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                                                                   EXHIBIT 10.04



                                                                         ANNEX B

                           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:


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                                    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 (with due bill attached) 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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         1.11 "KSL Common Share" shall mean a Common Share of KSL, as defined in
the KSL Limited Liability Company Agreement.

         1.12 "KSL Company" shall mean any Subsidiary of KSL.

         1.13 "KSL Employee" shall mean a common law employee of KSL or a KSL
Company.

         1.14 "KSL 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, other than a KSI Employee
Benefit Plan, that is now, is hereafter or was previously maintained, sponsored
or contributed to by KSL or a KSL Company, including (but not limited to) the
KSL Savings Plan, the KSL Health Plan, the Kaneb Services LLC 2001 Incentive
Plan and any welfare benefit plan established by KSL or a KSL Company pursuant
to Article IV of this Agreement.

         1.15 "KSL Former Employee" shall mean was previously, but is not as of
the Distribution Date, a KSL Employee.

         1.16 "KSL Health Plan" shall have the meaning set forth in Article IV.

         1.17 "KSL Savings Plan" shall have the meaning set forth in Article V.

         1.18 "KSL Option" shall mean an option to purchase KSL Common Shares.

                                   ARTICLE II

                    NONQUALIFIED DEFERRED COMPENSATION PLANS

         2.1 STATEMENT OF AMOUNTS CREDITED. After the Distribution, KSI shall
furnish to KSL a statement that indicates the number of non-monetary units equal
to one share of KSI Common Stock deemed to be credited to the accounts of each
participant and former participant under the KSI Deferred Compensation Plans as
a result of the Distribution. From time to time after the Distribution, KSI
shall furnish KSL an updated statement that indicates the number of non-monetary
units equal to those number of Common Shares deemed credited to the accounts of
each participant and former participant under the KSI Deferred Compensation
Plans.

         2.2 NOTIFICATION OF DISTRIBUTABLE EVENTS. KSI shall notify KSL when the
benefits of the participants and former participants who were employed by KSI or
any KSI Company become distributable in the form of KSL Common Shares under any
of the KSI Deferred Compensation Plans.

         2.3 ISSUANCE OF KSL COMMON SHARES. As soon as practicable after a
notification has been delivered to KSL pursuant to Section 2.2 above, KSL shall
cause to be issued directly to the participant or former participant that number
of KSL Common Shares equal to those number of non-monetary units deemed credited
to his account under the applicable KSI Deferred Compensation Plan as a result
of the Distribution, as adjusted under the antidilution provisions of the
applicable KSI Deferred Compensation Plan.

         2.4 QUARTERLY CASH DISTRIBUTIONS. Immediately prior to the date KSL
pays a quarterly cash distribution to the owners of KSL Common Shares, KSL shall
calculate and pay to KSI, with respect to each participant and former
participant in the KSI Deferred Compensation Plans who was employed by KSI or
any KSI Company, the aggregate amount of the cash distribution KSL would have
paid to him had he been the



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record owner of the aggregate number of KSL Common Shares equal to those number
of non-monetary units then deemed credited to his accounts under the KSL
Deferred Compensation Plans.

         2.5 DEDUCTIONS. The parties agree that neither KSL nor any KSL Company
is entitled to deduct any amounts paid under or with respect to either of the
KSI Deferred Compensation Plans, other than amounts paid under or with respect
to the portion of the applicable KSI Deferred Compensation Plan that is in
consideration of services performed for KSL or a KSL Company. KSL hereby agrees
that it shall not attempt to claim federal income taxation deductions with
respect to KSL Common Shares that are issued by KSL pursuant to this Agreement
to current or former employees of KSI or a KSI Company who are participants or
former participants under either of the KSI Deferred Compensation Plans. The
parties agree that pursuant to section 83(h) of the Code, KSI or a KSI Company,
as appropriate, shall be entitled to claim federal income taxation deductions
with respect to KSL Common Shares that are issued to current or former employees
of KSI or a KSI Company who are participants or former participants under either
of the KSI Deferred Compensation Plans pursuant to this Agreement.

