenues, respectively. During the year ended December 31,2006, three marketers and one operator accounted for 32.9%, 21.8%, 13.4%, and23.0% of the Partnership’s crude oil and natural gas revenues,respectively.  Due to the competitivenature of the market for purchase of crude oil and natural gas, the Partnershipdoes not believe that the loss of any particular purchaser would have amaterial adverse impact on the Partnership.

 

**Insurance**

 

ThePartnership is a named insured under blowout, pollution, public liability andworkmen’s compensation insurance policies obtained by RELP. Such insurance,however, may not be sufficient to cover all liabilities.  Each unit held by general partners representsan open-ended security for unforeseen events including, without limitation,blowouts, lost circulation, and stuck drill pipe that may result inunanticipated additional liability materially in excess of a general partner’sinitial investment in the Partnership.

 

ThePartnership is a named insured under various insurance policies and intends tomaintain such policies subject to its analysis of their premium costs, coverageand other factors.  In the exercise ofReef ‘s fiduciary duty as managing general partner, Reef has obtained insuranceon behalf of the Partnership to provide the Partnership with such coverage asReef believes is sufficient to protect the investor partners against theforeseeable risks of drilling and production. Reef reviewed the Partnership insurance coverage prior to commencingdrilling operations and periodically evaluates the sufficiency of insurance. Inno event will the Partnership maintain public liability insurance of less thantwo times the Partnership’s capitalization.****Subjectto the foregoing, Reef may, in its sole

 

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discretion,increase or decrease the policy limits and types of insurance from time to timeas Reef deems appropriate under the circumstances, which may vary materially.

 

Inaccordance with the Partnership Agreement of the Partnership, all generalpartner units held by investors were converted into limited partner unitsduring the third quarter of 2008. At that time, Reef amended the Certificate ofLimited Partnership to effectuate the conversion of the interest of the formerinvestor general partners to that of a limited partner. Investor generalpartners will have limited liability as a limited partner for any Partnershipoperations conducted after their conversion date. However, investor generalpartners that converted to limited partners continue to have unlimitedliability regarding partnership activities that occurred prior to theirconversion date.

 

**Competition**

 

Thereare thousands of oil and natural gas companies in the United States.  Competition is strong among persons andentities involved in the exploration for and production of crude oil andnatural gas.  Reef expects thePartnership to encounter strong competition at every phase of business.  The Partnership competes with entities havingfinancial resources and staffs substantially larger than those available to it.

 

Thenational supply of natural gas is widely diversified, with no one entitycontrolling over 5% of the supply.  As aresult of deregulation of the natural gas industry enacted by Congress andFERC, natural gas prices are generally determined by competitive marketforces.  Prices of crude oil, condensateand natural gas liquids are not currently regulated and are generallydetermined by competitive market forces.

 

**Markets**

 

Themarketing of crude oil and natural gas produced by the Partnership is affectedby a number of factors that are beyond the Partnership’s control and whoseexact effect cannot be accurately predicted. These factors include:

 
| · |   | the  amount of crude oil and natural gas imports;                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | the  availability, proximity and cost of adequate pipeline and other  transportation facilities;                                                                       |
| · |   | the  success of efforts to market competitive fuels, such as coal and nuclear  energy and the growth and/or success of alternative energy sources such as  wind power; |
| · |   | the  effect of United States and state regulation of production, refining,  transportation and sales;                                                                  |
| · |   | other  matters affecting the availability of a ready market, such as fluctuating  supply and demand; and                                                               |
| · |   | general  economic conditions in the United States and around the world.                                                                                                |

 

Thesupply and demand balance of crude oil and natural gas in world markets hascaused significant variations in the prices of these products over recentyears.  The North American Free TradeAgreement eliminated trade and investment barriers between the United States,Canada, and Mexico, resulting in increased foreign competition for domesticnatural gas production.  New pipelineprojects recently 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 natural gas sales from Partnership wells.

 

Membersof the Organization of Petroleum Exporting Countries (OPEC) establish pricesand production quotas for petroleum products from time to time with the intentof affecting 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’s wells.

 

Inseveral initiatives, FERC has required pipelines to develop electroniccommunication and to provide standardized access via the Internet toinformation concerning capacity and prices on a nationwide basis, so as tocreate a national market.  Parallel developmentstoward an electronic marketplace for electric power, mandated by FERC, areserving to create multi-national markets for energy products generally.  These systems will allow rapid consummationof natural gas transactions.  Althoughthis system may initially lower prices due to increased competition, it isanticipated to expand natural gas markets and to improve their reliability.

 

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**Regulation**

 

ThePartnership’s operations will be affected from time to time in varying degreesby domestic and foreign political developments, and by federal and state lawsand regulations.

 

*Production.*  In mostareas of operations within the United States the production of crude oil andnatural gas is regulated by state agencies that set allowable rates ofproduction and otherwise control the conduct of oil and gas operations. Amongthe ways that states control production is through regulations that establishthe spacing of wells or limit the number of days in a given month during whicha well can produce.

 

*Environmental.*  ThePartnership’s drilling and production operations are also subject toenvironmental protection regulations established by federal, state, and localagencies that may necessitate significant capital outlays that, in turn, wouldmaterially affect the financial position and business operations of thePartnership. These regulations, enacted to protect against waste, conservenatural resources and prevent pollution, could necessitate spending funds onenvironmental protection measures, rather than on drilling operations. If anypenalties or prohibitions were imposed on the Partnership for violating suchregulations, the Partnership’s operations could be adversely affected.

 

*Natural Gas 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 natural gas. Such deregulated natural gasproduction may be sold at market prices determined by supply and demand, Btucontent, pressure, location of wells, and other factors. Reef anticipates thatall of the natural gas produced by the Partnership’s wells will be consideredprice-decontrolled natural gas and that the Partnership’s natural gas will besold at fair market value.

 

*ProposedRegulation.*Various legislative proposals are being consideredin Congress and in the legislatures of various states, which, if enacted, maysignificantly and adversely affect the petroleum and gas industries. Suchproposals involve, among other things, the imposition of price controls on allcategories of natural gas production, the imposition of land use controls, suchas prohibiting drilling activities on certain federal and state lands inprotected areas, as well as other measures. At the present time, it isimpossible to predict what proposals, if any, will actually be enacted byCongress or the various state legislatures and what effect, if any, suchproposals will have on the Partnership’s operations.

 

**Employees**

 

ThePartnership has no employees, and is managed by its managing general partner,Reef. Through January 1, 2006, OREI employed a staff including geologists,petroleum engineers, landmen, and accounting personnel who administered all ofthe Partnership’s operations. On January 2, 2006, the employees of OREIwere transferred to RELP, where they continue to administer all of thePartnership’s operations.  ThePartnership reimburses OREI and RELP for technical and administrative servicesat cost.  See “Item 11- ExecutiveCompensation.”

 

**FORWARD-LOOKING STATEMENTS**

 

ThisAnnual Report contains forward-looking statements that involve risks anduncertainties.  You should exerciseextreme caution with respect to all forward-looking statements made in thisAnnual Report.  Specifically, thefollowing statements are forward-looking:

 
| · |   | statements  regarding the Partnership’s overall strategy for acquiring prospects,  including its intent to diversify the Partnership’s investments;                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | statements  estimating any number or specific type or size of prospects the Partnership  may acquire or size of the interest the Partnership may acquire in such  prospects;                                                                                            |
| · |   | statements  regarding the state of the oil and gas industry and the opportunity to profit  within the oil and gas industry, competition, pricing, level of production,  or the regulations that may affect the Partnership;                                             |
| · |   | statements  regarding the plans and objectives of Reef for future operations, including,  without limitation, the uses of Partnership funds and the size and nature of  the costs the Partnership expects to incur and people and services the  Partnership may employ; |

 

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| · |   | any  statements using the words “anticipate,” “believe,” “estimate,” “expect” and  similar such phrases or words; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | any  statements of other than historical fact.                                                                                                                |

 

Reefbelieves that it is important to communicate its future expectations to thepartners.  Forward-looking statementsreflect the current view of management with respect to future events and aresubject to numerous risks, uncertainties and assumptions, including, withoutlimitation, the factors listed in Item 1A of this Annual Report captioned “RISKFACTORS.” Although Reef believes that the expectations reflected in suchforward-looking statements are reasonable, Reef can give no assurance that suchexpectations will prove to have been correct. Should any one or more of these or other risks or uncertainties materializeor should any underlying assumptions prove incorrect, actual results are likelyto vary materially from those described herein. There can be no assurance that the projected results will occur, thatthese judgments or assumptions will prove correct or that unforeseendevelopments will not occur.

 

Reefdoes not intend to update its forward-looking statements.  All subsequent written and oralforward-looking statements attributable to Reef or persons acting on its behalfare expressly qualified in their entirety by the applicable cautionarystatements.

** **
| **ITEM  1A.** |   | **RISK FACTORS** |
|---------------|--------|------------------|

 

**Our business activities aresubject to certain risks and hazards, including the risks discussed below. Ifany of these events should occur, it could materially and adversely affect ourbusiness, financial condition, cash flow, or results of operations. The risksbelow are not the only risks we face. We may experience additional risks anduncertainties not currently known to us or, as a result of developmentsoccurring in the future, conditions that we currently deem to be immaterial mayalso materially and adversely affect our business, financial condition, cashflow, and results of operations.**

** **

**Crudeoil and natural gas prices are volatile, and fluctuate due to a number of factorsoutside of our control.**

 

Thefinancial condition, results of operations, and the carrying value of our oiland gas properties depend primarily upon the prices received for our crude oiland natural gas production. Crude oil and natural gas prices historically havebeen volatile and likely will continue to be volatile given currentgeopolitical conditions. Cash flow from operations is highly dependent upon thesales prices received from crude oil and natural gas production. The prices forcrude oil and natural gas are subject to a variety of factors beyond ourcontrol. These factors include:

 
| · |   | the  domestic and foreign supply of oil and natural gas; consumer demand for oil  and gas, and market expectations regarding supply and demand; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | the  ability of the members of OPEC to agree to and maintain oil price and  production controls;                                                |
| · |   | domestic  government regulations and taxes;                                                                                                     |
| · |   | the  price and availability of foreign exports and alternative fuel sources;                                                                    |
| · |   | weather  conditions, including hurricanes and tropical storms in and around the Gulf  of Mexico;                                                |
| · |   | political  conditions in oil and natural gas producing regions, including the Middle  East, Nigeria, and Venezuela; and                         |
| · |   | domestic  and worldwide economic conditions.                                                                                                    |

 

Thesefactors and the volatility of the energy markets make it extremely difficult topredict price movements. Also, crude oil and natural gas prices do notnecessarily move in tandem. Declines in crude oil and natural gas prices wouldnot only reduce revenues and cash flow available for distributions to partners,but could reduce the amount of crude oil and natural gas that can beeconomically produced from successful wells drilled by the Partnership, and,therefore, have an adverse effect upon financial condition, results ofoperations, crude oil and natural gas reserves, and the carrying value of thePartnership’s oil and gas properties. Approximately 33.3% of the Partnership’sestimated proved reserves were crude oil reserves and 66.7% were natural gasreserves at December 31, 2008. As a result, the Partnership’s financialresults are sensitive to fluctuations in both crude oil and natural gas prices.

 

ThePartnership, while not prohibited from engaging in commodity trading or hedgingactivities in an effort to reduce exposure to short-term fluctuations in theprice of crude oil and natural gas, has not engaged in such 

 

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activities.Accordingly, the Partnership is at risk for the volatility in oil and naturalgas prices, and the level of commodity prices has a significant impact upon thePartnership’s results of operations.

 

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

 

Thereare numerous hazards involved in the drilling and operation of oil and gaswells, including blowouts involving possible damages to property and thirdparties, bodily injuries, mechanical failures, explosions, uncontrollable flowsof crude oil, natural gas or well fluids, fires, formations with abnormalpressure, pollution, releases of toxic gas and other environmental hazards andrisks. The Partnership could suffer substantial losses as a result of any ofthese risks. The Partnership is not fully insured against all risks inherent tothe oil and gas business. Uninsured liabilities would reduce the fundsavailable to the Partnership, may result in the loss of Partnership propertiesand may create liability for the 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 drillingactivities.

 

**Wecannot control activities on non-operated properties.**

 

ThePartnership has limited ability to exercise influence over and control therisks associated with operations on properties not operated by RELP. Thefailure of an operator of our wells to adequately perform operations, anoperator’s breach of the applicable agreements, or an operator’s failure to actin ways that are in our best interest could reduce our production and revenues.The success and timing of drilling and development activities on propertiesoperated by others depends upon a number of factors outside of our control,including the operator’s

 
| · |   | timing  and amount of capital expenditures;             |
|--------|--------|---------------------------------------------------------|
| · |   | expertise  and financial resources;                     |
| · |   | inclusion  of other participants in drilling wells; and |
| · |   | use  of technology.                                     |

 

Inaddition, the Partnership could be held liable for the joint interestobligations of other working interest owners, such as nonpayment of costs andliabilities arising from the actions of the other working interest owners. Fulldevelopment of prospects may be jeopardized in the event other working interestowners cannot pay their share of drilling and completion costs.

 

**Crudeoil and natural gas reserve data are estimates based upon assumptions that maybe inaccurate and existing economic and operating conditions that may differfrom future economic and operating conditions.**

 

Securitiesand Exchange Commission (SEC) rules require the Partnership to presentannual estimates of reserves. Reservoir engineering is a subjective and inexactprocess of estimating underground accumulations of crude oil and natural gasthat cannot be measured in an exact manner, and is based upon assumptions thatmay vary considerably from actual results. Accordingly, reserve estimates maybe subject to upward or downward adjustments. Actual production, revenues andexpenditures with respect to reserves will likely vary from estimates, and suchvariances could be material.

 

You should not assumethat any present value of future net cash flows from our producing reservesshown in this Annual Report is the market value for our estimated crude oil andnatural gas reserves. The estimated discounted future net cash flows from ourproved reserves are based upon prices and costs in effect at the end of theperiod held constant and discounted at 10%. Actual future prices and costs maybe materially higher or lower. Further, actual future net cash flows will beaffected by factors such as the amount and timing of actual developmentexpenditures, the rate and timing of production, and changes in governmentalregulations and tax rates.

 

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

 

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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:

 
| · |   | Reef determines in good faith that its action was  in the best interest of the Partnership; |
|--------|--------|---------------------------------------------------------------------------------------------|
| · |   | Reef was acting on behalf of or performing  services for the Partnership; and               |
| · |   | Reef’s actions did not constitute negligence or  misconduct.                           |

 

**Drillingexploratory wells is riskier than drilling developmental 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 on production.The Partnership purchased working interests in seven exploratory prospects uponwhich seven exploratory wells and one developmental well were drilled. Sixexploratory wells were unsuccessful, and one exploratory well was successfulbut ceased production during 2007. The developmental well was successful and iscurrently producing crude oil and natural gas.

 

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

 

Productionwill decline. It is not possible to predict the life and production of anywell. The actual life could differ from that which is anticipated. Sufficientcrude oil or natural gas may not be produced for a partner to receive a profitor even to recover his initial investment. In addition, production from thePartnership’s oil and gas wells, if any, will decline over time, and does notindicate any consistent level of future production. This production decline maybe rapid and irregular when compared to a well’s initial production.

