Inspector, sure looks like the O-ring #18 is there to seal the threaded connection of #7 to the body #2, only. The seal #15, would also retain the oil, if this area is a low pressure area like a return or dump side of item #2. What concerns me more is what pushed the seal out of it's pocket in item #7 ? If enough pressure was built up behind the seal, the seal would be pushed out...
Have you tried putting the seal back into item#7 ? and does it seem to fit correctly and tight? Or does it just seem to easily fall into place in the pocket of item #7 ? Check item #7 closely for cracks or deformities of any kind.
A flow chart of the hydralic system for this valve would be nice, wouldn't it? Look at the valve body closely, removed is easier, and following the hydralic lines and circuits, and port/ control valve posistions, try to determine if this area of the valve in question is under system or return type pressures.
Hope this was of some help, and that others chime in to help you also. Lloyd