                                   ARTICLE III

                        OPTIONS TO PURCHASE COMMON SHARES

         3.1 GRANT OF KSL OPTIONS. (a) Upon the Distribution, KSL will grant KSL
Options under the Kaneb Services LLC 2001 Incentive Plan, the terms of which
plan shall be substantially similar to those set forth in Exhibit A hereto, to
persons who hold KSI Options. Except as specified in this Agreement, each KSL
Option granted to a KSI Option holder in compliance with this Agreement shall
contain provisions that are substantially similar to the provisions of the
holder's KSI Option.

         (b) The exercise price for each KSI Option will be reduced in
accordance with the following formula. The per share reduced exercise price
shall be an amount equal to the result of (1) the Fair Market Value of a share
of KSI Common Stock on the ex-distribution date multiplied by (2) the KSI Option
Exercise Price Adjustment Factor. The number of shares subject to the KSI Option
will not be changed as a result of the Distribution.

         (c) The per share exercise price applicable to a given KSL Option
granted as required under this Agreement shall be equal to (1) the KSI Option
Exercise Price Adjustment Factor applicable to the holder's KSI Option
multiplied by (2) the Fair Market Value of a KSL Common Share on the
ex-distribution date (or, if there is no trading in KSL Common Shares on the New
York Stock Exchange on the ex-distribution date, on the next date on which there
is such trading). The number of KSL Common Shares subject to a KSL Option shall
be such number as is necessary to produce an intrinsic value (determined as of
the ex-distribution date, or of there is no trading in KSL Common Shares on the
New York Stock Exchange on the ex-distribution date, on the next date on which
there is such trading) that, when added to the intrinsic value of the adjusted
KSI Option (determined as of the ex-distribution date), equals the
pre-distribution intrinsic value of the KSI Option (determined as of the last
trading date prior to the ex-distribution date). However, no KSL Option shall
provide a person a right to purchase a fraction of one KSL Common Share. For
purposes of determining the intrinsic values, the fair market values of shares
of KSI Common Stock and KSL Common Shares will be based upon the average of the
high and low sales prices of the shares on the New York Stock Exchange on the
relevant date.

         (d) 15 days prior to the record date for the Distribution all KSI
Options, other than KSI Options held by persons employed in KSI's Dallas, Texas
headquarters, shall become fully exercisable.



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         (e) A KSL Option that KSL grants pursuant to this Agreement to a person
who is not expected to perform services for KSL or a KSL Company immediately
after the Distribution shall provide that such KSL Option is fully exercisable
at all times prior to its expiration and shall expire upon the earliest to occur
of (1) 365 days following the ex-distribution date, (2) 90 days following the
date on which the person is no longer an employee or a director of KSI or a KSI
Company, or (3) the expiration of the person's general term specified in his KSI
Option. A KSL Option that KSL grants pursuant to this Agreement to a KSL
Employee, KSL director or a KSL Former Employee shall be exercisable under
substantially the same terms as were applicable to such person's KSI Option and
shall expire upon the earlier to occur of (1) the expiration of the general term
specified in his KSI Option (determined prior to the adjustments to the terms
made pursuant to the following paragraph) and (2) 90 days following the date on
which the person is no longer an employee of KSL or a KSL Company or a director
of KSL. A KSL Option that KSL grants pursuant to this Agreement to an employee
of KSI who is expected to perform services for KSL or a KSL Company but who will
not be a KSL Employee or a director of KSL immediately after the ex-distribution
date shall expire on the same terms as are applicable under the person's KSI
Option.

         A KSI Option that was granted to a person who will be a KSL Employee or
a director of KSL immediately after the ex-distribution date but not an employee
or a director of KSI shall expire upon the earliest to occur of (1) 365 days
after the Distribution Date, (2) 90 days after the date on which he is no longer
a KSL Employee or a KSL director or (3) the expiration of the person's general
term specified in his KSI Option. Persons who will be KSL Employees immediately
after the Distribution will not be deemed to have incurred terminations of
employment for purposes of their KSI Options as a result of the Distribution to
the extent that they continue to be employed by KSL or any KSL Company following
the Distribution.