 

**Extreme weather conditions mayadversely affect production operations and partner distributions.**

 

ThePartnership conducts operations in the coastal regions of Louisiana and Texas.This area is susceptible to extreme weather conditions, especially thoseassociated 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’soperations or distribution of revenues, if any.

 

**Our dependence on third parties for the processingand transportation of crude oil and natural gas may adversely affect thePartnership’s revenues and, consequently, the distribution of net cash flows toinvestor partners*.***

 

Werely on third parties to process and transport the crude oil and natural gasproduced by the Partnership’s successful wells. In the event a third party uponwhom we rely is unable to provide transportation or processing services, andanother third party is unavailable to provide such services, the Partnershipmay have to temporarily shut-in successful wells, and revenues to thePartnership and distributions to investor partners related to those wells maybe delayed.

 

**We facestrong competition within the energy industry.**

 

Theoil and gas industry is highly competitive. Competition is encountered in allaspects of Partnership operations, including the requisition of drilling andservice contractors. Many of our competitors are larger, well-establishedcompanies with substantially larger operating staffs and greater capitalresources than those of the Partnership, Reef and its affiliates. We may not beable to conduct our operations successfully, obtain drilling and servicecontractors, consummate transactions, and obtain technical, managerial andother professional personnel in this highly competitive environment.Specifically, larger competitors may be able to pay more for competentpersonnel than the Partnership, Reef and its affiliates. In addition, suchcompetitors may be able to expend greater resources on the existing andchanging technologies that will be increasingly important to success. Suchcompetitors may also be in a better position to secure drilling and oilfieldservices, as well as equipment, more timely or on more favorable terms.

 

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Finally,oil and gas producers are increasingly facing competition from providers ofnon-fossil energy, and government policy may favor those competitors in thefuture.

 

**ThePartnership has limited external sources of funds, which could result in ashortage of working capital.**

 

ThePartnership expended funds in excess of the previously raised capital inconnection with the drilling and completion of wells and acquisition of theprospects during the drilling phase of operations. The Partnership only hasnominal funds available for partnership purposes until there are revenues fromPartnership operations.  Any futurerequirement for additional funding for drilling or for repayment of the excesscapital spent during the drilling phase of operations will have to come, if atall, from the Partnership’s revenues or from borrowings. Reef cannot assure thepartners that Partnership operations will be sufficient to provide thePartnership with necessary additional funding. Reef cannot assure the partners that the Partnership will be able toborrow funds from third parties on commercially reasonable terms or at all.

 

**ThePartnership may incur liability for liens against its subcontractors.**

 

AlthoughReef will try to determine the financial condition of nonaffiliatedsubcontractors, if subcontractors fail to timely pay for materials andservices, the properties of the Partnership could be subject to materialmen’sand workmen’s liens.  In that event, thePartnership could incur excess costs in discharging such liens.

 

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

 

Reefplans to offer interests in other partnerships to be formed for substantiallythe same purposes as those of the Partnership. Therefore, a number ofpartnerships with unexpended capital funds, including those partnerships to beformed in future oil and gas programs sponsored by Reef, may exist at the sametime.  Due to competition among thepartnerships for equipment, contractors, and Reef’s personnel, the fact thatother partnerships organized by Reef and its affiliates may still be purchasingprospects and drilling and completing wells when the Partnership is attemptingto drill and complete wells on its prospects may make such activities of thePartnership more difficult.

** **
| **ITEM  1B.** |   | **UNRESOLVED STAFF COMMENTS** |
|---------------|--------|-------------------------------|

** **

**None.**

** **
| **ITEM  2.** |   | **PROPERTIES** |
|--------------|--------|----------------|

 

**DrillingActivities and Productive Wells**

 

Partnershipprospects are located onshore in Texas, Louisiana, New Mexico, and Wyoming. ThePartnership purchased working interests in six developmental prospects. ThePartnership drilled ten successful developmental wells and one unsuccessfuldevelopmental well on three developmental prospects located in GlasscockCounty, Texas, Terrebonne Parish, Louisiana, and Park County, Wyoming. ThePartnership drilled two unsuccessful developmental wells on two developmental prospectslocated in San Patricio County and Lavaca County, Texas.

 

ThePartnership participated in the drilling of eight developmental wells on theSand Dunes prospect located in Eddy County, New Mexico during the fourthquarter of 2007 and the first quarter of 2008. Initial testing confirmed thepresence of crude oil and natural gas in all eight wells; however, the fieldwas temporarily shut-in because of the lack of electric service and because ofthe high cost of trucking offsite the salt water volumes associated with theproduction of the crude oil and natural gas from the wells. Electrical serviceto the field was connected in September 2008. Based upon initial testing,larger bottom hole pumps were placed below the well perforations in three ofthe wells and testing was resumed to determine the three wells’ commercialproductivity. Water continued to be trucked offsite, and RELP applied for andreceived a permit which would allow for the conversion of one of the eightwells into a water disposal well. RELP has also explored the possibility ofdrilling a ninth well as a salt water disposal well for the field. Testingresults on two of the three wells were positive, and salt water productionvolumes declined as a result of pumping off the wells using the larger bottomhole pumps. However, the price of crude oil also declined at a rapid rate whiletesting was being conducted. In late December 2008, two of the threetesting wells were 

 

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shut-inagain. Crude oil prices continued declining to a level below $40 per barrel. InFebruary 2009, following a mechanical failure in the third testing well,RELP, as operator, shut-in the field. The eight wells cannot be commerciallyproductive without efficient salt water disposal capabilities, and RELP doesnot believe any of the options regarding salt water disposal are economicallyviable at current commodity prices. As a result, as of December 31, 2008,the eight Sand Dunes wells have been classified as unsuccessful, and there areno crude oil and natural gas reserves for these wells included in the December 31,2008 reserve information presented in this Annual Report. However, RELP hasmade no plans to plug and abandon the wells at this time, and will continue tomonitor and evaluate the economics of the field based upon commodity prices.

 

ThePartnership also has interests in unproved property consisting of un-drilledleasehold interest (11 potential drilling locations) in the Sand Dunesprospect. The Partnership has fully impaired this unproved property during thefourth quarter of 2008 based upon the eight already drilled wells beingclassified as unsuccessful at December 31, 2008. The Partnership currentlyhas no plans to conduct any drilling operations on this acreage.

 

ThePartnership purchased working interests in seven exploratory prospects, uponwhich a total of seven exploratory wells and one developmental well were drilled.The Partnership drilled one successful exploratory well, one successfuldevelopmental well, and six unsuccessful exploratory wells on seven exploratoryprospects located in St. Mary, Iberville, Cameron Parish, Louisiana, and SanPatricio, Lavaca (two prospects), and Galveston County, Texas. The successfulexploratory well in San Patricio, Texas ceased production in 2007.

 

Elevenof the twelve successful wells in which the Partnership participated drillingare currently productive.

 

P**roved Crude Oil and Natural Gas Reserves**

 

ThePartnership used an independent petroleum engineer, Gleason Engineering, ofArlington, Texas, to prepare its December 31, 2008 and 2007 estimates ofnet proved crude oil and natural gas reserves. The estimated net proved crude oiland natural gas reserves at December 31, 2008 and 2007 are summarizedbelow. The estimated quantities of proved crude oil and natural gas reservesdiscussed in this section include only the amounts which the Partnershipreasonably expects to recover in the future from known oil and gas reservoirsunder the current economic and operating conditions. Proved reserves includeonly quantities that the Partnership expects to recover commercially usingcurrent prices, costs, existing regulatory practices, and technology.Therefore, any changes in future prices, costs, regulations, technology orother unforeseen factors could materially increase or decrease the provedreserve estimates.

 
| ** **                                       | ** ** | **Oil (BBL)** | ** ** | **Gas (MCF)** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| Net proved reserves as of December 31, 2007 |       | 96,871             |       | 755,717            |       |
| Net proved reserves as of December 31, 2008 |       | 33,393             |       | 402,122            |       |

 

Thestandardized measure of discounted future net cash flows as of December 31,2008 and 2007 is computed by applying year-end prices, costs, and legislatedtax rates and a discount factor of 10% to net proved reserves. The standardizedmeasure of discounted future net cash flows does not purport to present thefair value of our crude oil and natural gas reserves.

 
| Standardized measure of discounted future net cash flows as of December 31,  2007 |   | $ | 7,199,362 |   |
|----------------------------------------------------------------------------------------|--------|---|-----------|--------|
| Standardized measure of discounted future net cash flows as of  December 31, 2008 |   | $ | 2,297,832 |   |

 

Duringthe years ended December 31, 2008, 2007, and 2006, the Partnershiprecorded property impairment costs of proved properties totaling $4,118,218,$10,739,537, and $1,825,482 as a result of the net capitalized costs of provedoil and gas properties exceeding the sum of estimated future net revenues fromproved reserves, using prices in effect at the end of the period held constantand discounted at 10%.

 

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**Titleto Properties**

 

ThePartnership’s interests in producing and non-producing acreage are in the formof assigned direct interests in leases held by the Partnership or by Reef onbehalf of the Partnership. Such properties are 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 has or will obtainsatisfactory title to all of its leases. Title will be held by the Partnershipor by Reef on behalf 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 VOTE OF 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, 2008, the Partnership hadone managing general partner, and 883 investor limited partners. Pursuant tothe Partnership Agreement of the Partnership, all general partner units held byinvestor partners were converted into limited partner units during the 3rd quarter of 2008. Reef holds a total of 48.620general partner units and the investor partners hold 923.784 limited partnerunits. No established trading market exists for the units.

 

Cashwhich, in the sole judgment of the managing general partner, is not required tomeet the Partnership’s obligations is distributed to the partners at leastquarterly in accordance with the Partnership Agreement. The Partnership hasmade monthly cash distributions to the partners of interest income and crudeoil and natural gas sales revenues, less operating, general and administrative,and other costs since August 2006. Cash distributions are distributed15.45% to the managing general partner (based upon the 11% interest notrepresented by units and the 4.45% interest represented by Partnership units)and 84.55% to investor partners.

 

Investor limited partner interests are transferable,subject to certain restrictions contained in the Partnership Agreement;however, no assignee of a unit in the Partnership can become a substitutedpartner without the written consent of both the transferor and Reef.

 

ThePartnership has adopted a unit repurchase program. Under the terms of theprogram, the managing general partner is obligated to purchase up to 5% of theunits in the Partnership per year during the period set forth in thePartnership Agreement, unless changes in oil and gas pricing meet certaincriteria specified in the prospectus supplement, dated November 15, 2005.However, the managing general partner’s obligation to purchase units is limitedto $500,000 per year in the aggregate for all partnerships previously orsubsequently organized by the managing general partner or its affiliates. ThePartnership did not repurchase any units in 2008.

 

**Use ofProceeds**

 

Inconnection with the Registration Statement filed on form S-1 (No. 333-122935)and declared effective July 7, 2005, Reef filed a final prospectus for theProgram on July 8, 2005. On November 15, 2005, Reef filed aprospectus supplement describing the Partnership and commenced the offering ofunits in the Partnership. All sales of Partnership units were made through theProgram’s dealer-manager, Reef Securities, Inc., and a number ofsoliciting dealers. The offering terminated April 28, 2006. Under theterms of the offering, a minimum of 40 Partnership units at a price of $25,000per unit were required to be sold in order to form the Partnership. Uponmeeting this requirement, the Partnership was formed on December 29, 2005.

 

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ThePartnership registered a total of 240 units of limited partner interests and960 units of general partner interests. The aggregate offering amountregistered was $30,000,000. During the offering period that terminated on April 28,2006, the Partnership sold 923.784 units to investor partners, consisting of182.783 units of limited partner interest and 741.001 units of additionalgeneral partner interest. Reef purchased 48.620 general partner units, equaling5.00% of the total Partnership units sold. The Partnership did not sell theremaining registered units. Total offering proceeds were $24,127,769. Reef alsocontributes 1% of all leasehold, drilling, and completion costs as incurred. AtDecember 31, 2008, Reef had contributed $199,145 in connection with thisobligation.

 

Allunits except those purchased by Reef paid a 15% management fee to Reef to payfor the Partnership organization and offering costs, including salescommissions. These costs totaled $3,464,188, leaving capital contributions of$20,862,726 available for Partnership oil and gas operations. As of December 31,2008, the Partnership had expended $21,375,415 on property acquisitions and$137,516 on general and administrative expenses. Beginning in December 2008,the Partnership began recovery of this $650,205 deficit, and has recovered$20,000 of this deficit through a reduction of Partnership distributions. Theremainder of this deficit will be recovered through future reductions inPartnership distributions.

 
| **ITEM  6.** |   | **SELECTED FINANCIAL DATA** |
|--------------|--------|-----------------------------|

 

Thefollowing table sets forth selected financial data. The selected financial datapresented below has been derived from the audited financial statements of thePartnership.

 
| ** **                                      | ** ** | **Year ended  December  31,** | ** ** | **Year ended  December  31,** | ** ** | **Year ended  December  31,** | ** ** | **Period from  Inception  (December  29, 2005) to  December  31** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                           | ** ** | **2007**                           | ** ** | **2006**                           | ** ** | **2005**                                                                         | ** ** |
|                                            |       |                               |       |                               |       |                               |       |                                                                             |       |
| Oil and gas sales revenue                       |       | $                                  | 2,861,452  |                               | $          | 1,517,970                          |       | $                                                                                | —     |   | $ | — |   |
| Interest income                                 |       | 8,577                              |       | 317,661                            |       | 691,667                            |       | 1,212                                                                            |       |
| Costs and expenses                              |       | (6,839,025                         | )          | (12,187,144                        | )          | (1,894,563                         | )          | (50,475                                                                          | )          |
| Partnership net loss                            |       | (3,968,996                         | )          | (10,351,513                        | )          | (1,202,896                         | )          | (49,263                                                                          | )          |
|                                            |       |                               |       |                               |       |                               |       |                                                                             |       |
| Allocation of net loss:                         |       |                               |       |                               |       |                               |       |                                                                             |       |
| Managing general partner                        |       | (80,234                            | )          | (476,894                           | )          | (12,240                            | )          | (73                                                                              | )          |
| General partner units                           |       | 243,801                            |       | (7,920,794                         | )          | (956,084                           | )          | (38,450                                                                          | )          |
| Limited partner units                           |       | (4,132,563                         | )          | (1,953,825                         | )          | (234,572                           | )          | (10,740                                                                          | )          |
| Net loss per managing partner unit              |       | (1,650.23                          | )          | (9,808.55                          | )          | (251.74                            | )          | (20.58                                                                           | )          |
| Net income (loss) per general partner unit      |       | 329.01                             |       | (10,689.32                         | )          | (1,290.26                          | )          | (729.60                                                                          | )          |
| Net loss per limited partner unit               |       | (4,209.61                          | )          | (10,689.32                         | )          | (1,283.33                          | )          | (719.23                                                                          | )          |
|                                            |       |                               |       |                               |       |                               |       |                                                                             |       |
| Total assets                                    |       | 2,745,502                          |       | 8,620,722                          |       | 21,786,620                         |       | 1,594,304                                                                        |       |
| Distributions to managing general partner       |       | 270,190                            |       | 238,316                            |       | 45,578                             |       | —                                                                           |       |
| Distributions to investor partners              |       | 1,478,610                          |       | 1,304,184                          |       | 249,422                            |       | —                                                                           |       |
| Distributions per general partner unit          |       | 703.38                             |       | 1,411.78                           |       | 270.00                             |       | —                                                                           |       |
| Distributions per limited partner unit          |       | 1,600.61                           |       | 1,411.78                           |       | 270.00                             |       | —                                                                           |       |
| Distributions per managing general partner unit |       | 5,557.18                           |       | 4,901.60                           |       | 937.43                             |       | —                                                                           |       |
|                                            |       |                               |       |                               |       |                               |       |                                                                             |       |
| **Operating Data**                              |       |                               |       |                               |       |                               |       |                                                                             |       |
| Annual sales volume:                            |       |                               |       |                               |       |                               |       |                                                                             |       |
| Gas (MCF)                                       |       | 131,512                            |       | 48,301                             |       | —                             |       | —                                                                           |       |
| Oil (BBL)                                       |       | 16,045                             |       | 14,032                             |       | —                             |       | —                                                                           |       |
|                                                 |            |                                    |            |                                    |            |                                    |            |                                                                                  |            |  |  |  |  |

 

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| ** **           | ** ** | **Year ended  December  31,** | ** ** | **Year ended  December  31,** | ** ** | **Year ended  December  31,** | ** ** | **Period from  Inception  (December  29, 2005) to  December  31** |   |
|----------------------|------------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------------------|--------|
| ** **           | ** ** | **2008**                           | ** ** | **2007**                           | ** ** | **2006**                           | ** ** | **2005**                                                                         |   |
|                 |       |                               |       |                               |       |                               |       |                                                                             |   |
| Average sales price: |       |                               |       |                               |       |                               |       |                                                                             |   |
| Gas (per MCF)        |       | $                                  | 9.66       |                               | $          | 8.59                               |       | $                                                                                | — |   | $ | — |   |
| Oil (per BBL)        |       | $                                  | 99.15      |                               | $          | 78.60                              |       | $                                                                                | — |   | $ | — |   |

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

 

Thefollowing discussion will assist you in understanding the Partnership’sfinancial position, liquidity, and results of operations. The informationshould be read in conjunction with the audited financial statements and notesto financial statements contained herein. The discussion contains historicaland forward-looking information.

