CHAPARRAL RESOURCES INC
SUBORDINATION AGREEMENT
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>13
<FILENAME>0013.txt
<DESCRIPTION>SUBORDINATION AGREEMENT
<TEXT>


                             SUBORDINATION AGREEMENT

     This SUBORDINATION AGREEMENT (this "Agreement") is entered into on the ___
day of August 2000 among Chaparral Resources, Inc. ("Borrower"), Shell Capital
Services Limited (the "Facility Agent"), and Sage Operating Ltd. ("Junior
Entity").

                                    RECITALS:

     WHEREAS, the Borrower and the Facility Agent are, inter alia, parties to
the Loan Agreement (as defined herein); and

     WHEREAS, as a condition to funding under the Loan Agreement, the Borrower,
the Facility Agent and the Junior Entity must enter into this Agreement.

                                   AGREEMENT:

     NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of covenants herein contained, the parties
agree as follows:

1.   Definitions and Interpretation.

     (a) "Loan Agreement" means the loan agreement dated 1 November 1999 between
     Borrower, Central Asian Petroleum (Guernsey) Limited, Closed Type JSC
     Karakudukmunay and Central Asian Petroleum, Inc., as Co-Obligors, Shell
     Capital Limited, Shell Capital Services Limited and the Lenders (as defined
     in the Loan Agreement).

     "Preferred Obligations" means all obligations of the Borrower, the
     Co-Obligors, or any of them, to any of the Finance Parties whether now
     existing or arising in the future and whether fixed, prospective or
     contingent under or in respect of any of the Finance Documents whether for
     principal outstanding, interest, fees, costs, expenses, indemnities or
     otherwise.

     "Junior Obligations" means all obligations of the Borrower to the Junior
     Entity (including, without limitation, in respect of the CRI Bridge Notes
     and the CRI Existing Notes) whether now existing or arising in the future
     and whether fixed, prospective or contingent, whether for principal
     outstanding, interest, fees, costs, expenses, indemnities or otherwise.

     (b) Capitalized terms used and not defined herein are used with the meaning
     assigned to such term in the Loan Agreement.

     (c) Any reference in this Agreement to:

<PAGE>


          (i) a statute shall be construed as a reference to such statute as
          from time to time amended or re-enacted;

          (ii) a person includes its permitted successors and assigns;

          (iii) a Finance Document or any other agreement or document shall be
          construed as a reference to that Finance Document or, as the case may
          be, such other agreement or document, as the same may have been, or
          may from time to time be, amended, novated or supplemented; and

          (iv) the singular includes the plural and vice versa.

2.   The payment of the Junior Obligations is expressly made subordinate and
     subject in right of payment and in liquidation to the prior payment in full
     of the Preferred Obligations.

3.   Until the date of irrevocable final repayment, in full, of the Preferred
     Obligations and termination of all commitments in respect thereof, the
     Borrower undertakes not to pay or repay and the Junior Entity undertakes
     not to claim, recover, retain or receive (or seek to claim, recover, retain
     or receive) any amount whatsoever in relation to any Junior Obligation
     (including, without limitation, any recovery, payment or repayment arising
     out of any claim under a guarantee) or to any interest or other amount
     payable by the Borrower in respect thereof, or to any other indebtedness of
     the Borrower to any Junior Entity.

4.   If:

     (i) there is any distribution of all or any part of the assets of the
     Borrower including, without limitation, by reason of the liquidation,
     dissolution or other insolvency proceeding, or assignment for the benefit
     of creditors; or

     (ii) the Borrower goes into liquidation or becomes subject to any
     insolvency or rehabilitation proceeding, administration, or voluntary
     arrangement,

     then until the date of final irrevocable repayment in full of the Preferred
     Obligations any payment or distribution of any kind or character and all
     and any rights in respect thereof payable or deliverable to the Junior
     Entity with respect to the Junior Obligations or any part thereof by the
     liquidator, administrator, administrative receiver or receiver (or the
     equivalent thereof) of the Borrower will forthwith be paid or delivered to
     the Facility Agent for application to the Preferred Obligations in
     accordance with the terms of the Finance Documents.

5.   Following the occurrence of any Event of Default, the Junior Entity will
     irrevocably authorise and empower the Facility Agent to demand, sue and
     prove for, collect and receive every payment or distribution referred to in
     Section 4 and give good discharge therefor and to file claims and take such
     other proceedings, in the Facility Agent's name, the name of the Junior
     Entity or otherwise, as the Facility Agent may deem necessary or advisable
     for the enforcement of the payment of debts in accordance with the priority
     set out in Section 2.

                                       2
<PAGE>


6.   The Junior Entity will, at all times, following the occurrence of any Event
     of Default, and for so long as such Event of Default is continuing, execute
     or procure the execution of and deliver to the Facility Agent such proxies,
     powers of attorney, assignments or other instruments as may be requested by
     it in order to enable the Facility Agent to vote and/or enforce any and all
     claims upon or with respect to the Junior Obligations or any part thereof
     and to collect and receive any and all payments or distributions which may
     be payable or deliverable to the Facility Agent at any time upon or with
     respect to the Junior Obligations or any part thereof.