         3.2 ISSUANCE OF KSL COMMON SHARES. KSL shall issue KSL Common Shares
upon the exercise of any KSL Option granted pursuant to this Agreement.

         3.3 DEDUCTIONS. The parties agree that neither KSL nor any KSL Company
is entitled to deduct any amounts with respect to the KSL Options granted
pursuant to the Distribution Agreement except to the extent that the KSI Option
that is substituted in part by such KSL Option was granted in consideration for
services performed for KSL or a KSL Company by the optionee. The parties agree
that pursuant to section 83(h) of the Code, the employer(s) for whom services
were performed in consideration for the granting of a KSI Option that is
substituted in part by a KSL Option shall be entitled to claim a federal income
taxation deduction with respect to the exercise of the KSL Option.

                                   ARTICLE IV

                   ESTABLISHMENT OF KSL WELFARE BENEFIT PLANS

         4.1 ADOPTION OF THE KSL HEALTH PLAN. Effective no later than the
Distribution Date, KSL shall adopt or cause its Subsidiaries to adopt a group
health plan for the benefit of KSL Employees and their dependents (the "KSL
Health Plan") which is substantially similar in all respects to the Kaneb
Services, Inc. Health Benefits Plan. Effective as of the Distribution Date or
the earlier effective date of the KSL Health Plan, KSL shall permit each KSL
Employee who participated in the Kaneb Services, Inc. Health Benefits Plan
immediately prior thereto and his eligible dependents to be covered under the
KSL Health Plan. The terms of the KSL Health Plan shall credit to each KSL
Employee, for the 2001 calendar year, with any duplicate deductible payments
incurred during the 2001 calendar year under the Kaneb Services, Inc. Health
Benefits Plan and shall waive any preexisting condition restrictions that were
waived or satisfied under the Kaneb Services, Inc. Health Benefits Plan.



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         4.2 ADOPTION OF LIFE INSURANCE, ACCIDENTAL DEATH AND DISMEMBERMENT
INSURANCE AND LONG-TERM DISABILITY BENEFIT PLANS. Effective no later than the
Distribution Date, KSL shall adopt or cause its Subsidiaries to adopt for the
benefit of KSL Employees life insurance, accidental death and dismemberment and
long-term disability programs that are substantially similar to the Kaneb
Services, Inc. Group Life & Accidental Death & Dismemberment Insurance Plan, the
Kaneb Services, Inc. Group Supplemental Death & Dismemberment Plan and the Kaneb
Services, Inc. Long Term Disability Benefit Plan.

         4.3 ADOPTION OF MEDICAL EXPENSE REIMBURSEMENT PLAN. Effective no later
than the Distribution Date, KSL shall adopt or cause its Subsidiaries to adopt
for the benefit of KSL Employees a medical expense reimbursement plan that
satisfies the requirements of section 125 of the Code and is substantially
similar to the Kaneb Services, Inc. Flexible Spending Account Plan.


                                    ARTICLE V

                                KSL SAVINGS PLAN

         Effective as of June 1, 2001, KSL shall adopt the Kaneb Services LLC
401(k) Savings Plan, the terms of which shall be substantially similar to those
set forth in Exhibit B hereto (the "KSL Savings Plan"). To the extent required
by KSI, KSL shall take such actions as are necessary to cause the trustee of the
KSL Savings Plan to accept a transfer of assets from the trust funding the KSI
Savings Plan that are attributable to the account balances of KSL Employees and
KSL Former Employees. KSI and KSL shall cooperate to ensure that any such
transfer satisfies the requirements of section 414(1) of the Code dealing with
trust-to-trust asset transfers and section 411(d)(6) of the Code dealing with
the preservation of optional forms of payment. The parties agree that no KSL
Common Shares and no shares of KSI Common Stock shall be transferred from the
trust funding the KSI Savings Plan to the trust funding the KSL Savings Plan.


