EXHIBIT 10.1





                             DISTRIBUTION AGREEMENT

                                 by and between

                              KANEB SERVICES, INC.

                                       AND

                       KANEB SERVICES LLC AND SUBSIDIARIES


                                  June 28, 2001


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                                TABLE OF CONTENTS


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<CAPTION>
                                                                                                               Page

<S>     <C>                                                                                                      <C>
ARTICLE 1.........................................................................................................1
         CERTAIN DEFINITIONS......................................................................................1
         1.1     "Action"   ......................................................................................1
         1.2     "Adjustment".....................................................................................1
         1.3     "Administrative Services Agreement"..............................................................1
         1.4     "Affected Layers"................................................................................1
         1.5     "Affiliate"......................................................................................1
         1.6     "Agreement"......................................................................................2
         1.7     "Allocated Shares"...............................................................................2
         1.8     "Annual Premiums"................................................................................2
         1.9     "Aon"      ......................................................................................2
         1.10    "Business Day"...................................................................................2
         1.11    "CERCLA"  .......................................................................................2
         1.12    "Code"     ......................................................................................2
         1.13    "Common Share Issuance"..........................................................................2
         1.14    "Distribution"...................................................................................2
         1.15    "Distribution Agent".............................................................................2
         1.16    "Distribution Date"..............................................................................2
         1.17    "Employee Benefits Agreement"....................................................................2
         1.18    "Environmental Conditions".......................................................................2
         1.19    "Environmental Law" or "Environmental Laws"......................................................2
         1.20    "Environmental Liabilities"......................................................................3
         1.21    "Estimate".......................................................................................3
         1.22    "Group"    ......................................................................................3
         1.23    "Income Tax".....................................................................................3
         1.24    "Incremental Group Tax Liability"................................................................3
         1.25    "Initial Policy Periods".........................................................................3
         1.26    "Insured Party"..................................................................................3
         1.27    "KFC"      ......................................................................................3
         1.28    "KPL"      ......................................................................................3
         1.29    "KPL Contribution"...............................................................................4
         1.30    "KPLOP Partnership Agreement"....................................................................4
         1.31    "KPP Distributions"..............................................................................4
         1.32    "KPP Partnership Agreement"......................................................................4
         1.33    "KSI"      ......................................................................................4
         1.34    "KSI Common Stock"...............................................................................4
         1.35    "KSI Employee Benefit Plan"......................................................................4
         1.36    "KSI Insurance Policy"...........................................................................4
         1.37    "KSL"      ......................................................................................4
         1.38    "KSL Assets".....................................................................................4
         1.39    "KSL Circumstance"...............................................................................4
         1.40    "KSL Common Shares"..............................................................................4
         1.41    "KSL Company"....................................................................................4
         1.42    "KSL Employee"...................................................................................4
         1.43    "KSL Employee Benefit Plan"......................................................................4
         1.44    "KSL Former Employee"............................................................................5
         1.45    "KSL Group"......................................................................................5
         1.46    "KSL Liabilities" ...............................................................................5
         1.47    "KSL Limited Liability Company Agreement"........................................................6
         1.48    "KSL Properties".................................................................................6
         1.49    "KSL Taxes"......................................................................................6
         1.50    "Liability"......................................................................................6
         1.51    "Liability Limit Trigger"........................................................................6
         1.52    "NYSE"     ......................................................................................6
         1.53    "Person"   ......................................................................................6
         1.54    "Predecessor"....................................................................................6
         1.55    "Record Date"....................................................................................6
         1.56    "Redemption".....................................................................................7
         1.57    "Reinstatement Premium"..........................................................................7
         1.58    "SEC"      ......................................................................................7
         1.59    "Subsidiary".....................................................................................7
         1.60    "Tax Subsidiary".................................................................................7
         1.61    "Taxes"    ......................................................................................7
         1.62    "Transfer Agent".................................................................................7
         1.63    "Voting Stock"...................................................................................7
         1.64    "Waste Materials"................................................................................7

ARTICLE 2.........................................................................................................8
         CONTRIBUTIONS; CONVERSION; LINE OF CREDIT................................................................8
         2.1     Pre-Distribution Transactions....................................................................8
         2.2     Guarantees and Financial Assurances..............................................................8
         2.3     KSL Acknowledgments..............................................................................8
         2.4     Line of Credit...................................................................................8
         2.5     Letter of Credit.................................................................................8
         2.6     Covenant regarding KPP Distributions.............................................................8
         2.7     Covenant regarding Assignment....................................................................8

ARTICLE 3.........................................................................................................8
         MECHANICS OF DISTRIBUTION................................................................................8
         3.1     Mechanics of KSL Distribution....................................................................8
         3.2     Timing of Distribution...........................................................................9

ARTICLE 4.........................................................................................................9
         ALLOCATION OF INSURANCE OBLIGATIONS......................................................................9
         4.1     Obligations during the Initial Policy Period.....................................................9
         4.2     Notification Requirements; Reinstatement of Liability Limits.....................................9
         4.3     Redetermination after Initial Policy Period.....................................................10
         4.4     Letter of Credit................................................................................10

ARTICLE 5........................................................................................................10
         5.1     Payment of Estimate and Incremental Group Tax Liability by KSL to KSI...........................10
         5.2     Determination of Incremental Group Tax Liability................................................11
         5.3     Indemnity ..................................................................................... 12
         5.4     Payment of Interest, Penalties and Expenses.....................................................12
         5.5     KSI as Agent....................................................................................12
         5.6     Application of Article 5........................................................................12

ARTICLE 6........................................................................................................13
         INDEMNIFICATION.........................................................................................13
         6.1     Indemnification Matters.........................................................................13
         6.2     Notice of KSL Circumstance......................................................................14
         6.3     Payment    .....................................................................................15
         6.4     Insurance  .....................................................................................15
         6.5     Scope of Indemnification........................................................................15
         6.6     Indemnity for Certain Environmental Liabilities.................................................15

ARTICLE 7........................................................................................................15
         CONDITIONS TO OBLIGATIONS OF KSI........................................................................15

ARTICLE 8........................................................................................................16
         MISCELLANEOUS...........................................................................................16
         8.1     KSL Covenants...................................................................................16
         8.2     Governing Law...................................................................................16
         8.3     Notices    .....................................................................................16
         8.4     Expenses   .....................................................................................17
         8.5     Entire Agreement................................................................................17
         8.6     Waiver     .....................................................................................17
         8.7     Binding Effect; Assignment; No Third Party Benefit..............................................18
         8.8     Counterparts....................................................................................18
         8.9     References .................................................................................... 18
         8.10    Terminology.....................................................................................18
         8.11    Severability....................................................................................18
         8.12    Further Assurances..............................................................................18
         8.13    Amendments..................................................................................... 18
</TABLE>
<PAGE>


                                 LIST OF ANNEXES

Annex A  --   Administrative Services Agreement
Annex B  --   Employee Benefits Agreement



<PAGE>

                             DISTRIBUTION AGREEMENT

     THIS DISTRIBUTION  AGREEMENT (this  "Agreement") is dated June 28, 2001, by
and among KANEB SERVICES,  Inc., a Delaware corporation ("KSI"),  KANEB SERVICES
LLC, a Delaware limited liability company ("KSL"),  and the Tax Subsidiaries (as
defined in Article 1) of KSL.

                              W I T N E S S E T H:

     WHEREAS, KFC is the sole organizational member of KSL;

     WHEREAS,  KSI  desires  that all of the  issued and  outstanding  shares of
capital  stock of KPL be  contributed  to KSL in exchange for the Common  Shares
Issuance; and

     WHEREAS,  KSI  desires to  distribute  to its  stockholders  all of the KSL
Common Shares that it receives in the Common Share Issuance;

     NOW,  THEREFORE,  in  consideration  of the premises and the mutual  terms,
covenants and  conditions  herein  contained,  and intending to be legally bound
hereby, the parties hereto hereby agree as follows:

                                    ARTICLE 1

                               CERTAIN DEFINITIONS

     As  used  in  this  Agreement,  the  following  terms  have  the  following
respective meanings:

     1.1 "Action"  shall mean that action before the District Court of the State
of Texas in Dallas County, case number DF99-1315,  in which Kaneb Services, Inc.
and Kaneb Management  Company,  Inc. are plaintiffs and  PricewaterhouseCoopers,
LLP is defendant.

