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").



                                   WITNESSETH



         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:



   2



                                    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 "Fair Market Value" shall mean the average of the high and low

sales prices of a share of KSI Common Stock or a KSL Common share, as

applicable, as quoted on the New York Stock Exchange on the relevant date.



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



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

KSL Company.



         1.6 "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.



         1.7 "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.



         1.8 "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

Fair Market Value of a share of KSI Common Stock on the last trading day prior

to the ex-distribution date.



         1.9 "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.



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

Investment Plan.

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