 

Fora discussion of risk factors that could impact the Partnership’s financialresults, please see Item 1A of this Annual Report.

 

**CriticalAccounting Policies**

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that can affect thereporting of assets, liabilities, equity, revenues, and expenses. We base ourestimates on historical experience and various other assumptions that arebelieved to be reasonable under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions. We are alsorequired to select among alternative acceptable accounting policies. See Note 2to the financial statements for a complete list of significant accountingpolicies.

 

**Oil and Gas Properties**

 

ThePartnership follows the full cost method of accounting for oil and gasproperties. Under this method, all direct costs and certain indirect costsassociated with acquisition of properties and successful as well asunsuccessful exploration and development activities are capitalized.Depreciation, depletion, and amortization of capitalized oil and gas propertiesand estimated future development costs, excluding unproved properties, arebased on the unit-of-production method using estimated proved reserves.  For these purposes, proved natural gasreserves are converted to equivalent barrels of crude oil at a rate of 6 Mcf to1 Bbl. Net capitalized costs of oil and gas properties, as adjusted for assetretirement obligations, are limited to the lower of unamortized cost or thecost ceiling, defined as the sum of the present value of estimated future netrevenues from proved reserves based on prices in effect at the end of theperiod held constant and discounted at 10 percent, plus the lower of cost orestimated fair value of  unprovedproperties, if any. Pursuant to full cost accounting rules, the Partnershipperforms a ceiling test quarterly as of the balance sheet date on its provedoil and gas properties. Excess capitalized costs are charged to propertyimpairment expense. No gain or loss is recognized upon sale or disposition ofoil and gas properties, unless such a sale would significantly alter the rateof depletion and amortization. During the years ended December 31, 2008,2007 and 2006, the Partnership recognized property impairment expense of provedproperties totaling $4,118,218, $10,739,537 and $1,825,482, respectively.

 

Unprovedproperties consist of undeveloped leasehold interest. Investments in unprovedproperties are not depleted pending determination of the existence of provedreserves. Unproved properties are assessed for impairment quarterly as of thebalance sheet date by considering the primary lease term, the holding period ofthe properties, geologic data obtained relating to the properties, and otherdrilling activity in the immediate area of the properties. Any impairmentresulting from this quarterly assessment is reported as property impairmentexpense in the current period, as appropriate. During the year ended December 31,2008, the Partnership recognized property impairment expense of unprovedproperties totaling $172,447.

 

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The estimate of proved crude oil and natural gas reserves used todetermine property impairment expense, and also utilized in the Partnership’sdisclosures of supplemental information regarding oil and gas producingactivities, including the standardized measure of discounted cash flows, wasprepared by an independent petroleum engineer at December 31, 2008 and2007, utilizing the period end prices and costs as promulgated by the SEC. ThePartnership had no proved reserves at December 31, 2006. Reservoirengineering is a subjective and inexact process of estimating underground accumulationsof crude oil and natural gas that cannot be measured in an exact manner, and isbased upon assumptions that may vary considerably from actual results.Accordingly, reserve estimates may be subject to upward or downwardadjustments. Actual production, revenues and expenditures with respect toreserves will likely vary from estimates, and such variances could be material.

 

The determination of depreciation,depletion and amortization expense recognized in the financial statements isalso dependent upon the estimates of proved oil and natural gas reserves andwill be computed using the units-of-production method based upon this estimateof proved reserves. During the years ended December 31, 2008 and 2007, thePartnership had depreciation, depletion, and amortization expense totaling$1,346,930 and $1,075,372. The Partnership had no productive oil and gasproperties as of December 31, 2006.

 

ThePartnership accounts for its asset retirement obligations in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 143, “Accountingfor Asset Retirement Obligations” (“SFAS No. 143”). Asset retirement costsand liabilities associated with future site restoration and abandonment oflong-lived assets are initially measured at fair value which approximates thecost a third party would incur in performing the tasks necessary to retire suchassets. The fair value is recognized in the financial statements as the presentvalue of expected future cash expenditures for site restoration andabandonment. Subsequent to the initial measurement, the effect of the passageof time on the liability for the net asset retirement obligation (accretionexpense) and the amortization of the asset retirement cost are recognized inthe results of operations. Duringthe years ended December 31, 2008 and 2007, the Partnership recognized$79,341 and $121,062 of asset retirement obligations and additional capitalizedcost in connection with successful wells drilled by the Partnership.

 

**Recognitionof Revenue**

 

The Partnership has entered into salescontracts for disposition of its share of crude oil and natural gas productionfrom productive wells. Revenue is recognized based upon the metered volumesdelivered to those purchasers each month. Any significant over or underbalanced gas positions are disclosed in the financial statements. As of December 31,2008, 2007 and 2006, the Partnership had no material gas imbalance positions.

 

**New Accounting Pronouncements**

 

**Modernization of Oil and GasReporting**

 

In January 2009, theSEC issued revisions to the oil and gas reporting disclosures, “Modernizationof Oil and Gas Reporting; Final Rule” (“the Final Rule”). In addition tochanging the definition and disclosure requirements for oil and gas reserves,the Final Rule changes the requirements for determining quantities of oiland gas reserves. The Final Rule also changes certain accountingrequirements under the full cost method of accounting for oil and gasactivities. The amendments are designed to modernize the requirements for thedetermination of oil and gas reserves, aligning them with current practices andupdating them for changes in technology. The Final Rule is effective forannual reports on Form 10-K for fiscal years ending on or after December 31,2009. The Partnership has not yet determined the impact, if any, on thefinancial statements.

 

**The Hierarchy of GenerallyAccepted Accounting Principles**

 

In May 2008, the FASBissued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (“SFAS 162”). SFAS 162 identifies the sources for accountingprinciples and the framework for selecting the principles to be used inpreparing financial statements of nongovernmental entities that are presentedin conformity with generally accepted accounting principles in the UnitedStates. This Statement became effective in November 2008.

 

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**DisclosuresAbout Derivative Instruments and Hedging Activities**

 

In March 2008,the FASB issued SFAS No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities” (“SFAS 161”). SFAS 161 requires entities that utilizederivative instruments to provide qualitative disclosures about theirobjectives and strategies for using such instruments, as well as any details ofcredit-risk-related contingent features contained within derivatives. ThePartnership does not utilize derivative instruments; therefore, the Partnershipdoes not expect this pronouncement to have any impact on the Partnership’sresults of operations, cash flows or financial position.

 

**Non-controllingInterests in Consolidated Financial Statements**

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements, an amendment of Accounting Research Bulletin No. 51”(“SFAS 160”), which improves the relevance, comparability and transparency ofthe financial information that a reporting entity provides in its consolidatedfinancial statements by establishing accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. The Partnership does not own any subsidiaries, and does not expectthis pronouncement to have any impact on the Partnership’s results ofoperations, cash flows or financial position.

 

**BusinessCombinations**

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS141R”), which replaces SFAS No. 141, “Business Combinations” (“SFAS 141”).SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisitionmethod of accounting (which SFAS 141 called the purchase method) be used forall business combinations. The Partnership has no business combinations inprogress or, at this time, in future plans. The Partnership does not expectthis pronouncement to have any impact on the Partnership’s results ofoperations, cash flows or financial position.

 

**AccountingStandard Fair Value for Financial Assets and Financial Liabilities**

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities the option tomeasure eligible financial instruments at fair value as of specified dates. ThePartnership did not elect fair value as an alternative as provided under SFAS159 for any of its financial assets and liabilities that are not currentlymeasured at fair value.

 

**Overview**

 

Reef Global Energy VII, L.P. is a Nevadalimited partnership formed to acquire, explore, develop, and produce crude oil,natural gas, and natural gas liquids for the benefit of its investor partners.The Partnership’s primary purposes are to generate revenues from the productionof crude oil and natural gas, distribute cash flow to investors, and providetax benefits to investors. The majority of the Partnership’s proceeds have beenused to purchase prospects and drill oil and gas wells upon those prospects.

 

The Partnership raised capital from the saleof Partnership units to investor partners and Reef, and uses those funds forthe purchase of working interests in prospects and for drilling and completionoperations and administrative costs during its drilling phase of operations.The Partnership did not borrow funds during the drilling phase of operations,and interest income and crude oil and natural gas revenues from successful wells,net of expenses, are being distributed monthly to the partners. The Partnershipis allowed to borrow funds in accordance with the Partnership Agreement, orutilize cash flows from successful wells in order to conduct furtherdevelopment upon prospects initially purchased by and drilled on by thePartnership during the drilling phase of operations. The Partnership completedits drilling phase of operations during the first quarter of 2008. ThePartnership currently has no plans to drill additional wells on any Partnershipprospect, or to acquire additional prospects.

 

The Partnership does not operate in any otherindustry segment. The Partnership expended approximately

 

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$1,977,000 for the purchase of workinginterests in six developmental prospects, and expended approximately $701,000for the purchase of working interests in seven exploratory prospects. The Partnershiphas seven prospects in Texas, four in Louisiana, one in Wyoming, and one in NewMexico, all of which are located onshore. The Partnership has drilledtwenty-two developmental and seven exploratory wells on these prospects as of December 31,2008. Three wells were drilled during 2006, twenty-two were drilled during2007, and four were drilled during 2008. The Partnership drilled elevensuccessful developmental wells, all of which are currently productive, andeleven unsuccessful developmental wells. The Partnership drilled one successfulexploratory well and six unsuccessful exploratory wells. The successfulexploratory well has ceased production.

 

Should the Partnership elect to borrow moniesfor additional development activity on its prospects, it will be subject to theinterest rate risk inherent in borrowing activities. The Partnership has nocurrent plans for additional drilling. The Partnership is permitted but is notexpected to engage in commodity futures trading or hedging activities, and thereforeis subject to commodity price risk.   See“Item 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.”

 

**Liquidity and Capital Resources**

 

The Partnership was funded with initial capital contributions totaling$24,127,769. Investor partners purchased 741.001 general partner units and182.783 limited partner units for $23,094,590. Reef purchased 48.620 generalpartner units, or 5% of the total units sold, for $1,033,179. As of December 31,2008, Reef has also contributed $199,145 in connection with its obligation topay 1% of all leasehold, drilling, and completion costs. Organization andoffering costs totaled $3,464,188, leaving capital contributions of $20,862,726available for Partnership activities. The Partnership was formed on December 29,2005, and the last partner was admitted to the Partnership on April 28,2006.

 

The Partnership did not borrow additional funds in accordance withlimitations set forth in the Partnership Agreement during the drilling phase ofoperations. The Partnership expended $21,375,415 on the drilling of 29 wellsand $137,516 on general and administrative expenses during its initial drillingphase of operations. The $650,205 expended in excess of capital raised is beingrecovered from the cash flow from successful wells by reducing cashdistributions to investor partners. At December 31, 2008, $20,000 had beenrecovered.

 

Please see Item 1A of this Annual Report for a list of risk factorsthat could impact the Partnership.

 

The table below summarizes Partnership drilling expenditures as of December 31,2008 by type and classification of well:

 
| ** **          | ** ** | **Leasehold  Costs** | ** ** | **Drilling,  Completion,  and Facilities  Costs** | ** ** | **Total Costs** | ** ** |
|---------------------|------------|----------------------|------------|--------------------------------------------------------|------------|----------------------|------------|
| Developmental wells |       | $                    | 1,976,674  |                                                   | $          | 12,371,504           |       | $ | 14,348,178 |   |
| Exploratory wells   |       | 701,265              |       | 6,325,972                                              |       | 7,027,237            |       |
| Total               |       | $                    | 2,677,939  |                                                   | $          | 18,697,476           |       | $ | 21,375,415 |   |
|                |       |                 |       |                                                   |       |                 |       |
| Successful wells    |       | $                    | 1,558,705  |                                                   | $          | 9,522,864            |       | $ | 11,081,569 |   |
| Unsuccessful wells  |       | 946,787              |       | 9,174,612                                              |       | 10,121,399           |       |
| Unproved properties |       | 172,447              |       | —                                                 |       | 172,447              |       |
| Total               |       | $                    | 2,677,939  |                                                   | $          | 18,697,476           |       | $ | 21,375,415 |   |

 

The Partnership had working capital of ($203,206) at December 31,2008, primarily as a result of expending funds in excess of original capitalcontributions in connection with the twenty-nine wells drilled during thedrilling phase of operations. Expenditures in excess of available capital arebeing deducted from Partnership distributions.

 

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**Results of Operations**

 

**Year ended December 31, 2008 compared to Year Ended December 31,2007**

 

During 2008, the Partnership incurred a net loss of $3,968,996,compared to a net loss of $10,351,513 incurred during 2007. During 2008, the finalsuccessful Partnership well began production operations in May. In addition,the Partnership had a significant discovery which began production operationsduring September 2007. Primarily as a result of these two successfulwells, crude oil and natural gas sales volumes increased during 2008 by 14.3%and 172.3%, respectively. Average prices received from the sale of crude oiland natural gas also increased by 26.1% and 12.1%, respectively. As a result ofthese two factors, the cash flow from crude oil and natural gas sales revenues,less operating expenses and production taxes, increased from $1,285,981 in 2007to $2,182,337 in 2008.