     1.2  "Adjustment"  shall mean the  alteration of any item of income,  gain,
loss,  deduction or credit of the Group or any one or more Tax  Subsidiaries  of
KSI  occurring  after the filing of any return  for any tax year  through  2001,
whether  incident  to  the  filing  of  an  amended  return  or  pursuant  to an
examination by a tax authority.  In the latter case, a proposed Adjustment shall
become an Adjustment  for purposes  hereof when it is agreed by KSI (or affected
members  of  the  Group),  or is  unagreed  initially  but is  finally  resolved
adversely to the  affected  members of the Group  pursuant to an  administrative
proceeding, judicial action or settlement.

     1.3  "Administrative  Services  Agreement"  shall mean the  agreement to be
entered  into by and between KSI and KSL, in  substantially  the form of Annex A
hereto.

     1.4  "Affected  Layers"  shall mean,  with respect to any  Liability  Limit
Trigger,  those layers of liability  coverage under the applicable KSI Insurance
Policies that the reserve established impacts.

     1.5 "Affiliate"  shall mean,  with respect to KSI or KSL, any Person,  that
directly or indirectly, is in control of, is controlled by, controls or is under
common  control  of KSI or  KSL,  as the  case  may  be.  For  purposes  of this
definition,  control  shall include the ownership of 50% or more of the legal or
beneficial  interest in any Person or the power to direct or cause the direction
of the management and policies of such Person,  whether through the ownership of
voting securities,  by contract or otherwise. A Person who is an Affiliate shall
only be considered an Affiliate for so long as that Person meets the  definition
of an Affiliate.  An officer,  director,  general  partner,  managing  member or
trustee of a Person or Affiliate of such Person shall not be considered to be an
Affiliate  unless such Person is under the direct or indirect  control or common
control of KSI or KSL, as the case may be. For purposes of clarity,  KSI and KSL
shall not be  considered  to be an Affiliate  of the other,  nor shall any other
company in which a director or officer of KSI or KSL is also a director, officer
or  stockholder  be  considered an Affiliate of KSI or KSL unless KSI or KSL, as
the case may be, itself controls such company.

     1.6 "Agreement" shall have the meaning specified in the preamble.

     1.7 "Allocated  Shares" shall mean that amount of each Annual Premium,  not
including any Reinstated  Premium,  if applicable,  for which KSL is agreeing to
pay to KSI  for  its  respective  shares  of the  various  Annual  Premiums,  as
determined in accordance with Section 4.1(b).

     1.8 "Annual Premiums" shall mean the premiums owed by KSI under the various
KSI Insurance Policies during the applicable Initial Policy Periods.

     1.9 "Aon" shall mean Aon Risk Services of Texas, Inc., or such other entity
that serves as the insurance agent for KSI.

     1.10 "Business Day" shall mean any day other than Saturday, Sunday or a day
on which commercial banks located in Dallas, Texas are required or authorized by
law to close.

     1.11  "CERCLA"  shall  mean  the  Comprehensive   Environmental   Response,
Compensation, and Liability Act, 42 U.S.C., Section 9601 et seq.

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

     1.13  "Common  Share  Issuance"  shall mean the issuance by KSL to KFC of a
number of KSL Common Shares equal to the quotient obtained by dividing (i) three
by (ii) the number of issued and  outstanding  shares of KSI Common Stock on the
Record Date.

     1.14 "Distribution"  shall mean the distribution by KSI to its stockholders
of all of the issued and outstanding shares of KSL Common Shares.

     1.15  "Distribution  Agent"  shall  mean  American  Stock  Transfer & Trust
Company.

     1.16  "Distribution  Date"  shall  mean the  time and date as of which  the
Distribution is effective.

     1.17 "Employee Benefits Agreement" shall mean the agreement entered into by
and between KSI and KSL, substantially in the form of Annex B hereto.

     1.18   "Environmental   Conditions"   shall   mean   (i)   any   pollution,
contamination, degradation, damage or injury caused by, related to, arising from
or in  connection  with  the  generation,  handling,  use,  treatment,  storage,
transportation,  disposal, discharge, release or emission of any Waste Materials
and (ii) any course of conduct or  operating  practice  with  respect to matters
governed by or regulated under Environmental Laws.

     1.19  "Environmental  Law" or  "Environmental  Laws"  shall  mean all laws,
rules, regulations,  statutes, ordinances, decrees or orders of any governmental
entity now or at any time in the future in effect relating to (i) the prevention
or control of any potential  pollutant or protection of the air,  water or land,
(ii) solid, gaseous or liquid waste generation,  handling,  treatment,  storage,
disposal,  discharge, release or transportation and (iii) exposure to hazardous,
toxic or other substances alleged to be harmful. The term "Environmental Law" or
"Environmental Laws" includes,  without limitation, (1) the terms and conditions
of any license,  permit,  approval or other  authorization  by any  governmental
entity and (2) judicial,  administrative or other regulatory decrees,  judgments
and  orders  of  any  governmental  entity.  The  term  "Environmental  Law"  or
"Environmental Laws" includes, but is not limited to, the following statutes and
the regulations promulgated thereunder:  the Clean Air Act, 42 U.S.C.ss. 7401 et
seq.,  the Resource  Conservation  Recovery Act, 42 U.S.C.ss.  6901 et seq., the
Superfund  Amendments and Reauthorization  Act, 42 U.S.C.ss.  11011 et seq., the
Toxic  Substances  Control  Act, 15  U.S.C.ss.2601  et seq.,  the Federal  Water
Pollution  Control Act (Clean Water Act), 33 U.S.C.ss.  1251, et seq.,  the Safe
Drinking Water Act, 42 U.S.C.ss.  300f et seq., CERCLA and any state,  county or
local laws or regulations similar thereto.

     1.20  "Environmental  Liabilities"  shall  mean  any and  all  liabilities,
responsibilities,  claims, suits, losses, costs (including remediation, removal,
response, abatement,  clean-up,  investigative or monitoring costs and any other
related costs and  expenses),  other causes of action  recognized  now or at any
later  time,  damages,  settlements,   expenses,  charges,  assessments,  liens,
penalties,  fines,  pre-judgment and post-judgment  interest,  attorney fees and
other legal fees  imposed or incurred  (i)  pursuant  to any  agreement,  order,
notice, requirement,  responsibility or directive (including directives embodied
in Environmental  Laws),  injunction,  judgment or similar documents  (including
settlements)  arising out of or in connection with any Environmental  Laws, (ii)
pursuant  to any  claim by a  governmental  entity  or other  person  or  entity
pursuant to common law or statute for personal injury,  property damage,  damage
to natural resources, remediation, payment or reimbursement of response costs or
similar costs or expenses or (iii) as a result of Environmental Conditions.

     1.21 "Estimate" shall mean the estimated  liability of the Group for Income
Tax resulting from the Distribution  and  restructuring  transactions  connected
with it, and for  operations  in 2000 and 2001,  taking into account the Group's
utilization of current-period  net operating losses and carryforwards (and other
tax attributes and items) from prior years, at an amount equal to $15,000,000.

     1.22 "Group" shall mean KSI, the  Predecessors of KSL, the Tax Subsidiaries
of KSI, and other "includable  corporations"  within the meaning of Section 1504
of the Code that are members of the affiliated  group of which KSI is the common
parent.

     1.23  "Income  Tax"  shall  mean any  federal,  state or local tax based on
income  (including  Texas franchise tax if the basis for taxation is the "earned
surplus"  of the  affected  taxpayer)  that is  imposed  on the Group or any Tax
Subsidiary of KSI, including applicable penalty and interest.

     1.24 "Incremental  Group Tax Liability" shall have the meaning specified in
Section 5.2 hereof.

     1.25 "Initial  Policy  Periods"  shall mean the various  policy periods for
each of the KSI Insurance Policies in effect on the date hereof.

     1.26 "Insured Party" shall mean each of KSI, the KSI Companies, KSL and the
KSL Companies.

     1.27 "KFC" shall mean Kaneb Financial Corporation, a Delaware corporation.

     1.28  "KPL"  shall mean Kaneb  Pipe Line  Company  LLC, a Delaware  limited
liability company.

     1.29 "KPL  Contribution"  shall mean the  contribution by KFC of all of the
issued and outstanding limited liability company interests of KPL to KSL.

