Document:

EXHIBIT 10.4

                           EMPLOYEE BENEFITS AGREEMENT

     THIS  AGREEMENT  is made by and between  KANEB  SERVICES,  INC., a Delaware
corporation ("KSI") and KANEB SERVICES LLC, a Delaware limited liability company
("KSL").

                               W I T N E S S E T H

     WHEREAS,  KSL will distribute to its  stockholders one KSL Common Share for
each three  shares of KSI Common  Stock held by KSI  stockholders  on the record
date for the distribution (the "Distribution");

     WHEREAS,  upon the  Distribution,  the Kaneb Services,  Inc. Deferred Stock
Unit  Plan  account  of each  Kaneb  Services,  Inc.  Deferred  Stock  Unit Plan
participant  shall be deemed to be credited with one non-monetary  unit equal to
one KSL Common Share for every three non-monetary units equal to three shares of
KSI  Common  Stock that is deemed to be  credited  to his Kaneb  Services,  Inc.
Deferred Stock Unit Plan account as of the record date for the Distribution;

     WHEREAS,  upon the  Distribution,  the Kaneb  Services,  Inc.  Non-Employee
Directors  Deferred  Stock  Unit  Plan  account  of each  Kaneb  Services,  Inc.
Non-Employee  Directors  Deferred Stock Unit Plan participant shall be deemed to
be credited with one  non-monetary  unit equal to one KSL Common Share for every
three  non-monetary  units  equal to three  shares of KSI  Common  Stock that is
deemed  to be  credited  to his  Kaneb  Services,  Inc.  Non-Employee  Directors
Deferred Stock Unit Plan account as of the record date for the Distribution;

     WHEREAS, upon the Distribution,  the Kaneb Services, Inc. 1996 Supplemental
Deferred   Compensation   Plan  account  of  each  Kaneb  Services,   Inc.  1996
Supplemental  Deferred  Compensation  Plan  participant  shall be  deemed  to be
credited  with one  non-monetary  unit equal to one KSL  Common  Share for every
three  non-monetary  units  equal to three  shares of KSI  Common  Stock that is
deemed to be credited to his Kaneb  Services,  Inc. 1996  Supplemental  Deferred
Compensation Plan account as of the record date for the Distribution; and

     WHEREAS,  after the  Distribution  and through the date the  participant is
paid his entire  benefit  due under the  applicable  plan,  the  account of each
participant in the Kaneb Services,  Inc. 1996 Supplemental Deferred Compensation
Plan, the Kaneb Services,  Inc. Deferred Stock Unit Plan and the Kaneb Services,
Inc. Non-Employee  Directors Deferred Stock Unit Plan shall also be deemed to be
credited with additional  non-monetary  units equal to the cash  distribution(s)
KSL would have paid to the  participant  had he been the owner of such number of
KSL Common Shares equal to the number of non-monetary  units equal to the number
of KSL Common  Shares  deemed  credited to his account  under the plan as of the
record date(s) for the cash distribution(s);

     NOW,  THEREFORE,  in consideration of the promises  contained  herein,  and
other valuable  consideration,  the receipt and  sufficiency of which are hereby
acknowledged by the parties, the parties hereto agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

     Whenever  used in this  Agreement,  the  following  terms  shall  have  the
meanings indicated below or in the recitals above, unless a different meaning is
plainly required by the context.  The singular shall include the plural,  unless
the context clearly indicates otherwise. Capitalized terms that are used in this
Agreement  which are not listed in the  recitals or in this Article I shall have
the respective meanings assigned to them in the Distribution Agreement.

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

     1.2  "Distribution  Agreement" shall mean the Distribution Agreement by and
          among Kaneb Services,  Inc., a Delaware corporation and Kaneb Services
          L.L.C., a Delaware limited liability company, and the Tax Subsidiaries
          (as defined therein).

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

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

     1.5  "KSI Deferred Compensation Plans" shall mean the Kaneb Services,  Inc.
          Deferred  Stock  Unit  Plan,  the Kaneb  Services,  Inc.  Non-Employee
          Directors  Deferred Stock Unit Plan and the Kaneb Services,  Inc. 1996
          Supplemental Deferred Compensation Plan.

