The govenor shaft should be above the oil level. The only oil it would be exposed too would be splash.
That O-ring held with the R clip like that does not look good and would never work. If you had enough room to put the o ring then a washer then the clip that might slow it down. Only thing you would need to be carefull with would be drag, too much and the govenor will not work propperly.
Breather valve is usually on the valve chest cover.