     1.30 "KPLOP  Partnership  Agreement"  shall mean the  Amended and  Restated
Agreement of Limited Partnership of Kaneb Pipe Line Operating Partnership,  L.P.
dated September 27, 1989.

     1.31 "KPP  Distributions"  shall mean a distribution  of cash made by Kaneb
Pipe Line  Partners,  L.P.  to KSL or any other  Subsidiary  of KSL  pursuant to
Section 5.3 of the KPP  Partnership  Agreement with respect to the second fiscal
quarter of 2001 and a  distribution  of cash made by Kaneb  Pipe Line  Operating
Partnership,  L.P. to KSL or any other Subsidiary of KSL pursuant to Section 5.3
of the KPLOP Partnership  Agreement with respect to the second fiscal quarter of
2001.  Such KPP  Distributions  are  expected  to be made in August,  2001.  For
purposes of this  definition,  a Subsidiary  of KSL shall not include Kaneb Pipe
Line  Partners,  L.P. or Kaneb Pipe Line Operating  Partnership,  L.P. or any of
their respective Subsidiaries.

     1.32 "KPP  Partnership  Agreement"  shall  mean the  Amended  and  Restated
Agreement of Limited  Partnership of Kaneb Pipe Line  Partners,  L.P. dated July
23, 1998.

     1.33 "KSI" shall mean Kaneb Services, Inc., a Delaware corporation.

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

     1.35 "KSI Employee  Benefit  Plan" shall have the meaning  specified in the
Employee Benefits Agreement.

     1.36 "KSI Insurance Policy" shall mean those certain insurance  policies of
Aon in which KSI is the named insured and all of the KSI Companies,  KSL and the
KSL Companies are additional named insureds.

     1.37 "KSL" for purposes of the assumption and indemnification provisions of
this Agreement, shall include Kaneb Services LLC and any and all predecessors or
successors  thereto,  whether  by  merger,  purchase  or  other  acquisition  of
substantially  all of the assets or otherwise,  and any and all  predecessors or
successors to such entities.

     1.38 "KSL Assets" shall mean,  collectively,  all the property,  assets and
rights,  tangible and  intangible,  owned or operated by the KSL  Companies  on,
before or after the Distribution Date.

     1.39 "KSL  Circumstance"  shall have the meaning  specified  in Section 5.3
hereof.

     1.40 "KSL Common Shares" shall mean the Common Shares of KSL, as defined in
the KSL Limited Liability Company Agreement.

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

     1.42 "KSL  Employee"  shall  have the  meaning  specified  in the  Employee
Benefits Agreement.

     1.43 "KSL Employee  Benefit  Plan" shall have the meaning  specified in the
Employee Benefits Agreement.

     1.44 "KSL Former Employee" shall have the meaning specified in the Employee
Benefits Agreement.

     1.45  "KSL  Group"  shall  mean  KSL and its Tax  Subsidiaries,  and  their
successors and assigns.

     1.46 "KSL Liabilities" shall mean any and all Liabilities and Environmental
Liabilities to which KSI or any of its  respective  Affiliates may now or at any
time in the future become subject (whether directly or indirectly,  including by
reason of any KSL Company  owning,  controlling  or  operating  any  business or
assets), resulting from, arising out of or relating to (i) any KSL Company, (ii)
any KSL Taxes  (except as provided  otherwise  in Article 5 of this  Agreement),
(iii) any obligation,  matter,  fact,  circumstance or action or omission by any
Person in any way relating to or arising from the business, operations or assets
of any KSL Company on, before or after the  Distribution  Date, (iv) any product
or service  manufactured,  sold or  otherwise  provided  by any KSL  Company on,
before or after the Distribution  Date, (v) except as provided  herein,  the KPL
Contribution,  the  KPP  Contribution,  the  Distribution  or any  of the  other
transactions  contemplated  hereby  or  (vi)  the  KSL  Assets.  The  term  "KSL
Liabilities" shall also include, without limitation, the following:

          (a) Any and all Liabilities and  Environmental  Liabilities  resulting
     from,  arising  out of or  relating  to (i) the  current,  former or future
     assets, activities, operations, facilities, actions or omissions of any KSL
     Company or any of their respective officers, directors or employees (to the
     extent such officer,  director or employee is acting in his or her capacity
     as  an  officer,  director  or  employee  of a  KSL  Company),  independent
     contractors  or  agents  (in their  capacity  as  such),  (ii) any  product
     liability claim, recall, replacement,  returns or customer allowances of or
     relating  to any KSL  Company  or (iii) any  contract  or permit of any KSL
     Company, regardless of whether the contract or permit is assigned, conveyed
     or leased hereunder or under any other agreement contemplated hereby;

          (b) Any and all accounts and notes payable of any KSL Company;

          (c) Any and all  Liabilities  and  Environmental  Liabilities  to,  on
     behalf of, or which  arise from or relate to active or  inactive  employees
     (retired or otherwise)  of KSL or any KSL Company for claims  occurring on,
     before or after the Distribution Date, including,  without limitation,  (i)
     liability for any salaries, wages, tax equalization payments, vacation pay,
     sick  leave,   personal  leave,   severance  pay,  wrongful   dismissal  or
     discrimination  claims;  (ii)  liability for or under any employee  benefit
     plan, policy or arrangement,  including,  without  limitation,  retirement,
     pension,  medical,  dental,  profit  sharing,  unemployment,   supplemental
     unemployment or disability plan policy or arrangement;  (iii) liability for
     any payroll taxes,  social security or similar taxes or  withholding;  (iv)
     liability  arising from claims or litigation and (v) liability arising from
     any injury, death, loss,  disability,  occupational disease or claims under
     any workers' compensation laws;

          (d) Any and all Liabilities and  Environmental  Liabilities  resulting
     from,  arising out of, relating to or occurring on the KSL Properties,  the
     operations  on any of the KSL  Properties  or with regard to any of the KSL
     Assets, and any off-site  Environmental  Liabilities  related to any of the
     foregoing or to any KSL Company, including, without limitation, those under
     any indemnification agreement or obligation of any KSL Company, KSI, or any
     Affiliate of KSI and any documents related thereto;

          (e) Any and all  Liabilities  of any KSL Company  with  respect to any
     projects or transactions  performed or engaged in by it on, before or after
     the Distribution Date;

          (f) Any and all litigation and claims against any KSL Company existing
     as of the Distribution Date;

          (g) Except as provided  otherwise in Article 5 of this Agreement,  any
     and all Liabilities for KSL Taxes; and

          (h) Any and all legal,  accounting,  consulting  and  expert  fees and
     expenses  incurred  in  investigating,  preparing,  defending,  settling or
     discharging any claim or action arising under, out of or in connection with
     any of the KSL Liabilities or KSL Assets.

     1.47 "KSL  Limited  Liability  Company  Agreement"  shall mean that certain
amended and restated limited  liability  company agreement of KSL dated June 28,
2001.

     1.48 "KSL  Properties"  shall mean the  properties  currently or previously
owned or operated by any KSL Company.

     1.49 "KSL Taxes"  shall mean any and all Taxes (i) to which any KSL Company
may be obligated  pursuant to Article 5 of this Agreement or (ii) relating to or
arising from the KPL  Contribution,  the KPP  Contribution  and the Distribution
(including, without limitation, any transfer taxes or value added taxes).

     1.50  "Liability"  shall  mean any and all  claims,  demands,  liabilities,
responsibilities,  disputes,  causes of action,  losses,  damages,  assessments,
costs  and  expenses  (including   interest,   awards,   judgments,   penalties,
settlements,  fines,  costs of  remediation,  diminutions  in  value,  costs and
expenses  incurred in connection with  investigating and defending any claims or
causes of action (including,  without  limitation,  attorneys' fees and expenses
and  all  fees  and  expenses  of  consultants  and  other  professionals))  and
obligations of every nature  whatsoever,  liquidated or  unliquidated,  known or
unknown, matured or unmatured, or fixed or contingent.

     1.51  "Liability  Limit  Trigger"  shall  mean  the   establishment  by  an
independent  third-party claims adjuster,  or a representative of the applicable
insurance  carriers,  of a reserve with  respect to a claim or a possible  claim
about which an Insured Party has notified the  applicable  insurance  carrier or
carriers under a KSI Insurance Policy or KSI Insurance Policies and such reserve
exceeds any limit of  liability  coverage  under the  applicable  KSI  Insurance
Policy or KSI Insurance Policies.

