EMPLOYEE BENEFITS AGREEMENT



     THIS  AGREEMENT  is made by and between  KANEB  SERVICES,  INC., a Delaware

corporation ("KSI") and KANEB SERVICES LLC, a Delaware limited liability company

("KSL").



                               W I T N E S S E T H



     WHEREAS,  KSL will distribute to its  stockholders one KSL Common Share for

each three  shares of KSI Common  Stock held by KSI  stockholders  on the record

date for the distribution (the "Distribution");



     WHEREAS,  upon the  Distribution,  the Kaneb Services,  Inc. Deferred Stock

Unit  Plan  account  of each  Kaneb  Services,  Inc.  Deferred  Stock  Unit Plan

participant  shall be deemed to be credited with one non-monetary  unit equal to

one KSL Common Share for every three non-monetary units equal to three shares of

KSI  Common  Stock that is deemed to be  credited  to his Kaneb  Services,  Inc.

Deferred Stock Unit Plan account as of the record date for the Distribution;



     WHEREAS,  upon the  Distribution,  the Kaneb  Services,  Inc.  Non-Employee

Directors  Deferred  Stock  Unit  Plan  account  of each  Kaneb  Services,  Inc.

Non-Employee  Directors  Deferred Stock Unit Plan participant shall be deemed to

be credited with one  non-monetary  unit equal to one KSL Common Share for every

three  non-monetary  units  equal to three  shares of KSI  Common  Stock that is

deemed  to be  credited  to his  Kaneb  Services,  Inc.  Non-Employee  Directors

Deferred Stock Unit Plan account as of the record date for the Distribution;



     WHEREAS, upon the Distribution,  the Kaneb Services, Inc. 1996 Supplemental

Deferred   Compensation   Plan  account  of  each  Kaneb  Services,   Inc.  1996

Supplemental  Deferred  Compensation  Plan  participant  shall be  deemed  to be

credited  with one  non-monetary  unit equal to one KSL  Common  Share for every

three  non-monetary  units  equal to three  shares of KSI  Common  Stock that is

deemed to be credited to his Kaneb  Services,  Inc. 1996  Supplemental  Deferred

Compensation Plan account as of the record date for the Distribution; and



     WHEREAS,  after the  Distribution  and through the date the  participant is

paid his entire  benefit  due under the  applicable  plan,  the  account of each

participant in the Kaneb Services,  Inc. 1996 Supplemental Deferred Compensation

Plan, the Kaneb Services,  Inc. Deferred Stock Unit Plan and the Kaneb Services,

Inc. Non-Employee  Directors Deferred Stock Unit Plan shall also be deemed to be

credited with additional  non-monetary  units equal to the cash  distribution(s)

KSL would have paid to the  participant  had he been the owner of such number of

KSL Common Shares equal to the number of non-monetary  units equal to the number

of KSL Common  Shares  deemed  credited to his account  under the plan as of the

record date(s) for the cash distribution(s);



     NOW,  THEREFORE,  in consideration of the promises  contained  herein,  and

other valuable  consideration,  the receipt and  sufficiency of which are hereby

acknowledged by the parties, the parties hereto agree as follows:



                                    ARTICLE I



                                   DEFINITIONS



     Whenever  used in this  Agreement,  the  following  terms  shall  have  the

meanings indicated below or in the recitals above, unless a different meaning is

plainly required by the context.  The singular shall include the plural,  unless

the context clearly indicates otherwise. Capitalized terms that are used in this

Agreement  which are not listed in the  recitals or in this Article I shall have

the respective meanings assigned to them in the Distribution Agreement.



     1.1  "Code" shall mean the Internal Revenue Code of 1986, as amended.



     1.2  "Distribution  Agreement" shall mean the Distribution Agreement by and

          among Kaneb Services,  Inc., a Delaware corporation and Kaneb Services

          L.L.C., a Delaware limited liability company, and the Tax Subsidiaries

          (as defined therein).



     1.3  "KSI Common Stock" shall mean KSI's common stock, no par value.



     1.4  "KSI Company" shall mean any Subsidiary of KSI other than KSL or a KSL

          Company.



     1.5  "KSI Deferred Compensation Plans" shall mean the Kaneb Services,  Inc.

          Deferred  Stock  Unit  Plan,  the Kaneb  Services,  Inc.  Non-Employee

          Directors  Deferred Stock Unit Plan and the Kaneb Services,  Inc. 1996

          Supplemental Deferred Compensation Plan.



     1.6  "KSI  Employee  Benefit  Plan" shall mean any  employee  benefit  plan

          (within the meaning of section 3(3) of the Employee  Retirement Income

          Security Act of 1974, as amended) or compensation  arrangement that is

          now or was previously  maintained,  sponsored or contributed to by KSI

          or a KSI  Company,  including  (but not limited  to) the KSI  Deferred

          Compensation Plans, the Kaneb Services, Inc. Health Benefits Plan, the

          Kaneb  Services,  Inc. Group Life & Accidental  Death &  Dismemberment

          Insurance Plan, the Kaneb Services,  Inc. Group  Supplemental  Death &

          Dismemberment   Plan,  the  Kaneb  Services,   Inc.  Group  Long  Term

          Disability  Benefit Plan, the Kaneb Services,  Inc.  Flexible Spending

          Account Plan, the Kaneb Services, Inc. Non-Employee Directors Deferred

          Stock Unit Plan, the Kaneb Services,  Inc. Severance Benefits Plan and

          the KSI Savings Plan.



     1.7  "KSI Option Exercise Price Adjustment Factor" shall mean, with respect

          to a given KSI  Option,  a  fraction,  the  numerator  of which is the

          original  exercise  price for the KSI  Option and the  denominator  of

          which is the  closing  price of a share of KSI Common  Stock (with due

          bill  attached)  on the  NYSE on the  last  trading  day  prior to the

          ex-distribution date.



     1.8  "KSI  Option"  shall mean an option to  purchase  shares of KSI Common

          Stock that was granted by KSI prior to, and is  outstanding as of, the

          record date for the Distribution.



     1.9  "KSI  Savings  Plan"  shall  mean the  Kaneb  Services,  Inc.  Savings

          Investment Plan.



     1.10 "KSL Common Share" shall mean a Common Share of KSL, as defined in the

          KSL Limited Liability Company Agreement.

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