 

Impairment expense totaled $10,937,537 during 2007. During the firsthalf of 2007, the Partnership recorded property impairment expense of$4,424,296 as a result of the drilling of four unsuccessful wells. During thesecond half of 2007, the Partnership drilled one additional unsuccessful well.In addition, the Partnership reduced the estimated reserves it expects to recoverfrom the eight successful Cole Ranch prospect wells located in GlasscockCounty, Texas because peak production from the wells was less than originallyanticipated, leading to an additional $6,315,241 of property impairment expensetaken during the fourth quarter of 2007. In comparison, property impairmentexpense for 2008 totaled $4,290,665. Of this amount, $172,447 was impairment ofunproved property relating to the Partnership’s Sand Dunes prospect, and$4,118,218 was impairment of proved properties. The entire $4,118,218impairment of proved properties resulted from a ceiling test writedown (seeNote 2 to the Partnership’s financial statements). The Partnership’s year-endreserve report utilizes current year end prices and costs to compute estimateddiscounted future net cash flows from successful wells. The base year endprices used in the Partnership’s reserve studies were $44.60 per barrel of oiland $5.71 per MCF of natural gas at December 31, 2008, compared to $89.16per barrel of oil and $7.207 per MCF of natural gas at December 31,2007.  The lower 2008 year-end pricesdirectly affect the estimated economic lives and, therefore, estimated reservesrecoverable from Partnership wells. At December 31, 2008, the estimateddiscounted future net cash flows of the Partnership totaled $2,297,832,compared to $7,199,362 at December 31, 2007. The Partnership recordedproperty impairment expense of proved properties totaling $4,118,218 in orderto reduce the proved property amount shown on the accompanying balance sheet atDecember 31, 2008 to the estimated discounted future net cash flow fromwells at December 31, 2008.

 

As production and sales volumes from the eight Cole Ranch wells havedecreased, operating costs on a barrels of oil equivalent (BOE) basis haverisen, since operating costs tend to increase as a property ages and productiontends to decline. During the year ended December 31, 2008, totalproduction expenses for all wells averaged $17.89 per BOE produced compared to$10.51 per BOE produced during 2007.  Thedecline rate attributable to the eight Cole Ranch wells has slowedsignificantly; however, the Partnership expects that natural declines inproduction will cause 2009 quarterly sales volumes to begin to trend downwardfrom the level achieved during the fourth quarter of 2008, and that operatingcosts per BOE will slowly increase.

 

During 2008, two Partnership wells accounted for 56.5% of Partnershipcrude oil and natural gas sales revenues, and these two wells account for 85.0%of total Partnership reserves at December 31, 2008.

 

General and administrative costs increased from $135,603 in 2007 to$456,589 in 2008 as a result of two primary factors. Reef implemented a newmethod for allocating overhead that takes actual overhead and allocates it basedupon the summation of revenues, expenses, and capital costs incurred. Under theprior method of allocating overhead, not all allocable general andadministrative expenses were charged to the Partnership during 2007. Inaddition, during the fourth quarter expenses were incurred in connection withSarbanes-Oxley compliance and improvement of financial reporting. ThePartnership expects to have continuing costs during 2009 related toSarbanes-Oxley compliance, as the Partnership is required to be Sarbanes-Oxleycompliant by December 31, 2009. Third party costs in connection withimprovement of financial reporting ended during January 2009.  The administrative overhead charge to thePartnership for the year ended December 31, 2008 was $279,926, compared to$57,221 for the year ended December 31, 2007.

 

The rapid decline in crude oil and natural gas prices that occurredduring the fourth quarter of 2008, the impairment of proved properties andunproved properties, and the significant increase in general and administrativecosts incurred during the fourth quarter of 2008 caused the Partnership’s tohave a net loss of $4,689,851 for the fourth 

 

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quarter. RELP and Reef are working to cut overhead costs, and even withcosts in connection with Sarbanes-Oxley compliance, the Partnership expects toincur overall lower general and administrative costs during 2009. Average salesprices during the first quarter of 2009 will continue to decline from fourthquarter 2008 levels. The Partnership expects that prior to depletion expenseand any possible impairment charges it will continue to generate net income.Nonetheless, 2009 results are expected to decline significantly from 2008results.

 

**Year ended December 31, 2007 compared to Year Ended December 31,2006**

 

During 2007, the Partnership incurred a net loss of $10,351,513,compared to a net loss of $1,202,896 incurred during 2006.

 

During 2006, the Partnership drilled three wells, all of which wereunsuccessful. The Partnership had no oil and natural gas revenues fromproductive wells. The Partnership had interest income earned from theshort-term investment of unexpended partner capital of $691,667, offset by$69,081 of general and administrative costs and $1,825,482 of propertyimpairment cost, which resulted in a net loss of $1,202,896.

 

During 2007, the Partnership drilled twelve successful wells, ten ofwhich are productive as of December 31, 2007, one which ceased productionduring 2007, and one which began production operations in May 2008. Thefirst productive well of the Partnership began operations in March 2007.Six wells began production operations during the second quarter of 2007, andfour wells began production operations during the third quarter of 2007. ThePartnership also drilled ten unsuccessful wells, including five wells on itsSand Dunes prospect that were not classified as unsuccessful until 2008.

 

The increase in production expenses on a BOE basis during the fourthquarter of 2007 relates directly to the eight wells on the Partnership’s ColeRanch prospect. Oil and natural gas sales revenues from these eight wellsdeclined by 16.8% during the fourth quarter of 2007 to $499,274, as compared to$599,788 during the third quarter. The Partnership had no comparative oil andnatural gas sales revenue for 2006, as all three wells drilled by thePartnership during 2006 were unsuccessful. Production expenses increased from$82,723 to $96,344 during the fourth quarter. Production expenses totaled$231,989 during the year ended December 31, 2007. There were no comparableexpenses during 2006. The Partnership reduced the estimated reserves it expectsto recover from the Cole Ranch prospect wells in the third quarter of 2007because peak production from the wells was less than originally anticipated.However, this reduction was offset by reserves from new discoveries during thethird quarter, and the Partnership recorded no property impairment expenseduring the third quarter of 2007.  Thedeclining production rates and increasing production expenses during the fourthquarter have led to additional reductions in the estimated recoverable reservesfrom these eight wells. Combined with an unsuccessful development well drilledduring the fourth quarter, these two items have caused the Partnership torecord property impairment expense totaling $6,315,241 during the fourthquarter. The Partnership had earlier recorded property impairment expensetotaling $4,424,296 during the first two quarters of 2007 as a result of fourunsuccessful wells, 

 

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for a total 2007 property impairment expense of $10,739,537. ThePartnership recorded property impairment expense totaling $1,825,482 during2006 because all three wells completed during 2006 were unsuccessful.

 

General and administrative costs totaled $135,603 during 2007 ascompared to $69,081 during 2006. Administrative costs paid to Reef rose from$5,203 to $57,221, accounting for a substantial portion of the increase. Thesecosts were directly related to the Partnership well count increasing from threewells during 2006 to twenty-nine wells during 2007.   Legal, accounting, and printing costsrelated to the Partnership’s required SEC filings rose from $59,792 in 2006 to$74,912 during 2007.

 

**Off-Balance Sheet Arrangements**

 

The Partnership does not participate intransactions that generate relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structure financeor special purpose entities (SPEs), which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes.  As of December 31,2008, 2007 and 2006, the Partnership was not involved in any unconsolidated SPEtransactions or any other off-balance sheet arrangements.

 

**Contractual Obligations Table**

 
| ** **                   | ** ** | **Payment due by period** | ** ** |
|------------------------------|------------|------------------------------------------|------------|
| **Contractual  obligations** | ** ** | **Total**                                | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 years** | ** ** | **More than 5  Years** | ** ** |
| Purchase obligations *       |       | $                                        | 430,096    |   | $ | 360,000 |   | $ | 70,096 |   | — |   | — |   |
|                              |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

* The 15% management fee due Reeffor organization and offering costs, including sales commissions, is payable intwo parts. Reef initially received an amount, not to exceed 13.5%, to recoveractual commissions and organization and offering costs. As of December 31,2008, the Partnership is obligated to pay Reef $430,096 representingthe portion of the management fee in excess of actual commissions andorganization and offering costs, from the oil and gas cash flows available forpartner distributions at a rate not to exceed $1 million per year. ThePartnership is paying this balance at a rate of $30,000 per month beginning in February 2008.

** **
| **ITEM 7A.** | ** ** | **QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK** |
|--------------|------------|---------------------------------------------------------------|

 

**Interest Rate Risk**

 

The Partnership has not borrowed any funds to date. The PartnershipAgreement allows borrowings from banks or other financial sources of up to 25%of the aggregate capital contributions to the Partnership without investorapproval, provided the lender agrees it will have no recourse againstindividual investor partners, and allows borrowings in excess of 25% of theaggregate capital contributions to the Partnership with the consent of investorpartners. Should the Partnership elect to borrow monies for additional drillingactivity on Partnership properties, it will be subject to the interest raterisk inherent in borrowing activities. Changes in interest rates couldsignificantly affect the Partnership’s results of operations and the amount ofnet cash flow available for partner distributions. Also, to the extent thatchanges in interest rates affect general economic conditions, the Partnershipwill be affected by such changes.

 

**Commodity Price Risk**

 

The Partnership has not and does not expect to engage in commodityfutures trading or hedging activities or enter into derivative financialinstrument transactions for trading or other speculative purposes.  The Partnership sells a vast majority of itsproduction from successful oil and gas wells on a month-to-month basis atcurrent spot market prices. Accordingly, the Partnership is at risk for thevolatility in commodity prices inherent in the oil and gas industry, and thelevel of commodity prices has a significant impact on the Partnership’s resultsof operations.

 

Assuming the production levels we attained during the year ended December 31,2008, a 10% change in the price received for our crude oil would have had anapproximate $159,000 impact on our crude oil revenues, and a 10% change in theprice received for our natural gas would have had an approximate $127,000impact on our natural gas 

 

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revenues.

** **
| **ITEM 8.** | ** ** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** |
|-------------|------------|-------------------------------------------------|

** **

The reports of our independent registered public accounting firm, andthe Partnership’s financial statements, related notes, and supplementary dataare set forth in a separate section to this Annual Report, beginning on page F-1.

** **
| **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 managing generalpartner of the Partnership, Reef maintains a system of controls and proceduresdesigned to provide reasonable assurance as to the reliability of the financialstatements and other disclosures included in this Annual Report, as well as tosafeguard assets from unauthorized use or disposition. The Partnership, underthe supervision and with participation of its management, including theprincipal executive officer and principal financial officer of the Partnership’smanaging general partner, Reef Oil & Gas Partners, L.P., evaluated theeffectiveness of its “disclosure controls and procedures” as such term isdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934,as amended (the “Exchange Act”), as of the end of the period covered by thisAnnual Report. Based on that evaluation, the principal executive officer andprincipal financial officer of our managing general partner have concluded thatthe Partnership’s disclosure controls and procedures are effective to ensurethat information required to be disclosed by the Partnership in reports that itfiles or submits under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified in Securities and ExchangeCommission rules and forms, and includes controls and procedures designedto ensure that information required to be disclosed by us in such reports is accumulatedand communicated to our management, including the principal executive officerand principal financial officer of our managing general partner, as appropriateto allow timely decisions regarding financial disclosure.

 

**Management Report on Internal Control OverFinancial Reporting**

 

Management ofthe Partnership is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in ExchangeAct Rule 13a-15(f). Our management conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in Internal Control - Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on this evaluationunder the framework in Internal Control – Integrated Framework, management ofthe Partnership concluded that the Partnership’s internal control overfinancial reporting was effective as of December 31, 2008.

 

Thisannual report does not include an attestation report of the Partnership’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by thePartnership’s registered public accounting firm pursuant to temporary rules ofthe SEC that permit the Partnership to provide only management’s report in thisannual report.

 

**Changes in Internal Controls**

 

Therehave not been any changes in the Partnership’s internal controls over financialreporting during the fiscal quarter ended December 31, 2008 that havematerially affected, or are reasonably likely to materially affect, thePartnership’s internal control over financial reporting.

**** ****
| **ITEM 9B.** | ** ** | **OTHER INFORMATION** |
|--------------|------------|-----------------------|

**** ****

****None.****

 

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**PART III**

** **
| **ITEM 10.** | ** ** | **DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE** |
|--------------|------------|-------------------------------------------------------------|

** **

The Partnership has no directors or executive officers. Its managinggeneral partner is 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             |       | 52      |       | Manager of Reef Oil & Gas Partners GP, LLC;  Chief Executive Officer of RELP |
| H. Walt Dunagin                |       | 51      |       | Vice President – Land Manager of RELP                                            |
| Lawrence J. Harrison, Jr. |       | 58      |       | Vice President – Business Development of RELP                                    |
| Byron H. Dean                  |       | 59      |       | Manager of Acquisitions and Divestitures of RELP                                      |
| Daniel C. Sibley               |       | 57      |       | General Counsel of RELP                                                               |
| L. Mark Price                  |       | 46      |       | Chief Financial Officer of Reef and of RELP                                           |
| David M. Tierney               |       | 56      |       | Chief Accounting Officer – Public Partnerships                                   |

 

**MichaelJ. Mauceli**is the Manager and a member of Reef Oil & Gas Partners, GP, LLC, whichis the general partner of Reef, as well as the Chief Executive Officer of RELP.Mr. Mauceli has been the principal executive officer of Reef since itsformation in February 1999. He has served in this position with RELP sinceJanuary 2006 and has served in this position with its predecessor entity,OREI, since 1987.  Mr. Mauceliattended the University of Mississippi where he majored in business managementand marketing as well as the University of Houston where he received hisCommercial Real Estate License. He entered the oil and natural gas business in1976 when he joined Tenneco Oil & Gas Company.  Mr. Mauceli moved to Dallas in 1979,where he was independently employed by several exploration and developmentfirms in planning exploration and marketing feasibility of privately sponsoreddrilling programs.

 

**H.Walt Dunagin**is Vice President - Land Manager of RELP. He has held this position since January 2006and has served in this position with its predecessor entity, OREI, since 1990.He is responsible for all contracts with other industry partners and all landactivities required for exploration, development and production, includinglease acquisition, title opinions, curative, permitting, unitization,rights-of-way and environmental issues. A graduate of the University ofMississippi in 1969 with a B.B.A. degree, Walt’s career has also involved landwork for ExxonMobil, ChevronTexaco, UNOCAL, Santa Fe Energy and Oryx Energy(now Kerr-McGee). Walt is a member of the Dallas Association of PetroleumLandmen and the Association of International Petroleum Negotiators.

 

**LawrenceJ. Harrison, Jr.**is Vice President – BusinessDevelopment of RELP. He joined RELP in October 2006 following fourteenyears with The Oil & Gas Asset Clearinghouse, a leading acquisitionand divestiture advisory firm. Mr. Harrison has served as an independentlandman verifying title ownership and acquiring leases and other agreements insupport of clients drilling programs. He worked for Mobil Oil Corporation andseveral other companies before joining The Clearinghouse. Mr. Harrison isa 1972 graduate of the University of Southern Mississippi with a Bachelor of Sciencedegree in Communications. Mr. Harrison is a past president of the HoustonAssociation of Professional Landmen and a past member of the AmericanAssociation of Professional Landmen Executive Committee. He is currently aDirector of the Louisiana Oil & Gas Association (LOGA) and a member ofthe ADAM Energy Forum and the Independent Petroleum Association of America.