     1.52 "NYSE" shall mean The New York Stock Exchange, Inc.

     1.53 "Person" shall mean an individual, partnership,  corporation, business
trust,  limited liability company,  limited liability  partnership,  joint stock
company,  trust,   unincorporated  association,   joint  venture,   governmental
authority or other entity of whatever nature.

     1.54  "Predecessor"  shall mean,  with respect to any Tax Subsidiary of KSI
(each a "Successor"  for purposes of this  definition),  such Tax Subsidiary (i)
that is converted into the Successor pursuant to a state statute permitting such
conversion  or  (ii)  that  transfers  substantially  all of its  assets  to the
Successor  by means of a  merger,  sale or  election  to  become a  "disregarded
entity" for federal (and state, if applicable) income tax purposes.

     1.55 "Record Date" shall have the meaning specified in Section 3.1 hereof.

     1.56 "Redemption" shall mean the redemption for cash by KSI of all of KSI's
issued and outstanding  shares of Adjustable  Rate Cumulative  Class A Preferred
Stock.

     1.57  "Reinstatement  Premium"  shall mean that optional  premium  required
under any KSI Insurance  Policy to reinstate  the maximum  amount of any and all
limits of liability coverage under such KSI Insurance Policy.

     1.58 "SEC" shall mean the United States Securities and Exchange Commission.

     1.59 "Subsidiary" shall mean, with respect to any Person, (i) a corporation
a majority of whose Voting Stock is at the time,  directly or indirectly,  owned
by such Person,  by one or more wholly owned  subsidiaries  of such Person or by
such Person and one or more wholly owned  subsidiaries  of such  Person,  (ii) a
partnership in which such Person or a wholly owned subsidiary of such Person is,
at the date of determination,  a general or limited partner of such partnership,
but only if such Person or its wholly  owned  subsidiary  is entitled to receive
more than fifty percent of the assets of such  partnership  upon its dissolution
or (iii) any other Person (other than a  corporation  or  partnership)  in which
such Person, a wholly owned subsidiary of such Person or such Person and one ore
more wholly owned  subsidiaries of such Person,  directly or indirectly,  at the
date of determination thereof, has (x) at least a majority ownership interest or
(y) the power to elect or direct the election of a majority of the  directors or
other governing body of such Person.

     1.60 "Tax Subsidiary" shall mean, with respect to KSI or KSL as the context
may require, (i) any corporation or association taxable as a corporation that is
connected in an unbroken chain of stock ownership satisfying the requirements of
Section  1504(a)  of the  Code  beginning  with  KSI or KSL as the  case  may be
(provided  that,  for this purpose,  after the  Distribution  Date, KSL shall be
regarded as a corporation that is the common parent of the KSL Group);  (ii) any
entity not a corporation  that is a "disregarded"  entity for federal income tax
purposes  pursuant to Treasury  Regulations  ss.301.7701-3  and that is owned by
KSI, KSL or any Tax Subsidiary of either (determined after application of clause
(i)  above)  and (iii) any  "disregarded"  entity  owned by KSI,  KSL or any Tax
Subsidiary  of either  (determined  after  application  of clauses  (i) and (ii)
above).

     1.61 "Taxes" shall mean all federal, state, local, foreign and other taxes,
duties,  levies,  imposts,  customs  or other  assessments,  including,  without
limitation,  all net  income,  gross  income,  gross  receipts,  sales,  use, ad
valorem,  transfer,  franchise,  profits,  profit share,  license,  value added,
withholding,   payroll,   employment,   excise,  estimated,   severance,  stamp,
occupation,  premium,  property,  windfall  profits  or other  taxes of any kind
whatsoever,  together with any interest,  penalties,  additions to tax, fines or
other additional amounts imposed thereon or related thereto,  and the term "Tax"
means any one of the foregoing Taxes.

     1.62 "Transfer Agent" shall mean American Stock Transfer and Trust Company.

     1.63 "Voting Stock" shall mean,  with respect to any Person,  securities of
any class or classes of  capital  stock in such  Person  entitling  the  holders
thereof  (whether  at all times or only so long as no senior  class of stock has
voting  power by  reason  of any  contingency)  to vote in the  election  of the
members of the board of directors or other governing body of such Person.

     1.64 "Waste  Materials" shall mean any (i) toxic or hazardous  materials or
substances;  (ii) solid wastes, including asbestos,  polychlorinated  biphenyls,
mercury, buried contaminants, chemicals, flammable or explosive materials; (iii)
radioactive materials; (iv) petroleum wastes and spills or releases of petroleum
products; and (v) any other chemical, pollutant, contaminant, substance or waste
that is regulated by any governmental entity under any Environmental Law.

                                    ARTICLE 2

                    CONTRIBUTIONS; CONVERSION; LINE OF CREDIT

     2.1 Pre-Distribution Transactions.

          (a) KSI  hereby  agrees  that it shall  cause  KFC to  effect  the KPL
     Contribution  and KSL hereby  agrees that it shall  cause the Common  Share
     Issuance to be made or occur, effective before the Distribution Date.

          (b) KSI hereby agrees that it shall cause KFC to distribute all of the
     issued and  outstanding  KSL Common  Shares  held by KFC to KSI,  effective
     before the Distribution Date.

     2.2 Guarantees  and Financial  Assurances.  KSL agrees to use  commercially
reasonable  efforts to obtain the release of any  guarantees or other  financial
assurances  provided  by  KSI or any of its  Affiliates  on  behalf  of any  KSL
Company.

     2.3 KSL  Acknowledgments  that  this  Agreement  is a  valid,  binding  and
enforceable  contract  which  has been  approved  by its sole  shareholder.  KSL
further  acknowledges  that this  Agreement  and the  transactions  contemplated
hereby are in the best interests of KSL.

     2.4 Line of Credit KSL hereby  agrees  that it will enter into a  revolving
credit  facility with KSI, on terms and conditions  reasonably  satisfactory  to
KSI,  under  which  KSI may  borrow  from  KSI up to $25  million  in  aggregate
borrowings.

     2.5  Letter of  Credit.  Within 30 after KSI  requests,  KSL shall  cause a
financial institution, which shall be reasonably acceptable to KSI, to issue for
the benefit of KSI an irrevocable letter of credit in the amount of at least the
Estimate and upon terms and conditions otherwise reasonably satisfactory to KSI.

     2.6 Covenant regarding KPP  Distributions.  KSL hereby agrees to pay to KSI
the full amount of any KPP  Distributions  within 10 Business  Days after KSL or
any  Subsidiary  of KSL  receives  any KPP  Distributions.  For purposes of this
Section 2.6, a  Subsidiary  of KSL shall not include  Kaneb Pipe Line  Partners,
L.P. or Kaneb Pipe Line Operating  Partnership,  L.P. or any of their respective
Subsidiaries.

     2.7 Covenant  regarding  Assignment.  KSL hereby  agrees that it will cause
Kaneb  Management  Company LLC to assign,  effective  prior to the  Distribution
Date,  to KSI (i) the rights to,  interests  in and rights to recover  under the
Action  and (ii) the  rights to,  interests  in and rights to recover  under any
claim  that has arisen or  hereafter  arises  out of any acts,  transactions  or
occurrences that formed the basis of the Action.

                                    ARTICLE 3

                            MECHANICS OF DISTRIBUTION

     3.1 Mechanics of KSL  Distribution.  The Distribution  shall be effected by
the  distribution to each holder of record of KSI Common Stock, as of the record
date designated for the Distribution by or pursuant to the  authorization of the
Board of Directors of KSI (the "Record Date"), of one share of KSL Common Shares
for each three shares of KSI Common Stock held by such holder.  No fraction of a
share of KSL Common Shares shall be issued,  but in lieu thereof KSI shall cause
the Distribution  Agent to aggregate all fractional  shares that would be issued
but for this  Section  3.1 and sell  such  aggregated  fractional  shares in the
public  market and the  aggregate  net cash  proceeds  of those  sales  shall be
distributed  ratably to those KSI stockholders who would otherwise have received
the fractional interests.