                                   ARTICLE VI

           TERMINATION OF PARTICIPATION IN KSI EMPLOYEE BENEFIT PLANS

         6.1 TERMINATION OF PARTICIPATION IN THE KSI EMPLOYEE BENEFIT PLANS
OTHER THAN THE KSI DEFERRED COMPENSATION PLANS. Effective no later than the
Distribution Date, KSL shall take such actions as are necessary to cause KSL and
its Subsidiaries to terminate KSL's and its Subsidiaries' participation in all
KSI Employee Benefit Plans other than the KSI Deferred Compensation Plans and
the KSI Savings Plan.

         6.2 TERMINATION OF PARTICIPATION IN THE KSI DEFERRED COMPENSATION
PLANS. Effective immediately upon the expiration of the compensation deferral
election period during which the Distribution occurs, KSL shall take such
actions as are necessary to cause KSL and its Subsidiaries to terminate KSL's
and its Subsidiaries' participation in the KSI Deferred Compensation Plans.

         6.3 TERMINATION OF PARTICIPATION IN THE KSI 401(k) PLAN. Effective as
of June 1, 2001, KSL shall take such actions as are necessary to cause KSL and
its Subsidiaries to terminate KSL's and its Subsidiaries' participation in the
KSI Savings Plan.



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                                   ARTICLE VII

                          EMPLOYEE BENEFIT LIABILITIES

         KSL and its Subsidiaries shall be exclusively liable for any Liability
relating to any KSL Employee Benefit Plan. Further, KSL and its Subsidiaries
shall be exclusively liable for any Liability relating to any KSI Employee
Benefit Plan to the extent that the Liability relates to a KSL Employee, a KSL
Former Employee or a dependent or beneficiary of a KSL Employee or a KSL Former
Employee.


                                  ARTICLE VIII

                                  MISCELLANEOUS

         8.1 NOTIFICATION OF ISSUANCE OF KSL COMMON SHARES. Promptly after each
issuance of KSL Common Shares pursuant to this Agreement, KSL shall furnish KSI
a notice that lists the date of the issuance, the recipient and the number of
KSL Common Shares issued to each recipient.

         8.2 INCORPORATION OF CERTAIN DISTRIBUTION AGREEMENT PROVISIONS. The
provisions of Article VII of the Distribution Agreement are incorporated by
reference herein and such provisions shall be deemed to have been separately
stated in this Agreement; provided, however, that there shall be no requirement
that copies of notifications be sent to counsel for any of the parties.

         8.3 AMENDMENTS TO AND ADOPTION OF KSL EMPLOYEE BENEFIT PLANS. Nothing
in this Agreement shall be construed to prevent KSL or its Subsidiaries from
adopting employee benefit plans after the Distribution Date that are not
described in this Agreement. Further, nothing in this Agreement shall be
construed to prevent KSL or its Subsidiaries from amending any employee benefit
plan described in this Agreement that is sponsored by KSL or any of its
Subsidiaries after the Distribution Date if the amendment is effective on or
after January 1, 2001 or is required by applicable law.

         8.4 NOTIFICATIONS TO THE TRUSTEE OF THE TRUST FUNDING THE KSI SAVINGS
PLAN. For so long as KSI Savings Plan assets are invested in KSL Common Shares,
whenever KSL files preliminary or final proxy solicitation materials with the
Securities and Exchange Commission, KSL shall cause a copy of such materials to
be simultaneously sent to the trustee of the trust funding the KSI Savings Plan
or the trustee's designee. Further, if KSI Plan assets are then invested in KSL
Common Shares, upon the commencement of a tender offer for KSL Common Shares,
KSL shall notify each KSI Savings Plan participant, former participant or
beneficiary of the tender offer and utilize its best efforts to timely
distribute or cause to be distributed to each KSI Savings Plan participant,
former participant or beneficiary the same information that is distributed to
other holders of KSL Common Shares in connection with the tender offer, and,
after consulting with the trustee of the trust funding the KSI Savings Plan,
shall provide and pay for a means by which each such participant, former
participant or beneficiary may direct the trustee of the trust funding the KSL
Savings Plan whether or not to tender the KSL Common Shares credited to his KSL
Savings Plan account.



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         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective as of the _______ day of _______________________, 2001.



                              KANEB SERVICES, INC.


                              By:
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                              Title:
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                              KANEB SERVICES LLC


                              By:
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                              Title:
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