 

**ByronH. (Howard) Dean**is Manager – Acquisitions and Divestitures of RELP and isresponsible for solicitation and technical evaluation of acquisition anddevelopment opportunities for Reef. A registered petroleum engineer, Mr. Deanhas over 30 years of industry experience with oil and natural gas operationsand reservoir engineering, both domestic onshore and offshore. Prior to joiningRELP, Mr. Dean was Senior Petroleum Engineer and Acquisition andDivestiture Specialist for PLS, Inc. and Noble Royalties, Inc. He isa 1974 graduate of the University of Texas at Arlington with a Bachelor ofScience degree in Civil Engineering. Mr. Dean is an active 

 

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member of theSociety of Petroleum Engineers, the Society of Petroleum Evaluation Engineers,ADAM Energy Forum, and Texas Independent Producer and Royalty OwnersAssociation.

 

**DanielC. Sibley**is General Counsel of RELP. Mr. Sibley wasappointed General Counsel of RELP on January 14, 2009. Previously, Mr. Sibleyserved as Chief Financial Officer of Reef and RELP. Mr. Sibley was employedas a Certified Public Accountant with Grant Thornton from 1977 to 1980. From1980 to 1994, he was involved in the private practice of law. He received aB.B.A. in accounting from the University of North Texas in 1973, a law degree(J.D.) from the University of Texas in 1977, and a Master of Laws-Taxationdegree (L.L.M.) from Southern Methodist University in 1984.

 

**L.Mark Price**is Chief Financial Officer of Reef and RELP. Mr. Price was appointed to this position January 9, 2009.   Mr. Price has over twenty-two years ofexperience working in the oil and gas and manufacturing industries. Hepreviously served as the Chief Financial Officer for The Terramar Group, Inc.,an international oil and gas and manufacturing company, since 2007. From 2004to 2007, he served as the Chief Accounting Officer for Lancer Corporation, aninternational manufacturing company. Additionally, Mr. Price served as theChief Financial Officer of Nunn Manufacturing, and for PCLC Asset Managementafter its acquisition of Nunn Manufacturing in 1998, from 1996 until 2004. Mr. Pricereceived his BBA in accounting and finance from Texas Tech University and is aTexas Certified Public Accountant.

 

**DavidM. Tierney**is****ChiefAccounting Officer – Public Partnerships. Mr. Tierney was appointed tothis position in July 2008. Mr. Tierney has been employed by RELP since January 2006 and waspreviously with its predecessor entity, OREI, since March 2001.  Mr. Tierney was previously theController of the Reef Global Energy Ventures and Reef Global Energy VenturesII partnerships. Mr. Tierney received a Bachelor’s degree from DavidsonCollege in 1974, a Masters of Business Administration from Tulane University in1976, and is a Texas Certified Public Accountant. Mr. Tierney has workedin public accounting, and has worked in the oil and gas industry since 1979.From 1992 through 2000 he served as controller/treasurer of an independent oiland gas exploration company.

 

**Audit Committee and Nominating Committee**

 

Because the Partnership has no directors, itdoes not have an audit committee, an audit committee financial expert or anominating committee.

 

**Code of Ethics**

 

Because thePartnership has no 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 & Gas Partners, L.P., 1901 N. Central Expressway, Suite 300,Richardson, Texas 75080, Attention: Daniel C. Sibley.

** **
| **ITEM 11.** | ** ** | **EXECUTIVE COMPENSATION** |
|--------------|------------|----------------------------|

** **

The following table summarizes the items of compensation to be receivedby Reef as the 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 |

 

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Reef’s “partnership interest,” as described in the table above, refersonly to its interest as managing general partner and does not include theinterest Reef has as the result of its purchase of units in the Partnership, orthe 1% interest Reef has as the result of its payment of 1% of all leasehold,drilling, and completion costs.  Reefpurchased 5.00% of the outstanding Partnership units. Reef received a 10%interest as managing general partner of the Partnership and a 1% interest as aresult of Reef’s payment of 1% of all leasehold, drilling, and completion costsfor 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 is entitled to receive a management fee equal to 15% of thePartnership subscriptions exclusive of the units purchased by Reef. From thisamount Reef pays all of the Partnership’s organization and offering costs,including sales commissions. The management fee is payable to Reef in twoparts. Reef initially received an amount not to exceed 13.5% to cover actualsales commissions and actual organization and offering costs. The remainder ofthe management fee is paid to Reef from the net cash flow available for partnerdistributions, at a rate not to exceed $1 million per year. The totalmanagement fee owed Reef is $3,464,188. The Partnership recorded $3,414,188 ofthis amount as offering costs, and $50,000 as organization costs. Of thisamount, $2,689,092 has been paid to Reef to cover actual sales commissions andorganization and offering costs, $345,000 has been paid to Reef from net cashflow, and $430,096 has been accrued at December 31, 2008 as an accountpayable to be paid to Reef from future net cash flows of the Partnership. ThePartnership is currently reimbursing these fees to Reef at a rate of $30,000per month.

 

Reef is reimbursed for direct costs and all documented out-of-pocketexpenses incurred on behalf of the Partnership, including administrative costs.During the years ended December 31, 2008, 2007 and 2006, the Partnershipreimbursed Reef $58,114, $945,521 and $217,183, respectively, for technicalservices costs which have been capitalized as project costs, and $279,926,$57,221 and $5,203, respectively, for administrative costs included as generaland administrative expenses.

 

OREI and RELP receive operator fees during the drilling and productionphase of each well at the competitive rate in the geographical area where thewell is located.  These fees are chargedas a monthly fee per well as agreed to in an operating agreement signed by thePartnership and participating third party working interest owners in the well.During the years ended December 31, 2008, 2007 and 2006, the Partnershippaid operator fees totaling $40,879, $51,700, and $0 to RELP and OREI. RELP(previously OREI) serves as operator for five Partnership prospects upon whichnine successful and ten unsuccessful wells have been drilled, including theeight Sand Dunes wells classified as unsucccessful that have not yet beenplugged and abandoned.

 

**Compensation Committee**

 

Because the Partnership has no directors, it does not have acompensation committee.

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

 

Thefollowing table sets forth information as of December 31, 2008 concerningall persons known by Reef to own beneficially more than 5% of the interests inthe Partnership. Unless expressly indicated otherwise, each partner exercisessole voting and investment 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 & Gas Partners, L.P.’s address is 1901 N.Central Expressway, Suite 300, Richardson, Texas 75080.

 

25

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The managing general partner received a 10% interest in the Partnershipas compensation for forming the Partnership, and also holds a 1% interest inthe Partnership as a result of paying 1% of all leasehold, drilling andcompletion costs. In addition to this 11% interest not represented by Partnershipunits, Reef purchased 5% of the 972.404 Partnership units and, therefore, holds5% of the 89% interest in the Partnership (4.45%) held by the unit holders.

 
| **ITEM 13.** | ** ** | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE** |
|--------------|------------|--------------------------------------------------------------------------------|

 

ThePartnership is managed by a managing general partner and does not havedirectors. Reef is the managing general partner of the Partnership.  Along with its affiliates, Reef has enteredinto agreements with, and received compensation from, the Partnership forservices it performs for the Partnership. See “Item 11 - EXECUTIVECOMPENSATION.”

** **
| **ITEM 14.** | ** ** | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES** |
|--------------|------------|---------------------------------------------|

** **

The Partnership incurred professional audit and tax fees from itsprincipal auditor BDO Seidman, LLP, as disclosed in the table below:

 
| ** **         | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit fees         |       | $        | 48,593     |     | $          | 43,561 |   |
| Audit related fees |       | —   |       | —   |       |
| Tax fees           |       | 3,701    |       | 866      |       |
| All other fees     |       | —   |       | —   |       |
|                    |            |          |            |          |            |  |  |

 

Tax fees are for review of the Partnership’s tax return.

 

As indicated in Item 10 above, the Partnership does not have anydirectors or an audit committee.

 

**PART IV**

 
| **ITEM 15.** | ** ** | **EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES** |
|--------------|------------|-------------------------------------------------|

 
| (a)    | 1.  Financial Statements                                 |   |
|--------|----------------------------------------------------------|--------|
|   |                                                     |   |
|   | Report of Independent Registered Public Accounting  Firm | F-1    |
|   | Balance  Sheets                                          | F-2    |
|   | Statements  of Operations                                | F-3    |
|   | Statements of Partnership Equity                         | F-4    |
|   | Statements  of Cash Flows                                | F-5    |
|   | Notes to Financial Statements                            | F-6    |
|   |                                                     |   |
|   | 2.  Financial Statement Schedules                        | None   |
|   |                                                     |   |
|   | 3.  Exhibits                                             |   |

 

A list of the exhibits filed or furnished with this Annual Report (orincorporated by reference to exhibits previously filed or furnished by us) isprovided in the Exhibit Index in this Annual Report.  Those exhibits incorporated by referenceherein are indicated as such by the information supplied in the parentheticalthereafter. Otherwise, the exhibits are filed herewith.

 

26

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this AnnualReport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Date:  April 15, 2009 | **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)*** |

 

27

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Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**          | ** ** | **Title**                                                                                                            | ** ** | **Date**            |
|------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|---------------------|
|                   |       |                                                                                                                 |       |                |
| /s/ Michael J. Mauceli |       | Manager and Member of the general partner of Reef Oil & Gas  Partners, L.P. (*Principal Executive Officer*) |       | April 15, 2009 |
| Michael J. Mauceli     |       |
|                   |       |                                                                                                                 |       |                |
| /s/ David M. Tierney   |       | Chief Accounting Officer-Public Partnerships Reef Exploration, L.P. (*Principal Financial and Accounting Officer*)   |       | April 15, 2009 |
| David M. Tierney       |       |

 

28

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Reef Global Energy VII, L.P.

 

Financial Statements

 

Years Ended December 31,2008, 2007, and 2006

 

**Contents**

 
| Report of Independent Registered Public  Accounting Firm | F-1    |
|----------------------------------------------------------|--------|
|                                                     |   |
| Audited Financial Statements                             |   |
|                                                     |   |
| Balance sheets                                           | F-2    |
| Statements of operations                                 | F-3    |
| Statements of  partnership equity                        | F-4    |
| Statements of cash flows                                 | F-5    |
| Notes to  financial statements                           | F-6    |

 

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Table of Contents

 

Report ofIndependent Registered Public Accounting Firm

 

The Partners

Reef Global Energy VII, L.P.

 

We have audited the accompanying balance sheets of Reef Global EnergyVII, L.P. as of December 31, 2008 and 2007, and the related statements ofoperations, partnership equity, and cash flows for the years ended December 31,2008, 2007, and 2006. These financial statements are the responsibility of thePartnership’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Partnership isnot required 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 overfinancial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Reef Global EnergyVII, L.P. at December 31, 2008 and 2007, and the results of its operationsand its cash flows for the years ended December 31, 2008, 2007, and 2006,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

BDO Seidman, LLP

 

 

Dallas, Texas

April 14, 2009

 

F-1

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Table of Contents

 

**Reef Global Energy VII, L.P.**

**BalanceSheets**

 
| **December 31,**                                                           | ** ** | **2008**      | ** **    | **2007**      | ** ** |
|---------------------------------------------------------------------------------|------------|---------------|---------------|---------------|------------|
|                                                                            |       |          |          |          |       |
| **Assets**                                                                      |       |          |          |          |       |
|                                                                            |       |          |          |          |       |
| **Current assets:**                                                             |       |          |          |          |       |
| Cash and cash equivalents                                                       | ** ** | **$**         | 444,655       | ** **    | **$**      | 1,261,615 | ** ** |
| Accounts receivable                                                             |       | 3,015         |          | —        |       |
| Accounts receivable from affiliates                                             |       | —        |          | 10,969        |       |
| **Total current assets**                                                        | ** ** | **447,670**   | ** **    | **1,272,584** | ** ** |
| ** **                                                                      | ** ** | ** **    | ** **    | ** **    | ** ** |
| **Oil and gas properties, full cost method of  accounting:**                    |       |          |          |          |       |
| Proved properties, net of accumulated  depletion of $19,105,539 and $13,640,391 |       | 2,297,832     |          | 7,175,691     |       |
| Unproved properties                                                             |       | —        |          | 172,447       |       |
| **Net oil and gas properties**                                                  | ** ** | **2,297,832** | ** **    | **7,348,138** | ** ** |
|                                                                            |       |          |          |          |       |
| **Total assets**                                                                | ** ** | $             | **2,745,502** | ** **    | $          | **8,620,722** | ** ** |
|                                                                            |       |          |          |          |       |
| **Liabilities and partnership equity**                                          |       |          |          |          |       |
|                                                                            |       |          |          |          |       |
| **Current liabilities:**                                                        |       |          |          |          |       |
| Accounts payable                                                                |       | 537           |          | —        |       |
| Accounts payable to affiliates                                                  |       | 650,339       |          | 598,728       |       |
| **Total current liabilities**                                                   | ** ** | **650,876**   | ** **    | **598,728**   | ** ** |
|                                                                            |       |          |          |          |       |
| **Long-term liabilities:**                                                      |       |          |          |          |       |
| Asset retirement obligation                                                     |       | 270,772       |          | 125,705       |       |
| Accounts payable to affiliates                                                  |       | 70,096        |          | 430,096       |       |
| **Total long-term liabilities**                                                 | ** ** | **340,868**   | ** **    | **555,801**   | ** ** |
|                                                                            |       |          |          |          |       |
| **Commitments and Contingencies (Note 5)**                                      |       |          |          |          |       |
|                                                                            |       |          |          |          |       |
| **Partnership equity**                                                          |       |          |          |          |       |
| General partners                                                                |       | —        |          | 5,624,838     |       |
| Limited partners                                                                |       | 1,644,959     |          | 1,387,493     |       |
| Managing general partner                                                        |       | 108,799       |          | 453,862       |       |
| **Partnership equity**                                                          | ** ** | **1,753,758** | ** **    | **7,466,193** | ** ** |
| ** **                                                                      | ** ** | ** **    | ** **    | ** **    | ** ** |
| **Total liabilities and partnership equity**                                    | ** ** | **$**         | **2,745,502** | ** **    | **$**      | **8,620,722** | ** ** |

 

*See accompanying notes to financial statements.*

 

F-2

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Table of Contents

 