     3.2 Timing of  Distribution.  The Board of Directors of KSI shall  formally
declare the Distribution and shall authorize KSI to pay it upon the satisfaction
or waiver of the conditions set forth in Article 7, by delivery of  certificates
for KSL Common Shares to the Transfer Agent for delivery to the holders entitled
thereto.  The Distribution  shall be deemed to be effective upon notification by
KSI to the Transfer Agent that the  Distribution  has been declared and that the
Transfer  Agent is  authorized  to proceed with the  distribution  of KSL Common
Shares.

                                    ARTICLE 4
                       ALLOCATION OF INSURANCE OBLIGATIONS

     4.1 Obligations during the Initial Policy Period.

          (a) Annual Premiums.

               (i) KSI hereby  agrees  that it will pay the Annual  Premiums  in
          accordance  and in  compliance  with the terms and  conditions  of the
          various KSI Insurance Policies.

               (ii) KSL  hereby  agrees  that it will  pay to KSI its  Allocated
          Shares  of  the  various  Annual  Premiums  in  the  manner  and  when
          reasonably  necessary  to  allow  KSI to meet its  obligations  in the
          payment of the Annual Premiums under the KSI Insurance Policies.

          (b) Allocated  Share.  Aon shall determine the Allocated Shares of KSL
     during the Initial Policy  Periods,  which may be different for each Annual
     Premium and which  determination  shall be based on the historical  losses,
     exposures to risk,  projected  expected  losses and  possible  magnitude of
     losses of KSI and KSL and their respective Subsidiaries. KSI and KSL hereby
     agree that Aon's determination  regarding the Allocated Shares of KSL shall
     be conclusive absent manifest error.

     4.2 Notification Requirements; Reinstatement of Liability Limits.

          (a) KSI agrees that it will,  and that it will cause all KSI Companies
     to,  comply with the  notification  requirements  relating to possible  and
     known claims set forth in the KSI  Insurance  Policies.  KSL agrees that it
     will,  and  that it will  cause  all KSL  Companies  to,  comply  with  the
     notification  requirements  relating to possible and known claims set forth
     in the KSI Insurance Policies.

          (b) If a  Liability  Limit  Trigger  occurs  relating  to a claim or a
     possible claim against KSI or a KSI Company,  then,  unless KSI obtains the
     written  consent of KSL, KSI shall (or shall cause such KSI Company to) (i)
     elect to pay any  Reinstatement  Premiums  relating to the Affected  Layers
     within the time period provided for in the applicable KSI Insurance  Policy
     or KSI Insurance Policies and (ii) pay such Reinstatement Premiums relating
     to the  Affected  Layers in  accordance  with the terms of the relevant KSI
     Insurance Policy or KSI Insurance Policies.

          (c) If a  Liability  Limit  Trigger  occurs  relating  to a claim or a
     possible claim against KSL or a KSL Company,  then,  unless KSL obtains the
     written  consent of KSI, KSL shall (or shall cause such KSL Company to) (i)
     elect to pay any applicable Reinstatement Premiums relating to the Affected
     Layers within the time period  provided for in the applicable KSI Insurance
     Policy or KSI Insurance Policies and (ii) pay such  Reinstatement  Premiums
     relating  to the  Affected  Layers  in  accordance  with  the  terms of the
     relevant KSI Insurance Policy or KSI Insurance Policies.

     4.3 Redetermination after Initial Policy Period. Each of KSL and KSI hereby
agree that the terms and conditions of this Article 4 shall be in full force and
effect,  with respect to each KSI  Insurance  Policy,  during such KSI Insurance
Policy's respective Initial Policy Period. Each of KSL and KSI hereby agree that
after,  with respect to each KSI Insurance  Policy,  the termination of such KSI
Insurance  Policy's  Initial  Policy  Period,  the  terms of this  Article 4 are
subject to change and  re-negotiation  in full after such Initial Policy Period,
but only with  respect to such KSI  Insurance  Policy.  With  respect to periods
after such Initial Policy Period,  KSL and KSI hereby agree to re-negotiate  the
terms of this Article 4 in full based on the changes in each  others'  business,
increases in the  applicable  Annual Premium and on the  recommendations  of Aon
with respect to the allocation of such Annual Premium,  but only with respect to
the  applicable  KSI Insurance  Policy whose Initial  Policy Period has expired.
Upon the  termination  of such Initial  Policy  Period,  if the parties have not
agreed on the terms and conditions of the  allocations of such Annual Premium or
on the continuation, amendment, or termination of the other terms and conditions
contained  in this  Article 4, then the terms and  conditions  of this Article 4
shall terminate and shall be of no further force and effect with respect to, and
only with respect to, such KSI Insurance  Policy.  KSL and KSI hereby agree that
this  Section 4.3 shall have not have the effect of reducing or  minimizing  the
obligations of KSL under Section 4.4, and this Section 4.3 is expressly  subject
to Section 4.4.

     4.4 Letter of Credit.  Notwithstanding anything contained in Section 4.3 to
the  contrary,  within 15 calendar  days after KSI  requests,  KSL shall cause a
financial institution, which is reasonably satisfactory to KSI, to issue for the
benefit of KSI a letter of credit to support  the  obligations  of KSI under the
various  issued  and  outstanding  letters  of credit  that KSI has caused to be
issued for the benefit of various insurance  carriers.  However,  such letter of
credit shall be in the amount reasonably  determined by KSI to back that portion
of such  issued and  outstanding  letters of credit  that KSI  allocates  to the
businesses and  operations of KSL and the KSL  Companies.  Such letter of credit
shall be on terms and conditions,  other than amount, that KSI determines in its
sole discretion.

                                    ARTICLE 5

                             LIABILITY FOR ESTIMATE

     5.1 Payment of Estimate and Incremental Group Tax Liability by KSL to KSI

          (a) KSL shall pay to KSI, on or before the fifteenth  (15th) day after
     written  demand  therefor,  an amount  equal to the  Estimate.  Demand  for
     payment by KSI may be made, at KSI's election, in lump-sum or installments.
     In the event that  transactions  and operations  occurring within the Group
     after the  Distribution  Date would, in KSI's sole judgement,  have reduced
     the amount of the  Estimate,  KSI may, but shall not be required to, reduce
     KSL's  obligation to pay KSI.  Such reduced  amount shall be treated as the
     Estimate  for all  purposes  hereunder,  and KSI shall  make  corresponding
     reductions in the relevant  components of the Estimate reflected in Section
     5.2 (a) and (b), below.

          (b) If an Incremental  Group Tax Liability  arises with respect to any
     tax period ending on or before  December 31, 2001,  KSL shall pay to KSI an
     amount  equal  to  the  Incremental  Group  Tax  Liability,  determined  in
     accordance  with Section 5.2 hereof,  such payment by KSL to be made to KSI
     no more than five (5) business days after demand therefor.

          5.2  Determination of Incremental  Group Tax Liability The Incremental
     Group  Tax  Liability  shall  be  one or  more  of  the  following  amounts
     (provided, however, that there shall be no duplication of amounts):

          (a) Tax Year 2001:

               (i) Federal - the amount by which (i) the Group's  liability  for
          Income Tax reflected on its consolidated  federal income tax return as
          filed exceeds (ii) $15,000,000.

               (ii)  State - (A) the amount by which (i) the  Group's  liability
          (whether  reflected on one or more combined,  consolidated  or unitary
          returns as filed or arising  pursuant to an  Adjustment)  for state or
          local tax that would not have been  payable  but for the  Distribution
          exceeds  (ii)  zero;  plus (B) the  amount  by which  (i) the  Group's
          liability  for Income Tax  reflected  on the  returns as filed for (or
          that include) KSL and/or any Tax Subsidiary of KSL (or any predecessor
          of KSL or any such  Tax  Subsidiary),  insofar  as such  liability  is
          reasonably  allocable to KSL or any such Tax  Subsidiary as determined
          by KSI exceeds (ii) zero.

          (b) Tax Year 2000:

               (i) Federal - the amount by which (i) the Group's  liability  for
          Income Tax reflected on its consolidated  federal income tax return as
          filed exceeds (ii) zero.

               (ii) State - the amount by which (i) the  Group's  liability  for
          Income Tax reflected on combined,  consolidated or unitary returns, as
          filed,  for (or that include) KSL and/or any Tax Subsidiary of KSL (or
          any  predecessor of KSL or any such Tax  Subsidiary),  insofar as such
          liability is reasonably allocable to KSL or any such Tax Subsidiary as
          determined by KSI exceeds (ii) zero.