     1.6  "KSI  Employee  Benefit  Plan" shall mean any  employee  benefit  plan
          (within the meaning of section 3(3) of the Employee  Retirement Income
          Security Act of 1974, as amended) or compensation  arrangement that is
          now or was previously  maintained,  sponsored or contributed to by KSI
          or a KSI  Company,  including  (but not limited  to) the KSI  Deferred
          Compensation Plans, the Kaneb Services, Inc. Health Benefits Plan, the
          Kaneb  Services,  Inc. Group Life & Accidental  Death &  Dismemberment
          Insurance Plan, the Kaneb Services,  Inc. Group  Supplemental  Death &
          Dismemberment   Plan,  the  Kaneb  Services,   Inc.  Group  Long  Term
          Disability  Benefit Plan, the Kaneb Services,  Inc.  Flexible Spending
          Account Plan, the Kaneb Services, Inc. Non-Employee Directors Deferred
          Stock Unit Plan, the Kaneb Services,  Inc. Severance Benefits Plan and
          the KSI Savings Plan.

     1.7  "KSI Option Exercise Price Adjustment Factor" shall mean, with respect
          to a given KSI  Option,  a  fraction,  the  numerator  of which is the
          original  exercise  price for the KSI  Option and the  denominator  of
          which is the  closing  price of a share of KSI Common  Stock (with due
          bill  attached)  on the  NYSE on the  last  trading  day  prior to the
          ex-distribution date.

     1.8  "KSI  Option"  shall mean an option to  purchase  shares of KSI Common
          Stock that was granted by KSI prior to, and is  outstanding as of, the
          record date for the Distribution.

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

     1.10 "KSL Common Share" shall mean a Common Share of KSL, as defined in the
          KSL Limited Liability Company Agreement.

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

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

     1.13 "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.

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

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

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

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

     1.18 "NYSE" shall mean the New York Stock Exchange.

                                   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 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 opening  price of a share
     of KSI Common Stock on the NYSE 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 opening  price of a KSL Common  Share on the
     NYSE on the ex-distribution  date (or, if there is no trading in KSL Common
     Shares on the NYSE 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 NYSE 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 this  Section  3.1,  the  pre-distribution
     intrinsic  value of a KSI Option shall be (1) the closing  price of a share
     of KSI  Common  Stock  (with  due  bill  attached)  on the NYSE on the last
     trading day prior to the  ex-distribution  date multiplied by the number of
     shares  of KSI  Common  Stock  subject  to the KSI  Option,  minus  (2) the
     original  exercise  price  for a share of KSI  Common  Stock  under the KSI
     Option  multiplied  by the number of shares of KSI Common Stock  subject to
     the KSI Option.  For purposes of this  Section  3.1, the  post-distribution
     intrinsic  value of a KSI Option shall be (1) the opening  price of a share
     of KSI Common Stock on the NYSE on the  ex-distribution  date multiplied by
     the number of shares of KSI Common Stock  subject to the KSI Option,  minus
     (2) the KSI Option  Exercise  Price  Adjustment  Factor  multiplied  by the
     number  of  shares of KSI  Common  Stock  subject  to the KSI  Option.  For
     purposes of this Section 3.1, the  post-distribution  intrinsic  value of a
     KSL Option shall be (1) the opening price of a KSL Common Share on the NYSE
     on the  ex-distribution  date multiplied by the number of KSL Common Shares
     subject  to the  KSL  Option,  minus  (2)  the KSI  Option  Exercise  Price
     Adjustment  Factor multiplied by the opening price of a KSI Common Share on
     the NYSE on the ex-distribution date multiplied by the number of KSL Common
     Shares subject to the KSL Option.

          (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.

          (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.

     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.

                                   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.

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
executed effective as of the 28th day of June, 2001.

                            KANEB SERVICES, INC.

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

                            KANEB SERVICES LLC

                            By:               //s//
                                       Howard C. Wadsworth
                                          Vice PresidentEXHIBIT 10.5

                                CREDIT AGREEMENT

                                 by and between

                              KANEB SERVICES, INC.