7.   A liquidator or other insolvency representative of the Borrower or the
     Junior Entity will be authorised, to the maximum extent permitted by
     applicable law, to apply any assets or moneys it receives in accordance
     with the order of priority referred to in Section 2.

8.   If any amounts are received by the Junior Entity or any person acting on
     its behalf with respect to the Junior Obligations or any part thereof
     whether in cash or in kind or by way of set-off, combination of accounts or
     otherwise, the Junior Entity (or person acting on its behalf as aforesaid)
     agrees that an amount equal to the amount so received by the relevant
     Junior Entity shall be held on trust for the Facility Agent and shall
     forthwith be paid to the Facility Agent for application to the Preferred
     Obligations in accordance with the terms of the Finance Documents and that
     any failure to make such payment shall be a breach of its obligations under
     this Agreement.

9.   (a) Unless otherwise agreed by the Facility Agent, the Junior Entity will
     waive, and undertake that it will not seek to obtain payment of any Junior
     Obligation, in whole or in part, by exercising any right of set-off it may
     have with respect to any Junior Obligation, whether created by contract,
     statute or otherwise.

     (b) Until the date of irrevocable final repayment, in full, of the
     Preferred Obligations and termination of all commitments in respect thereof
     the Facility Agent may (subject to the provisions of the Finance
     Documents), unless and until such moneys or distributions in the aggregate
     are sufficient to bring about the irrevocable final repayment, in full, of
     the Preferred Obligations (if applied to repayment of the Preferred
     Obligations), (i) apply any moneys or property received under this
     Agreement from the Borrower, the Junior Entity or any other person against
     the Preferred Obligations in such order as it thinks fit; and (ii) hold in
     a suspense account any moneys or distributions received under this
     Agreement.

10.  The Junior Entity will not be entitled without the consent of the Facility
     Agent to accelerate any Junior Obligation (or any portion thereof). The
     Facility Agent shall have complete discretion as to the granting of such
     consent.

                                       3
<PAGE>


11.  The Junior Entity will not under any circumstances, prior to the
     irrevocable final repayment, in full, of the Preferred Obligations, be
     subrogated to any of the rights of the Finance Parties or any security
     arising under the Finance Documents.

12.  This Agreement and the subordination provisions contained herein will
     terminate on the date of irrevocable final repayment, in full, of the
     Preferred Obligations, and termination of all commitments in respect
     thereof.

13.  Unless otherwise agreed by the Facility Agent, the Junior Entity undertakes
     not to commence, or join with any other creditor or creditors of the
     Borrower in commencing, any bankruptcy, insolvency or rehabilitation
     proceeding, administration or other voluntary arrangement against or in
     respect of the Borrower prior to irrevocable final repayment, in full, of
     the Preferred Obligations.

14.  This Agreement constitutes the entire agreement between the parties and
     supersedes all prior oral or written agreements, understandings,
     representations, warranties and course of conduct and dealings between the
     parties on the subject matter hereof.

15.  Time is of the essence of each party's obligations under this Agreement but
     no failure to exercise, nor any delay in exercising, on the part of the
     Facility Agent, any right or remedy under this Agreement shall operate as a
     waiver thereof, nor shall any single or partial exercise of any right or
     remedy prevent any further or other exercise thereof or the exercise of any
     other right or remedy. The rights and remedies contained in this Agreement
     are cumulative and not exclusive of any rights or remedies provided by law.

16.  If, at any time, any provision of this Agreement is or becomes illegal,
     invalid or unenforceable in any respect under the law of any jurisdiction,
     neither the legality, validity or enforceability of the remaining
     provisions of this Agreement under the law of that jurisdiction nor the
     legality, validity or enforceability of that or any other provision of this
     Agreement under the law of any other jurisdiction shall in any way be
     affected or impaired thereby unless the effect of the foregoing would be
     substantially to alter the rights and obligations of the parties originally
     agreed.

17.  This Agreement shall bind the parties and each of their respective
     successors and assignees.

18.  Neither the Borrower nor the Junior Entity will assign or otherwise
     transfer any of its rights or obligations under this Agreement. The
     Facility Agent is permitted to transfer its rights and/or obligations under
     this Agreement.

19.  (a) All notices or other communications to Borrower or the Facility Agent
     shall be given in writing addressed to the relevant party at its address
     specified in Clause 29.2 of the Loan Agreement. All notices or other
     communications to the Junior Entity shall be given in writing at its
     address set forth in the signature page of this Agreement. A written notice
     includes a notice by facsimile transmission.

                                       4
<PAGE>


     (b) Any such notice shall be deemed to be given:

          (i) if by personal delivery or letter, when delivered; and

          (iii) if by facsimile, when the answerback is received.