          (c) All Tax Years (including 2000 and 2001):

               (i)  Federal  - the  amount by which the  Group's  liability  for
          Income Tax is  increased  above the amount  shown on any  consolidated
          federal  income tax return by one or more  Adjustments  that  increase
          income or  decrease  deductions  or credits  (on a  cumulative  basis,
          taking into account  carrybacks and carryovers to tax years before and
          after  any such  Adjustment),  which  amount  shall be  determined  by
          calculating the Group's liability for Income Tax in the applicable tax
          years with and without the Adjustment(s).

               (ii) State - the amount by which the Group's liability for Income
          Tax is increased by any Adjustment (on a cumulative basis, taking into
          account  carrybacks  and  carryovers to tax years before and after the
          Adjustment) shown on any consolidated,  combined or unitary return, as
          filed, for (or that includes) KSL and/or any Tax Subsidiary of KSL (or
          any  predecessor of KSL or any such Tax  Subsidiary),  insofar as such
          increase is reasonably  allocable to KSL or any such Tax Subsidiary as
          determined by KSI. The foregoing  amount of increased Income Tax shall
          be  determined  by  calculating  the Group's  liability for tax in the
          applicable tax years with and without the Adjustment.

          (d) Separate  State  Returns - State and local Income Tax reflected on
     separate  returns filed (or that were required to be filed) by or on behalf
     of KSI, KSL or any Tax Subsidiary of either shall be the  responsibility of
     the entity whose operations are reflected on such return.

     5.3  Indemnity  In the event KSI or KSL is required to pay to the  Internal
Revenue Service, or any state or local taxing authority,  any Income Tax that is
the  responsibility  of the  other,  KSI or KSL,  as the case  may be,  shall be
entitled to reimbursement from the other party in the amount of such Income Tax.
The  procedural  mechanics for the  enforcement  of this Section 5.3 shall be in
accordance with Article 6.

     5.4 Payment of Interest,  Penalties  and Expenses  Interest,  penalties and
expenses  incurred by KSI in connection with the amendment of its tax returns or
those of its Tax Subsidiaries,  and/or the examination of any such return by the
Internal  Revenue  Service  or any  state  or  local  taxing  authority,  or any
subsequent  administrative or judicial proceedings,  shall be borne equitably by
those parties whose  liability for Income Tax may be affected by such amendment,
examination  or subsequent  proceedings.  No interest shall be charged to KSI or
KSL in  connection  with  any  liability  for  Income  Tax  payable  under  this
Agreement,  however,  unless interest is payable to the Internal Revenue Service
or any state or local taxing  authority  or to another  member of the Group as a
result of any allocation of Income Tax.

     5.5 KSI as Agent

          (a) KSL and its Tax  Subsidiaries  hereby  appoint  KSI as  agent  and
     attorney-in-fact with full authority (i) to prepare and file any tax return
     that reflects  operations of KSL or any Tax  Subsidiary,  for all tax years
     ending on or before December 31, 2001, (ii) to pay any liability for Income
     Tax shown  thereon,  (iii) to  represent  KSL and its Tax  Subsidiaries  in
     connection with the examination of any such return by the Internal  Revenue
     Service or any state or local taxing authority and (iv) to resolve disputes
     regarding liability for Income Tax.

          (b) KSL shall  provide  KSI with such data in its  possession  that is
     necessary for the proper and timely filing of all federal,  state and local
     tax  returns  and  forms.  In the event KSL fails to  provide  such data in
     proper form and within  sufficient  time to permit the timely filing of any
     such tax return, any penalties or interest assessed by reason of a delay in
     filing such tax return shall be payable by KSL. Any and all such data shall
     be  confidential  and may be disclosed by KSI to third  parties only to the
     extent KSI, in the exercise of its reasonable business judgment, determines
     such  disclosure is necessary or appropriate to comply with its obligations
     under applicable federal, state or local taxing provisions.

          (c) The agency  power of KSI,  as  described  in this  section,  shall
     extend to all periods  during which KSL or any member of the KSL Group is a
     member of the Group, and, after the Distribution Date, KSI shall retain the
     sole power to make or change on behalf of KSL, or any Tax  Subsidiary,  any
     election  or other  decision  affecting  Income  Tax  liabilities  for such
     periods that KSL or such Tax Subsidiary was a member of the Group.

     5.6  Application  of Article 5 This  Article 5 shall be  applicable  to the
Group's tax year ending December 31, 2001, and to all prior tax years.

                                    ARTICLE 6

                                 INDEMNIFICATION

     6.1 Indemnification Matters.

          (a) KSL hereby agrees to indemnify, defend and hold KSI its respective
     Affiliates and each of their  respective  officers,  directors,  employees,
     agents and assigns  (collectively,  the "KSL Indemnified Parties") harmless
     from and  against  any and all  Liabilities  or  Environmental  Liabilities
     (including, without limitation,  reasonable fees and expenses of attorneys,
     accountants,  consultants  and experts)  that the KSL  Indemnified  Parties
     incur,  suffer or  realize,  are  subject to a claim for or are subject to,
     that are based upon,  arising out of,  relating to or  otherwise in respect
     of:

               (i) any breach of any  covenant or  agreement  of any KSL Company
          contained  in  this  Agreement  or any  other  agreement  contemplated
          hereby, including the Employee Benefits Agreement;

               (ii) the acts or omissions of any KSL Company or any Affiliate of
          any KSL Company (other than KSI or its respective  Affiliates that are
          not KSL  Companies  after  the  Distribution)  or the  conduct  of any
          business by them or any predecessor  thereto  before,  on or after the
          Distribution Date;

               (iii) the KSL Liabilities;

               (iv) the KSL Assets;

               (v) any Tax for  which KSL in  responsible  (except  as  provided
          otherwise in Article 5 of this Agreement);

               (vi) any and all  amounts  for which KSI may be liable on account
          of  any  claims,   administrative  charges,  self-insured  retentions,
          deductibles,   retrospective   premiums  or  fronting   provisions  in
          insurance  policies,  including as the result of any uninsured period,
          insolvent  insurance  carriers or  exhausted  policies,  arising  from
          claims by any KSL Company or any Affiliate of any KSL Company,  or the
          employees of any of the foregoing,  or claims by insurance carriers of
          any KSL  Company  for  indemnity  arising  from or out of claims by or
          against any KSL Company for acts or omissions  of any KSL Company,  or
          related to any  current  or past  business  of any KSL  Company or any
          product or service provided by any KSL Company;

               (vii)  any  Liability  incurred  under the  Consolidated  Omnibus
          Budget  Reconciliation  Act of 1985,  as amended,  with respect to any
          employees  of KSI who become  employees  of any KSL Company  after the
          Distribution or their dependents;

               (viii) any  settlements or judgments in any litigation  commenced
          by one or more insurance  carriers against KSI on account of claims by
          any KSL Company or employees of any KSL Company;

               (ix) the  on-site or off-site  handling,  storage,  treatment  or
          disposal of any Waste Materials generated by any KSL Company;

               (x) any and  all  Environmental  Conditions,  known  or  unknown,
          existing on, at or underlying  any of the KSL Properties or related to
          the  operations on any of the KSL  Properties or with regard to any of
          the KSL Assets;

               (xi) any acts or  omissions  of any KSL  Company  relating to the
          ownership  or  operation of the business of any KSL Company or the KSL
          Properties;

               (xii)  any  and  all  Liabilities  incurred  by KSI or any of its
          Affiliates  relating to any  guarantee  or other  financial  assurance
          provided by KSI or any of its Affiliates on behalf of any KSL Company;

               (xiii)  any  Liability  relating  to any  claim or  demand by any
          stockholder of KSI, any member of KSL or any other Person with respect
          to the KPL Contribution, the KPP Contribution, the Distribution or the
          transactions relating thereto;

               (xiv) any  Liability  relating to any KSL Employee  Benefit Plan;
          and

               (xv) 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.