                                       and

                               KANEB SERVICES LLC

                            Dated as of June 28, 2001

<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

<S>                                                                                                              <C>
ARTICLE I - CREDIT FACILITIES.....................................................................................1
         1.01     Extensions of Credit............................................................................1
         1.02     Manner of Borrowing.............................................................................1
         1.03     Conversions and Continuations...................................................................2
         1.04     Use of Proceeds of Advances.....................................................................3
         1.05     Method of Payment...............................................................................3
         1.06     Prepayment; Compensation........................................................................3
         1.07     Computation of Interest.........................................................................4
         1.08     The Facilities..................................................................................4
         1.09     Fees............................................................................................4
         1.10     Reduction or Termination of Revolving Credit Commitment.........................................5
         1.11     Letters of Credit...............................................................................5
         1.14     Interest Rate Evidence..........................................................................6

ARTICLE II -  REPRESENTATIONS AND WARRANTIES......................................................................7
         2.01     Legal Existence.................................................................................7
         2.02     Corporate Power and Authority to Execute Documents..............................................7
         2.03     Valid, Binding, Enforceable Obligations.........................................................7
         2.04     No Violation of Charter, By-Laws or Agreements..................................................7
         2.05     No Violation of Laws, Rules or Orders...........................................................7
         2.07     Board of Directors Authorization................................................................8

ARTICLE III - DEFAULTS AND REMEDIES...............................................................................8
         3.01     Events of Default...............................................................................8

ARTICLE IV - TERMINATION OF LOANS................................................................................10

ARTICLE V - CONDITIONS PRECEDENT.................................................................................10
         5.01     Conditions Precedent to Initial Loan...........................................................10
         5.02     Conditions Precedent to Each Loan..............................................................11

ARTICLE VI - COVENANTS...........................................................................................11
         6.01     Insurance......................................................................................11
         6.02     Lender Change of Control.......................................................................11

ARTICLE VII - MISCELLANEOUS......................................................................................11
         7.01     No Waivers Except by Writing; Governing Law....................................................11
         7.02     Usury Laws.....................................................................................12
         7.03     Notice.........................................................................................13
         7.04     Waivers of Certain Rights......................................................................14
         7.05     No Intended Third-Party Beneficiaries..........................................................14
         7.06     Severability of Provisions.....................................................................14
         7.07     Survival of Representations and Warranties; Unsatisfied Conditions.............................14
         7.08     Assignments....................................................................................14
         7.09     Gender and Usage...............................................................................14
         7.10     Multiple Counterparts..........................................................................15
         7.11     Debtor-Creditor Relationship...................................................................15
         7.12     Agreement Controlling..........................................................................15
         7.13     Integration....................................................................................15
         7.14     WAIVER OF JURY TRIAL...........................................................................15
         7.15     Headings.......................................................................................15

DEFINITIONS.....................................................................................................A-1

</TABLE>
<PAGE>

                                CREDIT AGREEMENT

     THIS CREDIT  AGREEMENT  dated and  effective as of June 28, 2001  (together
with any and all  amendments  and  supplements  hereto and/or  restatements  and
modifications hereof,  collectively referred to hereinafter as the "Agreement"),
by and  between  KANEB  SERVICES  LLC,  a  Delaware  limited  liability  company
("Lender"),  and KANEB SERVICES, INC., a Delaware corporation  ("Borrower").  As
used in this  Agreement,  terms shall have the respective  meanings set forth in
Annex A hereto. Other terms defined herein have the meanings so given them.