     (c) However, a notice given in accordance with the above but received on a
     non-working day or after business hours in the place of receipt shall only
     be deemed to be given on the next working day in that place.

20.  Each communication and document made or delivered by one party to another
     pursuant to this Agreement shall be in the English language or accompanied
     by a translation into English certified (by an officer of the person making
     or delivering the same) as being a true and accurate translation thereof.

21.  This Agreement may not be amended except by an instrument in writing signed
     by each of the parties.

22.  This Agreement shall be governed by English law.

23.  (a) For the exclusive benefit of the Facility Agent, each of the Borrower
     and the Junior Entity irrevocably agrees that the courts of England are to
     have jurisdiction to settle any disputes which may arise out of or in
     connection with this Agreement and that accordingly any suit, action or
     proceedings (together in this Section 23 referred to as "proceedings")
     arising out of or in connection with this Agreement may be brought in such
     courts, subject to the option referred to in Section 26.

     (b) Each of the Borrower and the Junior Entity irrevocably waives and
     agrees not to raise any objection which it may have now or hereafter to the
     laying of the venue of any proceedings in any such court as is referred to
     in this Section 23 and any claim that any such proceedings have been
     brought in an inconvenient or inappropriate forum and further irrevocably
     agrees that a judgement in any proceedings brought in the English courts
     shall be conclusive and binding upon each Borrower and the Junior Entity
     and may be enforced in the courts of any other jurisdiction.

     (c) Nothing contained in this Section 23 shall limit the right of the
     Facility Agent to take proceedings against the Borrower or the Junior
     Entity in any other court of competent jurisdiction, nor shall the taking
     of proceedings in one or more jurisdictions preclude the taking of
     proceedings in any other jurisdiction, whether concurrently or not.

24.  To the extent that the Borrower or the Junior Entity may now or hereafter
     be entitled, in any jurisdiction in which proceedings may at any time be
     commenced with respect to this Agreement, to claim for itself or any of its
     undertaking, properties, assets or revenues present or future any immunity
     (sovereign or otherwise) from suit, jurisdiction of any court, attachment
     prior to judgement, attachment in aid of execution of a judgement,
     execution of a judgement or from set-off, banker's lien, counterclaim or
     any other legal process or remedy with respect to its obligations under
     this Agreement and to the extent that in any such jurisdiction there may be
     attributed to the Borrower or the Junior Entity any such immunity (whether
     or not claimed), each of the Borrower and the Junior Entity hereby to the
     fullest extent permitted by applicable law irrevocably agrees not to claim,
     and hereby to the fullest extent permitted by applicable law waives, any
     such immunity.

                                       5
<PAGE>


25.  Each of the Borrower and the Junior Entity consents generally in respect of
     any proceedings to the giving of any relief or the issue of any process in
     connection with such proceedings including the making, enforcement or
     execution against any property whatsoever (irrespective of its use or
     intended use) of any order or judgement which may be made or given in such
     proceedings.

26.  If any dispute arises in relation to this Agreement, including any
     questions as to existence, validity or termination, such dispute shall, at
     the option only of the Facility Agent, be referred to and finally resolved
     by arbitration under the rules of the London Court of International
     Arbitration which are applicable at the time of reference to the
     arbitration and are deemed to be incorporated by reference into this
     Section 26. Such arbitration shall take place in London, England and shall
     be conducted by three arbitrators, one of whom shall be nominated by the
     Borrower, one by the Facility Agent and the third to be agreed between the
     two arbitrators so nominated and in default he shall be nominated by the
     President of the London Court of International Arbitration. The language in
     which such arbitration shall be conducted shall be English. Any award
     rendered shall be final and binding on the parties thereto and may be
     entered into any court having jurisdiction or application may be made to
     such court for an order of enforcement as the case may require. No party
     may appeal to any court from any award or decision of the arbitral tribunal
     and, in particular, but without limitation, no applications may be made
     under section 45 of the Arbitration Act 1996 and no appeal may be made
     under section 69 of that Act.

27.  This Agreement may be executed in one or more counterparts, each of which
     will be deemed to be an original copy of this Agreement and all of which,
     when taken together, will be deemed to constitute one and the same
     agreement.


     IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.


CHAPARRAL RESOURCES, INC.

By: /s/ Michael B. Young
Name: Michael B. Young
Title: Treasurer


SHELL CAPITAL SERVICES LIMITED

By: /s/ Mark L.G. Turner
Name: Mark L.G. Turner
Title: Director


SAGE OPERATING LTD.

By: /s/ L. Todd Gremillion
Name: L. Todd Gremillion
Title: Authorized Signatory
Address: c/o Akin, Gump, Strauss, Hauer & Feld, LLP
         711 Louisiana, Suite 1900
         Houston, TX  77002

Telephone: 713-220-5800
Facsimile: 713-236-0822

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