          (b) Absolute  Indemnity.  NONE OF THE KSL INDEMNIFIED  PARTIES WILL BE
     OBLIGATED  TO  INSTITUTE  ANY  LEGAL  PROCEEDINGS  IN  CONNECTION  WITH THE
     COLLECTION  OR PURSUIT OF ANY  INSURANCE  TO  EXERCISE  AN  INDEMNIFICATION
     REMEDY UNDER THIS ARTICLE 6. UNLESS OTHERWISE SPECIFICALLY EXPRESSED,  THIS
     INDEMNITY OBLIGATION SHALL APPLY WITHOUT REGARD TO WHETHER THE LIABILITY OR
     ENVIRONMENTAL  LIABILITY WAS CAUSED BY THE ORDINARY OR GROSS  NEGLIGENCE OF
     ANY OF THE KSL INDEMNIFIED  PARTIES (WHETHER SUCH NEGLIGENCE BE SOLE, JOINT
     OR  CONCURRENT  OR  ACTIVE  OR  PASSIVE),   OR  WHETHER  THE  LIABILITY  OR
     ENVIRONMENTAL LIABILITY IS BASED ON STRICT LIABILITY, ABSOLUTE LIABILITY OR
     ARISES AS AN OBLIGATION OF CONTRIBUTION OR INDEMNITY. KSL ACKNOWLEDGES THAT
     IT IS AWARE OF VARIOUS THEORIES KNOWN AS THE "EXPRESS  NEGLIGENCE" DOCTRINE
     AND OTHER SIMILAR DOCTRINES AND THEORIES THAT MAY LIMIT INDEMNIFICATION AND
     AGREES AND STIPULATES  THAT THE  PROVISIONS OF THIS  AGREEMENT  REFLECT THE
     EXPRESS  INTENT OF THE PARTIES THAT THE  INDEMNIFICATION  TO BE PROVIDED BY
     KSL APPLY  NOTWITHSTANDING  THE FACT THAT THE  LIABILITY  OR  ENVIRONMENTAL
     LIABILITY  (I) MAY NOT  CURRENTLY BE KNOWN BY IT OR MANIFEST  ITSELF IN ANY
     REGARD,  (II) MAY ARISE  UNDER A STATUTE OR THEORY  THAT MAY NOT  CURRENTLY
     EXIST OR BE KNOWN TO KSL, RESPECTIVELY,  (III) MAY ARISE AS A RESULT OF ANY
     ACT OR OMISSION BY ANY OF THE KSL INDEMNIFIED PARTIES (WHETHER SUCH CONDUCT
     BE SOLE, JOINT OR CONCURRENT OR ACTIVE OR PASSIVE) OR (IV) MAY CONSTITUTE A
     VIOLATION OF ANY APPLICABLE CIVIL OR CRIMINAL LAW OR REGULATION.

     6.2 Notice of KSL  Circumstance.  After receipt by KSI of notice,  or KSI's
actual discovery,  of any action,  proceeding,  claim, demand or potential claim
that  could give rise to a right to  indemnification  from KSL  pursuant  to any
provision of this Agreement (any of which is individually  referred to as a "KSL
Circumstance"),   KSI  shall  give  KSL  written   notice   describing  the  KSL
Circumstance in reasonable detail;  provided,  however,  that no delay by KSI in
notifying KSL shall relieve KSL from any  Liability or  Environmental  Liability
hereunder.  If KSL  notifies  KSI within 15 days after such  notice  that KSL is
assuming the defense thereof,  except as otherwise provided in Article 5 of this
Agreement,  (i) KSL will  defend the KSL  Indemnified  Parties  against  the KSL
Circumstance  with counsel of its choice,  provided  such counsel is  reasonably
satisfactory  to KSI,  (ii) the KSL  Indemnified  Parties  may  retain  separate
co-counsel  at its or their  sole  cost  and  expense  (except  that KSL will be
responsible for the fees and expenses for the separate  co-counsel to the extent
KSI  concludes  reasonably  that the counsel KSL has  selected has a conflict of
interest),  (iii) the KSL  Indemnified  Parties will not consent to the entry of
any judgment or enter into any settlement  with respect to the KSL  Circumstance
without the written consent of KSL and (iv) KSL will not consent to the entry of
any judgment with respect to the KSL Circumstance,  or enter into any settlement
that  (x)  requires  any  payments  by  or  continuing  obligations  of  an  KSL
Indemnified  Party,  (y) requires a KSL Indemnified  Party to admit any facts or
liability  that  could   reasonably  be  expected  to  adversely  affect  a  KSL
Indemnified  Party in any  other  matter  or (z) does not  include  a  provision
whereby the  plaintiff or claimant in the matter  releases  the KSL  Indemnified
Parties from all Liability with respect thereto,  without the written consent of
KSI.  If KSL does not notify KSI,  within 15 days after KSI has given  notice of
the KSL  Circumstance  that KSL is assuming  the defense  thereof,  then the KSL
Indemnified  Parties  may  defend  against,  or enter into any  settlement  with
respect  to, the KSL  Circumstance  in any manner  the KSL  Indemnified  Parties
reasonably may deem appropriate, at KSL's sole cost.

     6.3 Payment. Payment of any amounts due pursuant to this Article 6 shall be
made in United States dollars in immediately  available  funds, by wire transfer
to a bank account or accounts to be designated by KSL  Indemnified  Party within
ten Business Days after notice is sent by the KSL  Indemnified  Party. If and to
the extent the KSL  Indemnified  Party  shall make  written  demand upon KSL for
indemnification  pursuant to this  Article 6 and KSL shall refuse or fail to pay
in full,  within ten Business Days of such written demand,  the amounts demanded
pursuant hereto and in accordance  herewith,  then the KSL Indemnified Party may
use any legal or equitable remedy to collect from KSL the amount demanded.

     6.4 Insurance.  KSL shall not be obligated to indemnify the KSL Indemnified
Parties for amounts  that shall have been  covered and paid by  insurance of the
KSL  Indemnified  Party;   provided,   however,   insurance  shall  not  include
deductibles or self-insured retentions.

     6.5 Scope of Indemnification. INDEMNIFICATION UNDER THIS ARTICLE 6 SHALL BE
IN ADDITION TO ANY REMEDIES KSI, KSL OR THE KSL  INDEMNIFIED  PARTY, AS THE CASE
MAY BE,  MAY HAVE AT LAW OR  EQUITY.  THERE  SHALL BE NO TIME  LIMIT AS TO KSL'S
INDEMNIFICATION OBLIGATIONS HEREUNDER.

     6.6 Indemnity for Certain Environmental Liabilities. It is the intention of
the parties that the  indemnity  provided  herein with respect to  Environmental
Liabilities  under  CERCLA  and  corresponding  provisions  of  state  law is an
agreement  expressly  not barred by 42  U.S.C.ss.  9607(e)(i)  or  corresponding
provisions of any state law.

                                    ARTICLE 7

                        CONDITIONS TO OBLIGATIONS OF KSI

     The  obligations of KSI to consummate the  Distribution  hereunder shall be
subject to the fulfillment of each of the following conditions:

          (a The Board of Directors of KSI shall be satisfied that, after giving
     effect to the KPL Contribution and the KPP  Contribution,  (i) KSI will not
     be insolvent  and will not have  unreasonably  small  capital with which to
     engage in its  businesses and (ii) the KSI surplus (as such term is defined
     by Delaware General Corporation Law) will be sufficient to permit,  without
     violation of Delaware law, the Distribution.

          (b KSI and KSL shall have executed the Employee Benefits Agreement.

          (c KSI  and  KSL  shall  have  executed  the  Administrative  Services
     Agreement.

          (d The KPL  Contribution  and Common  Share  Issuance  shall have been
     effected.

          (e The KSL Common  Shares shall have been  approved for listing by the
     NYSE,  and the NYSE shall not have (i)  withdrawn its  certification  filed
     with the SEC that the KSL Common Shares has been approved for listing, (ii)
     suspended  trading in either the KSL Common  Shares or the KSI Common Stock
     or (iii)  filed  with the SEC a Form 25 to  strike  either  the KSL  Common
     Shares or the KSI Common Stock from listing and registration thereof.

          (f KSL's Registration Statement on Form 10 shall have become effective
     pursuant to Section 12 of the Securities  Exchange Act of 1934, as amended,
     and the SEC shall not have commenced any action to prohibit or restrict the
     Distribution in any way.

          (g The Board of  Directors  of KSI shall not have  determined,  in its
     sole discretion,  to abandon, defer or modify the Distribution or the terms
     thereof.