**Reef Global Energy VII, L.P.**

**Statementsof Operations**

 
| ** **                                 | ** ** | **2008**       | ** **     | **2007**        | ** ** | **2006**        | ** ** |
|--------------------------------------------|------------|----------------|----------------|-----------------|------------|-----------------|------------|
| ** **                                 | ** ** | ** **     | ** **     | ** **      | ** ** | ** **      | ** ** |
| **Revenues:**                              | ** ** | **$**          | **2,861,452**  | ** **      | **$**      | **1,517,970**   | ** ** | **$** | **—** | ** ** |
| ** **                                 | ** ** | ** **     | ** **     | ** **      | ** ** | ** **      | ** ** |
| **Costs and expenses:**                    | ** ** | ** **     | ** **     | ** **      | ** ** | ** **      | ** ** |
| Lease operating expenses                   |       | 503,416        |           | 149,307         |       | —          |       |
| Production taxes                           |       | 175,699        |           | 82,682          |       | —          |       |
| Depreciation, depletion and amortization   |       | 1,346,930      |           | 1,075,372       |       | —          |       |
| Property impairment                        |       | 4,290,665      |           | 10,739,537      |       | 1,825,482       |       |
| Accretion of asset retirement obligation   |       | 65,726         |           | 4,643           |       | —          |       |
| General and administrative                 |       | 456,589        |           | 135,603         |       | 69,081          |       |
| **Total costs and expenses**               | ** ** | **6,839,025**  | ** **     | **12,187,144**  | ** ** | **1,894,563**   | ** ** |
| ** **                                 | ** ** | ** **     | ** **     | ** **      | ** ** | ** **      | ** ** |
| **Loss from operations**                   | ** ** | **(3,977,573** | **)**          | **(10,669,174** | **)**      | **(1,894,563**  | **)**      |
| ** **                                 | ** ** | ** **     | ** **     | ** **      | ** ** | ** **      | ** ** |
| Interest income                            |       | 8,577          |           | 317,661         |       | 691,667         |       |
| ** **                                 | ** ** | ** **     | ** **     | ** **      | ** ** | ** **      | ** ** |
| **Net loss**                               | ** ** | **$**          | **(3,968,996** | **)**           | **$**      | **(10,351,513** | **)**      | **$** | **(1,202,896** | **)** |
| ** **                                 | ** ** | ** **     | ** **     | ** **      | ** ** | ** **      | ** ** |
| Net income (loss) per general partner unit | ** ** | **$**          | **329.01**     | ** **      | **$**      | **(10,689.32**  | **)**      | **$** | **(1,290.26** | **)** |
| Net loss per limited partner unit          | ** ** | **$**          | **(4,209.61**  | **)**           | **$**      | **(10,689.32**  | **)**      | **$** | **(1,283.33** | **)** |
| Net loss per managing general partner unit | ** ** | **$**          | **(1,650.23**  | **)**           | **$**      | **(9,808.55**   | **)**      | **$** | **(251.74** | **)** |

 

*See accompanying notes to financial statements.*

 

F-3

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Tableof Contents

 

**Reef Global Energy VII, L.P.**

**Statementsof Partnership Equity**

** **
| ** **                                                               | ** ** | **General partners** | ** ** | **Limited partners** | ** ** | **Managing general  partner** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                                                               | ** ** | **Units**                 | ** ** | **Amount**                | ** ** | **Units**                          | ** ** | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** |
| 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 offering  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 |   |   |   |   |   |
|                                                                     |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| 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 |   |
| Partner contributions                                                    |       | —                    |       | —                    |       | —                             |       | —     |       | — |   | 144,544 |   | — |   | 144,544 |   |
| Partner distributions                                                    |       | —                    |       | (1,046,134                | )          | —                             |       | (258,050   | )          | — |   | (238,316 | ) | — |   | (1,542,500 | ) |
| Net loss                                                                 |       | —                    |       | (7,920,793                | )          | —                             |       | (1,953,826 | )          | — |   | (476,894 | ) | — |   | (10,351,513 | ) |
| Balance at December 31, 2007                                        |       | 741.001                   |       | 5,624,838                 |       | 182.783                            |       | 1,387,493  |       | 48.620 |   | 453,862 |   | 972.404 |   | 7,466,193 |   |
|                                                                     |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Distribution amount per partnership unit                                 |       |                      |       | $                         | 1,411.78   |                               |       |       | $          | 1,411.78 |   |   |   | $ | 4,901.60 |   |   |   |   |   |
|                                                                     |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2007                                        |       | 741.001                   |       | 5,624,838                 |       | 182.783                            |       | 1,387,493  |       | 48.620 |   | 453,862 |   | 972.404 |   | 7,466,193 |   |
| Partner contributions                                                    |       | —                    |       | —                    |       | —                             |       | —     |       | — |   | 5,361 |   | — |   | 5,361 |   |
| Partner distributions                                                    |       | —                    |       | (521,202                  | )          | —                             |       | (957,408   | )          | — |   | (270,190 | ) | — |   | (1,748,800 | ) |
| Net income (loss)                                                        |       | —                    |       | 243,801                   |       | —                             |       | (4,132,563 | )          | — |   | (80,234 | ) | — |   | (3,968,996 | ) |
| Conversion of general partner units into  limited partner units (Note 1) |       | (741.001                  | )          | (5,347,437                | )          | 741.001                            |       | 5,347,437  |       | — |   | — |   | — |   | — |   |
| Balance at December 31, 2008                                        |       | —                    |       | $                         | —     |                               | 923.784    |       | $          | 1,644,959 |   | 48.620 |   | $ | 108,799 |   | 972.404 |   | $ | 1,753,758 |   |
|                                                                     |       |                      |       |                      |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Distribution amount per partnership unit                                 |       |                      |       | $                         | 703.38     |                               |       |       | $          | 1,600.61 |   |   |   | $ | 5,557.18 |   |   |   |   |   |

 

*See accompanying notes to financial statements.*

 

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**Tableof Contents**

** **

**Reef Global Energy VII, L.P.**

**Statementsof Cash Flows**

 
| ** **                                                                       | ** ** | **2008**       | ** **  | **2007**        | ** ** | **2006**       | ** ** |
|----------------------------------------------------------------------------------|------------|----------------|-------------|-----------------|------------|----------------|------------|
| **Operating Activities**                                                         |       |           |        |            |       |           |       |
| Net loss                                                                         |       | $              | (3,968,996  | )               | $          | (10,351,513    | )          | $ | (1,202,896 | ) |
| Adjustments for non-cash transactions:                                           |       |           |        |            |       |           |       |
| Depreciation, depletion and amortization                                         |       | 1,346,930      |        | 1,075,372       |       | —         |       |
| Property impairment                                                              |       | 4,290,665      |        | 10,739,537      |       | 1,825,482      |       |
| Accretion of asset retirement obligation                                         |       | 65,726         |        | 4,643           |       | —         |       |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |           |        |            |       |           |       |
| Changes in operating assets and  liabilities:                                    |       |           |        |            |       |           |       |
| Accounts receivable                                                              |       | (3,015         | )           | —          |       | 1,177          |       |
| Accounts payable                                                                 |       | 537            |        | —          |       | (475           | )          |
| Accounts payable to affiliates                                                   |       | 246,646        |        | 21,118          |       | (80,263        | )          |
| **Net cash provided by operating activities**                                    | ** ** | **1,978,493**  | ** **  | **1,489,157**   | ** ** | **543,025**    | ** ** |
| ** **                                                                       | ** ** | ** **     | ** **  | ** **      | ** ** | ** **     | ** ** |
| **Investing Activities**                                                         | ** ** | ** **     | ** **  | ** **      | ** ** | ** **     | ** ** |
| Property acquisition and development                                             |       | (732,983       | )           | (13,162,379     | )          | (7,457,478     | )          |
| **Net cash used in investing activities**                                        | ** ** | **(732,983**   | **)**       | **(13,162,379** | **)**      | **(7,457,478** | **)**      |
| ** **                                                                       | ** ** | ** **     | ** **  | ** **      | ** ** | ** **     | ** ** |
| **Financing Activities**                                                         | ** ** | ** **     | ** **  | ** **      | ** ** | ** **     | ** ** |
| Partner capital contributions                                                    |       | 16,330         |        | 174,012         |       | 22,445,763     |       |
| Offering costs                                                                   |       | (330,000       | )           | (268,014        | )          | (2,182,457     | )          |
| Partner distributions                                                            |       | (1,748,800     | )           | (1,542,500      | )          | (295,000       | )          |
| **Net cash provided by (used in) financing  activities**                         | ** ** | **(2,062,470** | **)**       | **(1,636,502**  | **)**      | **19,968,306** | ** ** |
| ** **                                                                       | ** ** | ** **     | ** **  | ** **      | ** ** | ** **     | ** ** |
| **Net increase (decrease) in cash and cash  equivalents**                        | ** ** | **(816,960**   | **)**       | **(13,309,724** | **)**      | **13,053,853** | ** ** |
| Cash and cash equivalents at beginning of  period                                |       | 1,261,615      |        | 14,571,339      |       | 1,517,486      |       |
| **Cash and cash equivalents at end of period**                                   | ** ** | **$**          | **444,655** | ** **      | **$**      | **1,261,615**  | ** ** | **$** | **14,571,339** | ** ** |
| ** **                                                                       | ** ** | ** **     | ** **  | ** **      | ** ** | ** **     | ** ** |
| **Non-cash investing transactions**                                              |       |           |        |            |       |           |       |
| Property additions included in accounts  payable to affiliates                   | ** ** | **$**          | 22,575      |            | $          | 247,610        |       | $ | 1,542,848 |   |
| Property additions and asset retirement  obligation                              | ** ** | **$**          | 79,341      |            | $          | 121,062        |       | $ | — |   |
| **Non-cash financing transactions:**                                             | ** ** | ** **     | ** **  | ** **      | ** ** | ** **     | ** ** |
| Managing partner contributions included in  accounts receivable from affiliates  | ** ** | **$**          | —      |            | $          | 10,969         |       | $ | 40,437 |   |
| Offering costs included in accounts payable  to affiliates                       | ** ** | **$**          | 360,000     |            | $          | 330,000        |       | $ | — |   |
| Offering costs included in non-current  accounts payable to affiliates           | ** ** | **$**          | 70,096      |            | $          | 430,096        |       | $ | 1,028,110 |   |

 

*See accompanying notes to financial statements.*

 

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Reef Global EnergyVII, L.P.

Notes to Financial Statements

December 31, 2008

 

**1. Organization and Basis of Presentation**

 

Reef Global Energy VII, L.P. (the “Partnership”) is the second in aseries of four Nevada limited partnerships comprising a program called ReefGlobal Energy Ventures II (the “Program”), pursuant to an S-1 RegistrationStatement declared effective by the Securities and Exchange Commission (the “SEC”)on July 7, 2005. In order to be formed, each partnership was required tosell a minimum of 40 partnership units at $25,000 per unit, including unitspurchased by the managing general partner. Each partnership formed as a part ofthe Program offered a minimum of 1,000 and a maximum of 2,000 units for sale.The Program was authorized to sell up to 1,600 limited partner units and 6,400general partner units during the period beginning July 8, 2005 through July 7,2007. The Partnership offered 1,200 units for sale ($30,000,000); consisting ofup to 240 limited partner units and up to 960 general partner units. Investorfunds were held in escrow and were subject to reimbursement with interest ifthe minimum number of units was not sold. The Program filed a prospectussupplement with the SEC on November 15, 2005 describing the Partnership,and commenced offering units in the Partnership. Upon reaching the minimumsubscription level, the Partnership was formed on December 29, 2005. ThePartnership offering closed April 28, 2006, with sales to outsideinvestors totaling 741.001 general partner units and 182.783 limited partnerunits, and sales to the managing general partner totaling 48.620 generalpartner units.

 

The Partnership is a Nevada limited partnership formed under the NevadaUniform Limited Partnership Act. Reef Oil & Gas Partners, L.P. (“Reef”)serves as the Partnership’s managing general partner. Partnership interests areheld by the managing general partner and investor partners who are general andlimited partners (“investor partners”). The managing general partner received a10% interest in the Partnership as compensation for forming the Partnership,and also 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 purchased working interests in exploratoryand developmental drilling prospects and drilled oil and gas wells locatedonshore in the continental United States. Other partnerships formed as a partof this Program, as well as other partnerships managed by Reef also owninterests in some of the prospects purchased by this Partnership. In instanceswhere Reef-affiliated entities own a majority working interest in a prospect,wells drilled on that prospect may be operated by OREI, Inc. (“OREI”) orReef Exploration, L.P. (“RELP”), affiliates of the managing general partner.

 

Pursuant to the Partnership Agreement of the Partnership, all generalpartner units held by investors other than the managing general partner wereconverted into limited partner units. This conversion of general partner unitsinto limited partner units occurred during the 3rd quarter of 2008. The general partner equity atJune 30, 2008 was transferred to limited partner equity, and all incomeand expense items subsequent to the second quarter of 2008 have been allocatedbetween the managing general partner and the limited partners.

 

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Reef Global Energy VII, L.P.

Notes to Financial Statements (continued)

 

Under the terms of the partnership agreement, certain income andexpense items are allocated differently between the managing general partnerand the investor partners. Allocations of income and expense to the managinggeneral partner and investor partner are made quarterly based upon the numberand type of partnership units held at the end of the quarter.

 

Organization and offering costs are allocated 100% to investorpartners, as the managing general partner purchases its units net of the 15%fee for organization and offering costs. Monthly cash distributions to partnersare based upon the number and type of partnership units held at the close ofthe prior month.  Cash distributions topartners of the net cash flow from interest income and crude oil and naturalgas sales revenues, less operating, general and administrative, and other costsare distributed 15.45% to the managing general partner (based upon the 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**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom these estimates.

 

**Cash and Cash Equivalents**

 

The Partnership considers all highly liquid investments with maturitydates of no more than three months from the purchase date to be cashequivalents. Cash and cash equivalents consist of demand deposits and moneymarket investments invested with a major national bank, which at times mayexceed federally insured limits. The Partnership has not experienced any lossesin such accounts, and does not expect any loss from this exposure. The carryingvalue of the Partnership’s cash equivalents approximates fair value.

 

**Risks and Uncertainties**

 

Historically, the oil and gas market has experienced significant pricefluctuations. Prices are impacted by local weather, supply in the area,availability and price of competitive fuels, seasonal variations in localdemand, limited transportation capacity to other regions, and the worldwidesupply and demand balance for crude oil.

 

The Partnership has not engaged in commodity futures trading or hedgingactivities and has not entered into derivative financial instrumenttransactions for trading or other speculative purposes. Accordingly, thePartnership is at risk for the volatility in commodity prices inherent in theoil

 

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Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

and gas industry, and the level of commodity prices has a significantimpact on the Partnership’s results of operations.

 

# **Crude Oil and Natural Gas Properties**

 

The Partnership follows the full cost methodof accounting for crude oil and natural gas properties. Under this method, alldirect costs and certain indirect costs associated with acquisition ofproperties and successful as well as unsuccessful exploration and developmentactivities are capitalized. Depreciation, depletion, and amortization ofcapitalized crude oil and natural gas properties and estimated futuredevelopment costs, excluding unproved properties, are based on theunit-of-production method using estimated proved reserves.  For these purposes, proved natural gasreserves are converted to equivalent barrels of crude oil at a rate of 6 Mcf to1 Bbl. Net capitalized costs of crude oil and natural gas properties, asadjusted for asset retirement obligations, are limited to the lower ofunamortized cost or the cost ceiling, defined as the sum of the present valueof estimated future net revenues from proved reserves based on prices in effectat the end of the period held constant and discounted at 10 percent, plus thelower of cost or estimated fair value of unproved properties, if any. Pursuantto full cost accounting rules, the Partnership performs a ceiling testquarterly as of the balance sheet date on its proved crude oil and natural gasproperties. Excess capitalized costs are charged to property impairmentexpense. No gain or loss is recognized upon sale or disposition of crude oiland natural gas properties, unless such a sale would significantly alter the rateof depletion and amortization. During the years ended December 31, 2008and 2007, the Partnership recognized property impairment expense of provedproperties totaling $4,118,218 and $10,739,537, respectively.