                              W I T N E S S E T H:

     WHEREAS,  Borrower has requested Lender to make certain loans, from time to
time, to Borrower, and Lender has agreed to make such loans;

     NOW  THEREFORE,  to induce  Lender to make  available  the credit  facility
herein  described and referenced,  and for and in consideration of the premises,
covenants and agreements  herein contained,  in reliance on the  representations
and warranties herein made, and for other good and valuable  considerations  and
reasonably  equivalent  value,  the receipt and  sufficiency of which are hereby
acknowledged by the parties hereto, Lender and Borrower agree as follows:

                         Article 1 - Credit Facilities

Article 1.1  Extensions of Credit . Subject to the terms and  conditions of this
Agreement,  Lender hereby agrees to lend to Borrower, and Borrower has the right
to borrow from Lender,  from time to time during the period from the date hereof
to and  including  the  Maturity  Date,  amounts  not to  exceed at any one time
outstanding  the  difference of the Total Credit  Commitment  and the sum of the
Total Letter of Credit Liabilities.

Article 1.2 - Manner of Borrowing

     (a) Borrower  shall give to Lender,  on or before 12:00 noon Dallas,  Texas
time,  notice (whether by telephone,  facsimile,  in person,  by mail or e-mail)
specifying the amount of such Advance,  the Pricing  Selection and, with respect
to any Eurodollar  Advance,  the desired Interest  Period.  Such notice shall be
made at least three  Business Days prior to the requested  date for a Eurodollar
Advance and at least one  Business  Day prior to the  requested  date for a Base
Rate  Advance.  Each  Advance  shall be in the  aggregate  principal  amount  of
$100,000 or an integer multiple thereof.

     (b) Lender  shall,  before 12:00 noon Dallas,  Texas time on the  requested
Borrowing Date, make available to Borrower,  in same day funds the amount of the
Loan.

     (c) If no  Interest  Period  with  respect  to any  Eurodollar  Advance  is
specified by Borrower when it notifies Lender,  then Borrower shall be deemed to
have requested a one-month Interest Period available under the terms hereof with
respect to such Advance.

     (d) The Loans shall be  evidenced  by the Note.  Lender shall record on its
books,  and prior to any  transfer  of the Note shall  endorse  on the  schedule
forming a part thereof  appropriate  notations to evidence the date,  amount and
maturity of each Loan and the date and amount of each payment of principal  made
by Borrower  with respect  thereto;  provided that the failure of Lender to make
any such recordation or endorsement shall not affect the obligations of Borrower
hereunder  or under  any other  Loan  Document.  Lender  is  hereby  irrevocably
authorized  by  Borrower so to endorse the Note and to attach to and make a part
of the Note a continuation of any such schedule as and when required.

     (e) Each Advance shall bear interest on the unpaid balance of the principal
amount  thereof  from the date  such  Advance  is made  until  paid in full at a
varying per annum rate of interest  equal to, from day to day, the lessor of (i)
the Maximum Rate and (ii) the Applicable Rate.

     (f) Accrued and unpaid interest on all Advances shall be due and payable as
follows:  (i) in the case of each Base Rate Advance,  or Eurodollar  Advance, on
each  Interest  Payment  Date,  and (ii) in the case of any  Advance,  when such
Advance shall be due (whether at maturity,  by reason of  prepayment,  scheduled
due date, acceleration or otherwise), or converted into another Type but only to
the extent accrued on the amount then due or converted. All unpaid principal and
accrued unpaid interest shall be due and payable on the Maturity Date.

     (g) Without  duplication of the provisions of Section 1.03 hereof, all past
due principal,  and, to the maximum extent permitted by Applicable Law, all past
due interest on Advances under this Agreement, the Note and other amounts herein
and under each other Loan  Document  due,  shall bear  interest  on the  amounts
thereof from time to time remaining  unpaid (both before and after  judgment) at
the Default Rate.

     (h) The Note, in addition to the applicable terms and provisions hereof and
referenced herein,  shall otherwise be subject to, and governed by the terms and
provisions  therein  set  forth and  referenced  and such  terms and  provisions
incorporated herein for all purposes.

