BASELINE OIL & GAS CORP.
                             STOCK OPTION AGREEMENT
                              (At $0.60 Per Share)

      This Stock Option Agreement (this "Agreement") is effective as of December
20, 2006 (the "Option Grant Date") by and between Baseline Oil & Gas Corp., a
Nevada corporation having its principal place of business at 20022 Creek Farm,
San Antonio, Texas 78259 (the "Company"), and Thomas Kaetzer, an individual
residing in the State of Texas (the "Optionee"). The Optionee and the Company
hereby agree as follows:

      1. Grant. The Company hereby grants to the Optionee an option (the
"Option") to purchase up to an aggregate of 500,000 shares (the "Optioned
Shares") of the Company's common stock, par value $0.001 per share (the "Common
Stock"), at an exercise price (the "Exercise Price") of $0.60 per Optioned
Share.

      2. Term. The Option granted hereby shall terminate no later than at the
close of business on December 20, 2011 (the "Termination Date").

      3. Exercisability; Termination of Employment.

            (a) Exercisability. Subject to Section 3(b) below, the Option shall
vest and may be exercised in whole or in part, as follows: (i) up to 166,666
Optioned Shares at any time from and after the Option Grant Date until the
Termination Date, (ii) up to an additional 166,667 Optioned Shares at any time
from and after the first anniversary date of the Option Grant Date until the
Termination Date, and (iii) up to the remaining 166,667 Optioned Shares at any
time from and after the second anniversary date of the Option Grant Date until
the Termination Date (each such Option Grant Date and anniversary date, a
"Vesting Date"); provided, that on each such Vesting Date, the Optionee shall
have been continuously employed by the Company through such date. To the extent
the Option has become vested and is exercisable, the Option may thereafter be
exercised by the Optionee, in whole or in part, at any time or from time to time
prior to the expiration of the Option as provided herein. Optioned Shares that
are available to be issued to the Optionee upon exercise pursuant to this
Section 3 are referred to herein as "Exercisable Shares."

            (b) Termination of Employment.

                  (1) If the Optionee's employment under his current employment
agreement with the Company ("Employment Agreement") is terminated by the Company
without Cause (as defined in the Employment Agreement) or by the Optionee
pursuant to the requirements for his voluntary resignation for Good Reason (as
defined in the Employment Agreement) prior to any Vesting Date, then Options
Shares that had not yet vested and become exercisable as of the employment
termination date shall immediately vest and become exercisable in an number that
is equal to (x) multiplied by (y), where (x) is the total number of Option
Shares that would have become exercisable on the next Vesting Date, and (y) is a
fraction, the numerator of which is the number of whole thirty-day periods the
Optionee was employed from the preceding Vesting Date through such termination
date and the denominator of which is twelve (12).

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                  (2) If the Optionee's employment with the Company is
terminated by the Company for Cause or by the Optionee other than pursuant to
the requirements for voluntary resignation for Good Reason, or for any other
reason (except as provided in Section 3(b)(1) above), then the unvested portion
of the Option shall be immediately forfeited and canceled, but any portion of
the Option that had vested prior thereto shall continue to be exercisable by the
Optionee pursuant to the terms hereof.

      4. Procedure for Exercise.

            (a) Notice. The Optionee may exercise the Option at any time with
respect to all or any part of the Exercisable Shares by giving the Secretary of
the Company written notice of intent to exercise. The notice of exercise shall
specify the number of Exercisable Shares as to which the Option is to be
exercised and the date of exercise thereof, which date shall be at least five
days after the giving of such notice unless an earlier time shall have been
mutually agreed upon.

            (b) Payment of Exercise Price. Full payment (in U.S. Dollars) by the
Optionee of the Exercise Price for the Exercisable Shares purchased shall be
made on or before the exercise date specified in the notice of exercise in cash,
or, with the prior written consent of the Board, in whole or in part through the
surrender of previously acquired shares of Common Stock (valued at their fair
market value on the exercise date). If the Optionee fails to pay for any of the
Exercisable Shares specified in such notice or fails to accept delivery thereof,
the Optionee's right to purchase such Exercisable Shares may be terminated by
the Company. The date specified in the Optionee's notice as the date of exercise
shall be deemed the date of exercise of the Option, provided that payment in
full for the Exercisable Shares to be purchased upon such exercise shall have
been received by such date.

            (c) Cashless Exercise. In addition to the method of payment set
forth above, provided that the Common Stock is either registered on a national
securities exchange or quoted on a national quotation system at the time of
exercise, Optionee shall have the right to exercise this Option in full or in
part by delivering written notice to the Company, and Optionee shall receive the
number of Exercisable Shares equal to the product of (x) the number of
Exercisable Shares as to which this Option is being exercised, multiplied by (y)
a fraction, the numerator of which is the Market Price (defined below) of the
Common Stock minus the Exercise Price of the Exercisable Shares and the
denominator of which is the Market Price of the Common Stock. As used in this
Agreement, the phrase "Market Price" for any given date shall be deemed to be
the last reported sale price on the trading day immediately preceding such date,
or, in case no such reported sale takes place on such day, the average of the
last reported sale prices for the last three (3) trading days immediately
preceding such date on which reported sales did take place, in either case as
officially reported by the OTC Bulletin Board or the principal securities
exchange on which the Common Stock is listed or admitted to trading if so listed
and admitted.