 

Unproved properties consist of undeveloped leasehold interests.Investments in unproved properties are not depleted pending determination ofthe existence of proved reserves. Unproved properties are assessed forimpairment quarterly as of the balance sheet date by considering the primarylease term, the holding period of the properties, geologic data obtainedrelating to the properties, and other drilling activity in the immediate areaof the properties. Any impairment resulting from this quarterly assessment isreported as property impairment expense in the current period, as appropriate.During the year ended December 31, 2008, the Partnership recognizedproperty impairment expense of unproved properties totaling $172,447.

 

# **Restoration, Removal, andEnvironmental Liabilities**

# ** **

The Partnership is subject to extensive Federal, state and localenvironmental laws and regulations. These laws regulate the discharge ofmaterials into the environment and may require the Partnership to remove ormitigate the environmental effects of the disposal or release of petroleumsubstances at various sites. Environmental expenditures are expensed orcapitalized depending on their future economic benefit. Expenditures thatrelate to an existing condition caused by past operations and that have nofuture economic benefit are expensed.

 

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Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

Liabilities for expenditures of a non-capital nature are recorded whenenvironmental assessments and/or remediation is probable, and the costs can bereasonably estimated. Such liabilities are generally undiscounted values unlessthe timing of cash payments for the liability or component is fixed or reliablydeterminable.

 

The Partnership accounts for its asset retirement obligations inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 143,“Accounting for Asset Retirement Obligations” (“SFAS No. 143”). Assetretirement costs and liabilities associated with future site restoration andabandonment of long-lived assets are initially measured at fair value whichapproximates the cost a third party would incur in performing the tasksnecessary to retire such assets. The fair value is recognized in the financialstatements as the present value of expected future cash expenditures for siterestoration and abandonment. Subsequent to the initial measurement, the effectof the passage of time on the liability for the net asset retirement obligation(accretion expense) and the amortization of the asset retirement cost arerecognized in the results of operations.

 

The following table summarizes thePartnership’s asset retirement obligation for the years ended December 31,2008 and 2007.

 
| ** **                            | ** ** | **2008** | ** ** | **2007**   | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|
| Beginning asset retirement obligation | ** ** | **$**    | 125,705    | ** ** | **$**      | — | ** ** |
| Additions related to new properties   |       | 79,341   |       | 121,062    |       |
| Accretion expense                     |       | 65,726   |       | 4,643      |       |
| Ending asset retirement obligation    | ** ** | **$**    | 270,772    | ** ** | **$**      | 125,705 | ** ** |

 

**Recognition of Revenue**

 

The Partnership enters into sales contractsfor disposition of its share of crude oil and natural gas production fromproductive wells. Revenues are recognized based upon the Partnership’s share ofmetered volumes delivered to its purchasers each month. The Partnership had nomaterial gas imbalances at December 31, 2008, 2007, and 2006.

 

**Income Taxes**

 

The Partnership’s net income or loss flows directly through to itspartners, who are responsible for the payment of Federal taxes on their respectiveshare of any income or loss. Therefore, there is no provision for federalincome taxes in the accompanying financial statements.

 

As of December 31, 2008, the tax basis of the Partnership’s assetsexceeds the financial reporting basis of the assets by approximately $4.22million, primarily due to the difference between property impairment costsdeducted for financial reporting purposes and intangible drilling costsdeducted for income tax purposes.

 

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Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

**Fair ValueMeasurements**

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157,which defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. Effective January 1,2008, the Partnership adopted SFAS No. 157, which applies to otheraccounting pronouncements that require or permit fair value measurements;however, it does not require any new fair value measurements.

 

SFAS No. 157establishes a hierarchy for disclosure of the inputs to valuation used tomeasure fair value. The hierarchy prioritizes the inputs into three broadlevels. Level 1 inputs are quoted prices (unadjusted) in active markets foridentical assets or liabilities. All of the Partnership’s cash equivalents fallinto Level 1 and consist of short-term, highly liquid investments, which havematurities of 90 days or less, including money market funds. The Partnershipdoes not have any assets or liabilities falling under Level 2 or 3.

 

**NewAccounting Pronouncements**

 

**Modernizationof Oil and Gas Reporting**

 

In January 2009,the SEC issued revisions to the oil and gas reporting disclosures, “Modernizationof Oil and Gas Reporting; Final Rule” (“the Final Rule”). In addition tochanging the definition and disclosure requirements for oil and gas reserves,the Final Rule changes the requirements for determining quantities of oiland gas reserves. The Final Rule also changes certain accountingrequirements under the full cost method of accounting for oil and gasactivities. The amendments are designed to modernize the requirements for thedetermination of oil and gas reserves, aligning them with current practices andupdating them for changes in technology. The Final Rule is effective forannual reports on Form 10-K for fiscal years ending on or after December 31,2009. The Partnership has not yet determined the impact, if any, on thefinancial statements.

 

**TheHierarchy of Generally Accepted Accounting Principles**

 

In May 2008,the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles” (“SFAS 162”). SFAS 162 identifies the sources foraccounting principles and the framework for selecting the principles to be usedin preparing financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles in theUnited States. This Statement became effective in November 2008.

 

**DisclosuresAbout Derivative Instruments and Hedging Activities**

 

In March 2008,the FASB issued SFAS No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities” (“SFAS 161”). SFAS 161 requires entities that utilizederivative instruments to provide qualitative disclosures about theirobjectives and strategies for using such instruments, as well as any details ofcredit-risk-related contingent features contained within derivatives. The

 

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Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

Partnershipdoes not utilize derivative instruments; therefore, the Partnership does notexpect this pronouncement to have any impact on the Partnership’s results ofoperations, cash flows or financial position.

 

**Non-controllingInterests in Consolidated Financial Statements**

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements, an amendment of Accounting Research Bulletin No. 51”(“SFAS 160”), which improves the relevance, comparability and transparency ofthe financial information that a reporting entity provides in its consolidatedfinancial statements by establishing accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. The Partnership does not own any subsidiaries, and does not expectthis pronouncement to have any impact on the Partnership’s results ofoperations, cash flows or financial position.

 

**BusinessCombinations**

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS141R”), which replaces SFAS No. 141, “Business Combinations” (“SFAS 141”).SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisitionmethod of accounting (which SFAS 141 called the purchase method) be used forall business combinations. The Partnership has no business combinations inprogress or, at this time, in future plans. The Partnership does not expectthis pronouncement to have any impact on the Partnership’s results ofoperations, cash flows or financial position.

 

**AccountingStandard Fair Value for Financial Assets and Financial Liabilities**

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities the option tomeasure eligible financial instruments at fair value as of specified dates. ThePartnership did not elect fair value as an alternative as provided under SFAS159 for any of its financial assets and liabilities that are not currentlymeasured at fair value.

 

**3. Transactions with Affiliates**

 

The Partnership has no employees. RELP employs a staff includinggeologists, petroleum engineers, landmen and accounting personnel whoadminister all of the Partnership’s operations. Prior to January 2, 2006,OREI employed this staff of employees. On January 2, 2006, the employeesof OREI were transferred to RELP. In addition, during 2006 RELP assumed fromOREI well operator status for all wells previously operated by OREI. ThePartnership reimburses RELP and OREI for technical and administrative servicesat cost. During the years ended December 31, 2008, 2007, and 2006 thePartnership incurred technical services and administrative costs totaling$338,040, $1,002,742, and $222,386, respectively. Of these

 

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Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

amounts, $58,114, $945,521, and $217,183 represent technical servicescosts capitalized as project costs, and $279,926, $57,221, and $5,203 representadministrative costs included as general and administrative expenses.

 

Reef contributes 1% of all leasehold, drilling, and completion costswhen incurred. During the years ended December 31, 2008 and 2007, this 1%obligation totaled $5,361 and $144,544. In connection with the 1% obligation,Reef owed the Partnership $10,969 at December 31, 2007. Reef alsopurchased 5% of the Partnership units and pays 5% of the 99% of these costspaid by the unit holders (4.95%).

 

RELP processes joint interest billings and revenue payments on behalfof the Partnership. At December 31, 2008 and 2007, the Partnership owedRELP $290,339 and $268,728, respectively, for joint interest and technical andadministrative charges processed in excess of net revenues. The Partnershipsettles its balances with Reef and RELP on a quarterly basis.

 

Accounts payable to affiliates as of December 31, 2008 and 2007also includes $430,096 and $760,096, respectively, for the unpaid portion ofthe 15% management fee due Reef for organization and offering costs, includingsales commissions. The management fee is payable in two parts. Reef initiallyreceived an amount not to exceed 13.5% to recover actual commissions andorganization and offering costs. The portion of the management fee in excess ofactual commissions and organization and offering costs is paid to Reef from theoil and gas cash flows available for partner distributions, at a rate not toexceed $1 million per year. During 2008, the Partnership reimbursed $330,000 ofthis amount to Reef. The Partnership is reimbursing this amount to Reef at arate of $30,000 per month. As such, $360,000 has been classified as a currentliability, and the remaining $70,096 has been classified as a long termliability to affiliates at December 31, 2008.

 

Reef entered into, and allowed to expire, two agreements (the “CMIAgreements”) with Challenger Minerals Inc. (“CMI”), a subsidiary ofGlobalSantaFe Corporation and a screener of oil and gas prospects in the Gulfof Mexico and North Sea regions. The CMI Agreements provided Reef theopportunity to review and selectively participate in exploratory anddevelopmental prospects either originated or previewed by CMI. Reef paid CMI forthe geological and geophysical services provided by CMI under the CMIagreements. The agreements expired in January and November, 2006.

 

Reef also entered into an agreement with Access Exploration Corp. (“AEC”),a screener of domestic oil and gas prospects both onshore and in the Gulf ofMexico. This agreement provided Reef the opportunity to review and selectivelyparticipate in exploratory and developmental prospects previewed by AEC. Reefpaid AEC for the geological and geophysical services provided by AEC under thisagreement. This agreement expired in October 2007.

 

Prospects approved for acquisition by Reef under these agreements couldbe assigned to this Partnership as well as other limited partnerships formed aspart of the Program. Each partnership formed as a part of the Program paidReef, on a pro rata basis, a portion of the fees paid by Reef

 

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Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

under these agreements during the term of the Program. Totalreimbursements to Reef by the partnerships formed as a part of this Programwere equal to the actual fees paid by Reef under these agreements. At December 31,2006, the Partnership had a payable to Reef of $150,736 in connection with thisobligation, which was paid to Reef during the first quarter of 2007. Thepayment has been capitalized as geological and geophysical costs in accordancewith the full cost method of accounting for oil and gas properties.

 

If an affiliate of Reef serves as operator of a Partnership prospect,then operator fees will be payable to the affiliate. Under such circumstances,such affiliate will receive fees at the competitive rate in the geographicalarea where the prospect is located during the drilling and production phase ofoperations. These fees are charged as a monthly fee per well as agreed to in anoperating agreement signed by the Partnership as well as outside third partyworking interest owners in the well. During the year ended December 31,2007, the Partnership paid drilling overhead fees totaling $28,398 to RELP.During the years ended December 31, 2008 and 2007, the Partnership paidoperating overhead fees totaling $40,879 and $23,302 to RELP, respectively.

 

**4. Major Customers**

 

The Partnership sells crude oil and naturalgas on credit terms to refiners, pipelines, marketers, and other users ofpetroleum commodities. Revenues are received directly from these parties or, incertain circumstances, paid to the operator of the property who disburses tothe Partnership its percentage share of the revenues. During the year ended December 31,2008, two marketers and one operator accounted for 41.7%, 41.4%, and 14.9% ofthe Partnership’s crude oil and natural gas revenues, respectively. During theyear ended December 31, 2007, two marketers accounted for 79.4% and 16.5%of the Partnership’s crude oil and natural gas revenues, respectively. As of December 31,2006, the Partnership had no crude oil and natural gas production and,therefore, had no customers. Due to the competitive nature of the market forpurchase of crude oil and natural gas, the Partnership does not believe thatthe loss of any particular purchaser would have a material adverse impact onthe Partnership.

 

**5. Commitments and Contingencies**

 

The Partnership is not currently involved in any legal proceedings.

 

**6. Partnership Equity**

 

Sales of Partnership units began on November 15, 2005. Proceedsreceived were placed into an interest bearing escrow account until thePartnership reached the minimum subscription level of 40 units. The Partnershipwas formed on December 29, 2005 and the sale of Partnership units wasclosed on April 28, 2006. The Partnership raised $23,094,590 from the saleof 923.784 Partnership units to investor partners. Reef purchased 48.620 units(5%) for $1,033,179. Reef also contributes 1% of all leasehold, drilling, andcompletion costs when incurred, in addition to

 

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Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

paying its pro rata share (4.95%) of the leasehold, drilling, andcompletion costs paid by the Partnership. In connection with this obligation,Reef has contributed $199,145 to the Partnership at December 31, 2008.

 

All units, except those purchased by Reef, paid a 15% management fee toReef to pay for Partnership organization and offering costs, including salescommissions. These costs totaled $3,464,188, leaving net capital contributionsof $20,862,726 available for Partnership oil & gas activities. Of the$3,464,188 management fee, offering costs were $3,414,188 and organizationcosts were $50,000. The Partnership has drilled twenty-nine wells at December 31,2008, and has completed drilling operations with the capital raised by thePartnership.

 

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

 

**7.Partnership Prospects**

 

Asof December 31, 2008, the Partnership owns working interests in six developmentalprospects and seven exploratory prospects, upon which a total of twenty-ninewells were drilled with the capital raised by the Partnership.

 

The Partnership drilled eleven successful developmental wells andeleven unsuccessful developmental wells, including the eight Sand Dunes wellsdescribed below. The Partnership drilled one successful exploratory well, andsix unsuccessful exploratory wells. The successful exploratory well ceasedproduction during 2007.

 

The Partnership participated in the drilling of eight developmentalwells on the Sand Dunes prospect during the fourth quarter of 2007 and thefirst quarter of 2008. Initial testing confirmed the presence of crude oil andnatural gas in all eight wells, however, the field was temporarily shut-inbecause of the lack of electric service and because of the high cost oftrucking offsite the salt water volumes associated with the production of thecrude oil and natural gas from the wells. Electrical service to the field wasconnected in September 2008. Based upon initial testing, larger bottomhole pumps were placed below the well perforations in three of the wells andtesting was resumed to determine the three wells’ commercial productivity.Water continued to be trucked offsite, and RELP applied for and received apermit which would allow for the conversion of one of the eight wells into awater disposal well. RELP has also explored the possibility of drilling a ninthwell as a salt water disposal well for the field. Testing results on two of thethree wells were positive, and salt water production volumes declined as aresult of pumping off the wells using the larger bottom hole pumps. However,the price of crude oil declined at a rapid rate while testing was beingconducted. In late December 2008 two of the three testing wells wereshut-in again. Crude oil prices continued declining to a level below $40 perbarrel. In February 2009, following a mechanical failure in the thirdtesting well, RELP, as operator, shut-in the field. The eight wells cannot becommercially productive without efficient salt water disposal capabilities, andRELP does not believe any of the options regarding salt water disposal are

 

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Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

economically viable at current commodity prices. As a result, as of December 31,2008, the eight Sand Dunes wells have been classified as unsuccessful, andthere are no crude oil and natural gas reserves for these wells included in theDecember 31, 2008 reserve information presented in this Annual Report.However, RELP has made no plans to plug and abandon the wells at this time, andwill continue to monitor and evaluate the economics of the field based uponcommodity prices.