                                    ARTICLE 8

                                  MISCELLANEOUS


     8.1 KSL  Covenants.  To assure the  performance  of the  obligations of KSL
under this Agreement, KSL hereby covenants and agrees that it will not, and will
cause its respective  Subsidiaries  not to, merge,  convert into another entity,
engage in a share exchange for a majority of its shares,  liquidate or transfer,
assign or otherwise convey or allocate,  directly or indirectly,  in one or more
transactions,  whether or not related,  a majority of its assets  (determined in
good faith by a board  resolution  prior to the  transaction on a fair value and
consolidated  basis) to any Person  unless the  acquiring  Person (i)  expressly
assumes the  obligations  of it hereunder,  (ii) executes and delivers to KSI an
agreement,  in form and substance  satisfactory to KSI,  agreeing to be bound by
each and every provision of this Agreement and the Employee  Benefits  Agreement
as if it were KSL and (iii) has a net worth on a pro forma  basis  after  giving
effect to the acquisition or business  combination equal to or greater than that
of KSL (on a  consolidated  basis)  and  KSL's  compliance  with the  provisions
Article 5 of this  Agreement.  Any such assumption of liability by the acquiring
Person shall not release KSL from its obligations under this Agreement.

     8.2  Governing  Law. All  questions  arising out of this  Agreement and the
rights  and   obligations   created   herein,   or  its   validity,   existence,
interpretation,  performance  or breach,  shall be governed by and  construed in
accordance  with the internals laws of the State of Texas,  without regard to or
the application of the rules of conflicts of laws set forth in such laws.

     8.3  Notices.  All  notices  and other  communications  to be given or made
hereunder shall be in writing and shall be (a) personally  delivered with signed
receipt  obtained  acknowledging  delivery;  (b)  transmitted by postage prepaid
registered mail,  return receipt requested (air mail if  international);  or (c)
transmitted  by  facsimile;  to a party at the address set out below (or at such
other address as it may have provided  notification  for the purposes  hereof to
the other party hereto in accordance with this Section).

         If to KSL or to any of the         Kaneb Services LLC
         Tax Subsidiaries of KSL:           2435 North Central Expressway
                                            Richardson, Texas 75080
                                            Fax number:       (972) 699-4000
                                            Attention: President

         With a copy to:                    Fulbright & Jaworski L.L.P.
                                            1301 McKinney, Suite 5100
                                            Houston, Texas 77010-3095
                                            Fax number:       (713) 651-5246
                                            Attention:        John A. Watson

         If to KSI:                         Kaneb Services, Inc.
                                            2435 North Central Expressway
                                            Richardson, Texas 75080
                                            Fax number:       (972) 699-4000
                                            Attention: President

         With a copy to:                    Fulbright & Jaworski L.L.P.
                                            1301 McKinney, Suite 5100
                                            Houston, Texas 77010-3095
                                            Fax number:       (713) 651-5246
                                            Attention:        John A. Watson

     8.4  Expenses.  Except as otherwise  set forth  herein or in any  agreement
executed  in  connection   herewith  all  costs  and  expenses  related  to  the
Distribution and the transactions contemplated hereby shall be borne by KSL.

     8.5 Entire Agreement. This Agreement,  including the Schedules, Annexes and
other writings referred to herein or delivered pursuant hereto,  constitutes the
entire  agreement  between KSI, KSL and the Tax Subsidiaries of KSL with respect
to  the   subject   matter   hereof  and   supersedes   all  other   agreements,
representations,  warranties,  statements, promises and understandings,  whether
oral or written,  with respect to the subject matter hereof.  This Agreement may
not be  amended,  altered  or  modified  except  by a  writing  signed  by  duly
authorized officers of KSI, KSL and the Tax Subsidiaries of KSL.

     8.6 Waiver. No consent or waiver,  express or implied, by a party hereto to
or of any breach or default by the other party hereto in the performance by such
other party of its  obligations  hereunder  will be deemed or  construed to be a
consent or waiver to or of any other  breach or default  in the  performance  by
such  other  party of the same or any  other  obligations  of such  other  party
hereunder.  Failure on the part of a party to  complain of any act or failure to
act of the other party or to declare the other party in default, irrespective of
how long such failure  continues,  will not constitute a waiver by such party of
its rights hereunder.  The giving of consent by a party in any one instance will
not limit or waive the  necessity to obtain such  party's  consent in any future
instance.

     8.7 Binding Effect; Assignment; No Third Party Benefit.

          (a This Agreement will be binding upon and inure to the benefit of and
     be enforceable by the parties  hereto and their  respective  successors and
     permitted  assigns.  None of the parties to this  Agreement  may assign its
     rights under this Agreement without the prior written consent of all of the
     other  parties;  provided,  however,  KSI may  assign any of its rights and
     obligations  under this  Agreement to any  Subsidiary  of KSI,  without the
     consent of any other party to this Agreement.

          (b Nothing in this  Agreement,  express or implied,  is intended to or
     shall  confer  upon any person  other than KSL,  KSI,  the KSL  Indemnified
     Parties and the Tax Subsidiaries of KSL any rights, benefits or remedies of
     any nature whatsoever under or by reason of this Agreement.

     8.8 Counterparts.  This Agreement may be executed  simultaneously in two or
more counterparts,  each of which shall be deemed an original,  but all of which
together shall constitute one and the same agreement.

     8.9 References. All references in this Agreement to Articles,  Sections and
other  subdivisions  refer to the Articles,  Sections and other  subdivisions of
this Agreement unless expressly provided otherwise.  The words "this Agreement",
"herein", "hereof",  "hereby",  "hereunder" and words of similar import refer to
this Agreement as a whole and not to any particular subdivision unless expressly
so limited.

     8.10  Terminology.  All personal  pronouns used in this Agreement,  whether
used in the  masculine,  feminine  or  neuter  gender,  will  include  all other
genders;  and the singular will include the plural and vice versa.  The headings
of the Articles and Sections of this Agreement are included for convenience only
and will not be deemed to  constitute  part of this  Agreement  or to affect the
construction hereof or thereof.

     8.11  Severability.  Any provision of this  Agreement that is determined by
arbitration  as  provided  herein  or a court of  competent  jurisdiction  to be
invalid,  illegal or  unenforceable  shall be  ineffective to the extent of such
invalidity,  illegality or  unenforceability,  without  affecting in any way the
remaining  provisions hereof in such jurisdiction or rendering that or any other
provision of this Agreement  invalid,  illegal or unenforceable,  so long as the
material  purposes of this Agreement can be determined and  effectuated.  Should
any   provision  of  this   Agreement  be  so  declared   invalid,   illegal  or
unenforceable,  the parties shall agree on a valid  provision to substitute  for
it.

     8.12 Further Assurances. Each party hereto agrees to do all acts and things
and to make, execute and deliver such written instruments,  as will from time to
time be  reasonably  required  to carry  out the terms  and  provisions  of this
Agreement.

     8.13  Amendments.  Any  term  of  this  Agreement  may be  amended  and the
observance  of any  term of this  Agreement  may be  waived,  only by a  written
instrument executed by KSI, KSL and the Tax Subsidiaries of KSL.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth in the introduction to this Agreement.

                                 KANEB SERVICES, INC.


                                 By:           //s//
                                         William H. Kettler
                                          Vice President


                                 KANEB SERVICES LLC

                                 By:          //s//
                                         Howard C. Wadsworth
                                          Vice President

                                KANEB PIPE LINE COMPANY LLC


                                 By:          //s//
                                         Howard C. Wadsworth
                                          Vice President

                                MARTIN OIL LLC

                                By:          //s//
                                       Howard C. Wadsworth
                                        Vice President


                                KANEB MANAGEMENT COMPANY LLC


                                 By:          //s//
                                         Howard C. Wadsworth
                                          Vice President

                                 TEXAS ENERGY SERVICES LLC

                                 By:          //s//
                                         Howard C. Wadsworth
                                           President

                                 KANEB INVESTMENT, L.L.C.


                                 By:          //s//
                                         Howard C. Wadsworth
                                           President


                                 KANEB, INC.

                                 By:          //s//
                                         Howard C. Wadsworth
                                           President


                                 KANEB LLC

                                 By:          //s//
                                         Howard C. Wadsworth
                                          Vice President

<PAGE>
                                                                        Annex A


                       [Administrative Services Agreement]


<PAGE>
                                                                        Annex B


                          [Employee Benefits Agreement]