            (d) Other Limitations on Exercise. The obligation of the Company to
deliver shares of Common Stock upon the exercise hereof shall be subject to the
condition that if at any time the Company's Board of Directors shall determine
in its sole discretion that the listing, registration or qualification of the
Option or the Exercisable Shares upon any securities exchange or under any state
or federal law, or the consent or approval of any governmental regulatory body,


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<PAGE>

is necessary or desirable as a condition of, or in connection with, the grant of
this Option or the issuance or purchase of stock hereunder, then this Option may
not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board of Directors.

      5. Adjustment of and Changes in Stock of Company. If the Company at any
time after the Option Grant Date subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Exercise Price in effect
immediately prior to such subdivision will be proportionately reduced and the
number of shares of Common Stock obtainable upon exercise of this Option will be
proportionately increased. If the Company at any time after the Option Grant
Date combines (by combination, reverse stock split or otherwise) one or more
classes of its outstanding shares of Common Stock into a smaller number of
shares, the Exercise Price in effect immediately prior to such combination will
be proportionately increased and the number of Exercisable Shares issuable upon
exercise of this Option will be proportionately decreased. Any adjustment under
this Section 5 shall become effective at the close of business on the date the
subdivision or combination becomes effective.

      6. Non-Transferability of Option. During the Optionee's lifetime, this
Option shall be exercisable only by the Optionee or any guardian or legal
representative of the Optionee, and the Option shall not be transferable except,
in case of the death of the Optionee, by will or the laws of descent and
distribution, nor shall the Option be subject to attachment, execution or other
similar process. In the event of (a) any attempt by the Optionee to alienate,
assign, pledge, hypothecate or otherwise dispose of this Option, except as
provided for herein, or (b) the levy of any attachment, execution or similar
process upon the rights or interest hereby conferred, the Company may terminate
the Option by notice to the Optionee and it shall thereupon become null and
void.

      7. Restrictions on Underlying Stock. The shares of Common Stock issuable
upon exercise of this Option may not be sold, pledged, hypothecated, transferred
or assigned in the absence of an effective registration statement for the
securities under the applicable federal and state securities laws or an opinion
of counsel satisfactory to the Company to the effect that such registration is
not required thereunder.

      8. "Piggy-Back" Registration Rights. If at any time commencing on the
first anniversary of the date hereof and expiring five (5) years hereafter, the
Company proposes to register any of its securities under the Securities Act of
1933 (other than in connection with an initial public offering or in connection
with a Form S-8 or any successor form as may be adopted by the Securities and
Exchange Commission), then the Company shall afford the Optionee the opportunity
to include for sale in such registration statement, shares of Common Stock
acquired by the Optionee upon the exercise of this Option; provided, however,
that if the Company's underwriter shall advise the Company in writing that in
its opinion the number of shares to be included in such registration is too
large, then the Company will include only such number of Option Shares as such
underwriter shall so advise.

      9. Nonqualified Option. The Option granted hereby shall be treated as a
nonqualified stock option and not as an incentive stock option under the
Internal Revenue Code.


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<PAGE>

      10. No Rights as Stockholder. Neither the Optionee nor any personal
representatives shall be, or shall have any of the rights and privileges of, a
stockholder of the Company with respect to any shares of Common Stock
purchasable or issuable upon the exercise of this Option, in whole or in part,
prior to the date of exercise of this Option in accordance with the provisions
hereof, and then only to the extent of the shares of Common Stock so purchased
or issued.

      11. Successors and Assigns. This Option shall not be assignable by the
Optionee without the prior consent of the Company, which shall not be
unreasonably withheld. This Option shall be binding upon the successors and
assigns of the Company, and shall be expressly assumed by any successor to the
Company pursuant to a merger in which the Company is not the surviving entity.

      12. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This certificate is deemed to have been delivered in the State of New
York and shall be construed and enforced in accordance with and governed by the
laws of such State. The headings in this Stock Option Agreement are for purposes
of reference only, and shall not limit or otherwise affect any of the terms
hereof.

                                     * * * *

          [The signatures hereto are set forth on the following page.]


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<PAGE>

            IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by a duly authorized representative and the Optionee has hereunto set
his hand as of the Option Grant Date.

                                            BASELINE OIL & GAS CORP.


                                            By: /s/ Barrie M. Damson
                                                --------------------------------
                                                Name:  Barrie M. Damson
                                                Title: Chairman & CEO


                                            /s/ Thomas Kaetzer
                                            ------------------------------------
                                            Thomas Kaetzer


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