 

The Partnership also has unproved property consisting of un-drilledleasehold interest (11 potential drilling locations) in the Sand Dunesprospect. The Partnership has fully impaired this unproved property during thefourth quarter of 2008 based upon the eight already drilled wells beingclassified as unsuccessful at December 31, 2008. The Partnership currentlyhas no plans to conduct any drilling operations on this acreage.

 

**8. Supplemental Information on Oil & Natural Gas Explorationand Production Activities (unaudited)**

 

**Capitalized Costs**

 

Thefollowing table presents the Partnership’s aggregate capitalized costs relatingto oil and gas activities at the end of each of the years indicated:

 
| **December 31,**                                 | ** ** | **2008**       | ** **    | **2007**       | ** ** | **2006**      | ** ** |
|-------------------------------------------------------|------------|----------------|---------------|----------------|------------|---------------|------------|
| ** **                                            | ** ** | ** **     | ** **    | ** **     | ** ** | ** **    | ** ** |
| **Oil and natural gas properties:**                   | ** ** | ** **     | ** **    | ** **     | ** ** | ** **    | ** ** |
| Unproved properties                                   | ** ** | **$**          | —        | ** **     | **$**      | 172,447       | ** ** | **$** | 3,211,249 | ** ** |
| Proved properties                                     |       | 21,403,371     |          | 20,816,082     |       | 1,825,482     |       |
| ** **                                            | ** ** | **21,403,371** | ** **    | **20,988,529** | ** ** | **5,036,731** | ** ** |
| Less:                                                 | ** ** | ** **     | ** **    | ** **     | ** ** | ** **    | ** ** |
| Accumulated depreciation, depletion and  amortization |       | (2,422,302     | )             | (1,075,372     | )          | —        |       |
| Property impairment                                   |       | (16,683,237    | )             | (12,565,019    | )          | (1,825,482    | )          |
| **Total**                                             | ** ** | **$**          | **2,297,832** | ** **     | **$**      | **7,348,138** | ** ** | **$** | **3,211,249** | ** ** |

 

**CostsIncurred**

 

Thefollowing table sets forth costs incurred in oil and gas exploration anddevelopment activities during the years ended December 31, 2008, 2007, and2006:

 

 
| ** **                          | ** ** | **2008**   | ** **  | **2007**   | ** ** | **2006**       | ** ** |
|-------------------------------------|------------|------------|-------------|------------|------------|----------------|------------|
| ** **                          | ** ** | ** ** | ** **  | ** ** | ** ** | ** **     | ** ** |
| **Oil and natural gas properties:** | ** ** | ** ** | ** **  | ** ** | ** ** | ** **     | ** ** |
| Exploration                         | ** ** | **$**      | (134,657    | )          | **$**      | 3,691,736      | ** ** | **$** | 3,482,548 | ** ** |
| Development                         |       | 721,946    |        | 12,260,062 |       | 1,554,183      |       |
| **Total**                           | ** ** | **$**      | **587,289** | ** ** | **$**      | **15,951,798** | ** ** | **$** | **5,036,731** | ** ** |

 

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Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

**Resultsof Operations**

 

**The following table sets forth results of operationsfrom oil and gas producing activities for the years ended December 31,2008, 2007, and 2006.**

 
| ** **                                           | ** ** | **2008**   | ** **     | **2007**    | ** ** | **2006**        | ** ** |
|------------------------------------------------------|------------|------------|----------------|-------------|------------|-----------------|------------|
| ** **                                           | ** ** | ** ** | ** **     | ** **  | ** ** | ** **      | ** ** |
| **Oil and gas producing activities:**                |       |       |           |        |       |            |       |
| Oil sales                                            | ** ** | **$**      | 1,590,912      | ** **  | **$**      | 1,102,915       | ** ** | **$** | — | ** ** |
| Natural gas sales                                    |       | 1,270,540  |           | 415,055     |       | —          |       |
| Production expenses                                  |       | (679,115   | )              | (231,989    | )          | —          |       |
| Accretion of asset retirement obligation             |       | (65,726    | )              | (4,643      | )          | —          |       |
| Depreciation , depletion and amortization            |       | (1,346,930 | )              | (1,075,372  | )          | —          |       |
| Property impairment expense                          |       | (4,118,218 | )              | (10,739,537 | )          | (1,825,482      | )          |
| **Results of operations from producing  activities** | ** ** | **$**      | **(3,348,537** | **)**       | **$**      | **(10,533,571** | **)**      | **$** | **(1,825,482** | **)** |
| ** **                                           | ** ** | ** ** | ** **     | ** **  | ** ** | ** **      | ** ** |
| Depletion rate per BOE                               | ** ** | **$**      | 35.48          | ** **  | **$**      | 48.70           | ** ** | **$** | — | ** ** |

 

BOE = Barrels of OilEquivalent (6 MCF equals 1 BOE)

 

**Crude Oil and Natural Gas Reserves**

 

The following information describes changes during the years andbalances of proved crude oil and natural gas reserves as of December 31,2008 and 2007. The Partnership had no proved crude oil and natural gas reservesat December 31, 2006. The definitions used are in accordance withapplicable SEC regulations.

 

Proved crude oil and natural gas reserves are the estimated quantitiesof crude oil, natural gas and natural gas liquids which geological andengineering data demonstrate with reasonable certainty to be recoverable infuture years from known reservoirs under existing economic and operatingconditions, that is, prices and costs as of the date the estimate is made.

 

Prices include consideration of changes in existing prices provided bycontractual arrangements, but not escalations based upon future conditions.Additional development costs required to recover these proved reserves areestimated at approximately $0 and $274,087 as of December 31, 2008 and2007. All of the Partnership’s reserves are located in the United States.

 
| ** **                                                                                          | ** ** | **Oil  (BBL) (1)** | ** ** | **Gas  (mcf)** | ** ** | **BOE (2)** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------|------------|-------------|------------|
| Net proved reserves for properties owned by the Partnership | ** ** | ** **              | ** ** | ** **     | ** ** | ** **  | ** ** |
| Reserves at December 31, 2006                                                                  | ** ** | **—**              | ** ** | **—**     | ** ** | **—**  | ** ** |
| New discoveries                                                                                     |       | 110,903                 |       | 804,018        |       | 244,906     |       |
| Production                                                                                          |       | (14,032                 | )          | (48,301        | )          | (22,082     | )          |
| Reserves at December 31, 2007                                                                  |       | 96,871                  |       | 755,717        |       | 222,824     |       |
| ** **                                                                                          | ** ** | ** **              | ** ** | ** **     | ** ** | ** **  | ** ** |
| Revisions of previous estimates                                                                     | ** ** | (47,433                 | )          | (222,083       | )          | (84,447     | )          |
| Production                                                                                          |       | (16,045                 | )          | (131,512       | )          | (37,964     | )          |
| Reserves at December 31, 2008                                                                  |       | 33,393                  |       | 402,122        |       | 100,413     |       |

 

F-16

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Table of Contents

 

Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

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(1)     Oilincludes both oil and natural gas liquids

(2)     BOE(barrels of oil equivalent) is calculated by converting 6 MCF of natural gas to1 BBL of oil. A BBL (barrel) of oil is one stock tank barrel, or 42 U.S.gallons liquid volume, of crude oil or other liquid hydrocarbons.

 

**Standardized Measure of Discounted Future Net Cash Flows**

 

As required by the Financial Accounting Standards Board, thestandardized measure of discounted future net cash flows is computed byapplying year-end prices, costs and legislated tax rates and a discount factorof 10 percent to net proved reserves.

 

Changes in the demand for crude oil and natural gas, inflation, andother factors make such estimates inherently imprecise and subject tosubstantial revision. This table should not be construed to be an estimate ofthe current market value of the Partnership’s proved reserves.

 
| **December 31,**                                           | ** ** | **2008**      | ** **    | **2007**      | ** ** |
|-----------------------------------------------------------------|------------|---------------|---------------|---------------|------------|
| Crude oil and natural gas properties owned  by the Partnership: |       |          |          |          |       |
| Future cash inflows                                             | ** ** | **$**         | 3,959,364     | ** **    | **$**      | 13,857,388 | ** ** |
| Future production costs                                         |       | (1,217,470    | )             | (4,277,881    | )          |
| Future development costs                                        |       | —        |          | (274,087      | )          |
| Future net cash flows                                           | ** ** | **2,741,894** | ** **    | **9,305,420** | ** ** |
| Effect of discounting net cash flows at 10%                     |       | (444,062      | )             | (2,106,058    | )          |
| Discounted future net cash flows                                | ** ** | **$**         | **2,297,832** | ** **    | **$**      | **7,199,362** | ** ** |

** **

**Changes in the Standardized Measure of DiscountedFuture Net Cash flows Relating to Proved Crude Oil and Natural Gas Reserves**

 
| **December 31,**                                           | ** ** | **2008**   | ** **    | **2007**   | ** ** |
|-----------------------------------------------------------------|------------|------------|---------------|------------|------------|
| Crude oil and natural gas properties owned  by the Partnership: |       |       |          |       |       |
| Standardized measure at beginning of period                     |       | $          | 7,199,362     |       | $          | — |   |
| Extensions and discoveries                                      |       | —     |          | 8,480,700  |       |
| Net change in sales price, net of  production costs             |       | (1,471,634 | )             | —     |       |
| Revisions of quantity estimates                                 |       | (1,932,472 | )             | —     |       |
| Net changes in estimated future development  costs              |       | (42,183    | )             | —     |       |
| Changes in production timing rates                              |       | (58,566    | )             | —     |       |
| Accretion of discount                                           |       | 719,936    |          | —     |       |
| Sales net of production costs                                   |       | (2,116,611 | )             | (1,281,338 | )          |
| Net increase (decrease)                                         |       | (4,901,530 | )             | 7,199,362  |       |
| Standardized measure at end of year                             | ** ** | **$**      | **2,297,832** | ** ** | **$**      | **7,199,362** | ** ** |

 

F-17

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Table of Contents

 

Reef Global Energy VII, L.P.

Notesto Financial Statements (continued)

 

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

 
| **Year ended December 31,  2007**     | ** ** | **1st Qtr** | ** ** | **2nd Qtr** | ** ** | **3rd Qtr** | ** ** | **4th Qtr** | ** ** | **Totals**  | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|-------------|------------|
| Total crude oil and natural gas sales                | ** ** | **$**            | 9,579      | ** **       | **$**      | 147,135          | ** ** | **$**            | 635,516    | ** **  | **$**      | 725,740 | ** ** | **$** | 1,517,970 | ** ** |
| Income (loss) from operations                        |       | (3,967,639       | )          | (551,505         | )          | 221,902          |       | (6,371,932       | )          | (10,669,174 | )          |
| Net income (loss)                                    |       | (3,824,681       | )          | (451,722         | )          | 274,075          |       | (6,349,185       | )          | (10,351,513 | )          |
| Net income (loss) per managing general  partner unit |       | (4,411.83        | )          | (228.53          | )          | 1,458.46         |       | (6,626.65        | )          | (9,808.55   | )          |
| Net income (loss) per general partner unit           |       | (3,908.03        | )          | (476.97          | )          | 219.93           |       | (6,524.25        | )          | (10,689.32  | )          |
| Net income (loss) per limited partner unit           |       | (3,908.03        | )          | (476.97          | )          | 219.93           |       | (6,524.25        | )          | (10,689.32  | )          |
|                                                      |            |                  |            |                  |            |                  |            |                  |            |             |            |  |  |  |  |  |

 

Propertyimpairment expense included in the above amounts is as follows:

 

1st quarter — $3,884,152,   2nd quarter — $540,144,   3rd quarter — $0, 4th quarter — $6,315,241

 
| **Year ended December 31,  2008**     | ** ** | **1st Qtr** | ** ** | **2nd Qtr** | ** ** | **3rd Qtr** | ** ** | **4th Qtr** | ** ** | **Totals** | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| Total crude oil and natural gas sales                | ** ** | **$**            | 663,141    | ** **       | **$**      | 913,165          | ** ** | **$**            | 788,934    | ** ** | **$**      | 496,212 | ** ** | **$** | 2,861,452 | ** ** |
| Income (loss) from operations                        |       | 97,056           |       | 319,841          |       | 295,956          |       | (4,690,426       | )          | (3,977,573 | )          |
| Net income (loss)                                    |       | 103,252          |       | 321,102          |       | 296,501          |       | (4,689,851       | )          | (3,968,996 | )          |
| Net income (loss) per managing general  partner unit |       | 930.03           |       | 1,546.61         |       | 1,547.84         |       | (5,674.71        | )          | (1,650.23  | )          |
| Net income per general partner unit                  |       | 62.82            |       | 266.19           |       | —           |       | —           |       | 329.01     |       |
| Net income (loss) per limited partner unit           |       | 62.82            |       | 266.19           |       | 239.49           |       | (4,778.11        | )          | (4,209.61  | )          |
|                                                      |            |                  |            |                  |            |                  |            |                  |            |            |            |  |  |  |  |  |

 

Property impairment expense included in the 4th quarter totaled $4,290,665

 

F-18

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Table of Contents

 

**EXHIBIT INDEX**

** **
| 3.1(a)(i)   |       | 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).                                                                                                             |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                    |
| 3.1(a)(ii)  |       | Certificate of Amendment to the Certificate of Limited  Partnership of Reef Global Energy VII, L.P., dated August 27, 2008  (incorporated by reference to Exhibit 3.1(i)(a) to Form 8-K,  SEC File No. 000-52540,  as filed with the SEC on September 3, 2008). |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                    |
| 3.1(a)(iii) |       | Certificate of Amendment to the Certificate of Limited  Partnership of Reef Global Energy VII, L.P., dated August 28, 2008  (incorporated by reference to Exhibit 3.1(i)(b) to Form 8-K,  SEC File No. 000-52540,  as filed with the SEC on September 3, 2008). |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                    |
| 3.2         |       | Form of  Limited Partnership Agreement (incorporated by reference to Appendix A to the  prospectus filed as part of Post-Effective Amendment No. 2 to  Registration Statement on Form S-1, SEC File No.333-122935, filed with  the SEC on July 7, 2006).                  |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                    |
| 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).                 |
|        |       |                                                                                                                                                                                                                                                                                          |
| 23.2        | *          | Consent of Gleason Engineering.                                                                                                                                                                                                                                                               |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                    |
| 31.1        | *          | Certification of Principal Executive  Officer pursuant to Rule 13a-14(a) under the Securities Exchange  Act of 1934.                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                          |
| 31.2        | *          | Certification of Principal Financial Officer pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                          |
| 32.1        | *          | Certification of Principal Executive Officer pursuant to 18 U.S.C.  §1350.                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                          |
| 32.2        | *          | Certification of Principal Financial Officer pursuant to 18 U.S.C.  §1350.                                                                                                                                                                                                               |

 

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|   |   | *  Attached herewith |
|--------|--------|---------------------------|

 

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