Article 1.3 Conversions  and  Continuations . Borrower shall have the right from
time to time to convert all or a part of one Loan or Type into  another  Loan or
Type or to continue all or part of any Loan by giving Lender notice  (whether by
telephone,  facsimile,  in person, by mail or e-mail) at least three (3) and not
more than ten (10) Business Days before  conversion  into or  continuation of an
Advance, specifying: (i) the conversion or continuation date, (ii) the amount of
the  Loan  or  Advance  to be  converted  or  continued,  (iii)  in the  case of
conversions,  the Loan or Type to be converted  into,  and (iv) in the case of a
continuation  of or conversion  into a Eurodollar  Advance,  the duration of the
Interest Period applicable thereto; provided that neither Base Rate Advances nor
Eurodollar  Advances  may be  converted  to,  or,  on  the  last  day(s)  of the
then-current Interest Period(s) for outstanding  Eurodollar Advances,  continued
as, as  applicable,  Eurodollar  Advances,  after the  occurrence of an Event of
Default or Default or when any of the conditions  referred to in Section 5.02(a)
or (b) are not  then  met.  Eurodollar  Advances  shall  only  be  converted  or
continued on the last day of the Interest Period for such  Eurodollar  Advances.
All notices  given under this Section  shall be given not later than 12:00 noon,
Dallas, Texas time, on the day that is not less than the number of Business Days
specified  above for such notice.  If Borrower  shall fail to give to Lender the
notice as specified above for continuation or conversion of a Eurodollar Advance
prior  to the  end of the  Interest  Period  with  respect  thereto,  then  such
Eurodollar  Advance,  on the last day of the Interest Period for such Eurodollar
Advance shall  automatically  be converted  into a Base Rate  Advance.  Upon the
occurrence of an Event of Default, Lender may convert all Eurodollar Advances to
Base Rate  Advances,  and Borrower  agrees to pay any and all costs and expenses
associated with or related to such conversion(s) of its Eurodollar Advances. The
provisions of the immediately preceding sentence  notwithstanding,  however, (i)
the provisions of such sentence shall not limit in any respect the obligation of
Borrower to pay interest at the Default Rate on all past due  principal  and, to
the maximum extent  permitted by Applicable Law, all past due interest,  whether
by acceleration or otherwise,  as provided herein, and (ii) after the occurrence
and during the continuance of an Event of Default,  all Base Rate Advances shall
bear interest at a rate per annum equal to the Default Rate rather than the Base
Rate.

                    Article 1.4 Use of Proceeds of Advances.

The  proceeds  of each  Advance  may be used by Borrower  for any  corporate  or
business purposes.

                         Article 1.5 Method of Payment.

All payments of  principal,  interest  and other  amounts to be paid by Borrower
hereunder,  under the Note and under any other Loan  Document  shall be made, in
Dollars to Lender by wire transfer of immediately available funds, no later than
3:00 P.M. Dallas,  Texas time on the date on which payment shall become due, and
each such  payment made after such time on such due date shall be deemed to have
been made on the next succeeding  Business Day. Whenever any payment  hereunder,
under the Note or under any other Loan  Document  shall be stated to be due on a
day that is not a Business Day, such payment may be made on the next  succeeding
Business Day and interest shall continue to accrue during such extension.

                     Article 1.6 Prepayment; Compensation .

     (a) Subject to Section  1.06(b)  hereof,  Borrower may,  without premium or
penalty thereon, upon at least one Business Day's prior written notice to Lender
in the case of Base  Rate  Advances,  and at least  three  Business  Days  prior
written notice to Lender in the case of any Eurodollar Advance,  prepay the Note
in whole at any time or from time to time in part,  such  prepaid  amounts to be
delivered  to Lender  with  accrued  interest to the date of  prepayment  on the
amount so prepaid;  provided that (i) each  Eurodollar  Advance prepaid on a day
other  than the last  day of the  Interest  Period  for  such  Advance,  must be
accompanied by the payment  described in Section 1.06(b),  and (ii) each partial
prepayment  shall be in the principal amount equal to the lessor of (x) $100,000
or an integer  multiple  thereof and (y) the aggregate amount of the outstanding
Loans at the time of prepayment.

     (b) Borrower shall pay to Lender,  upon the request of Lender,  such amount
or amounts as shall be  sufficient to  compensate  it for any  reasonable  loss,
cost,  damages,  liabilities or expense incurred as a result of (i) any payment,
prepayment or  conversion of a Eurodollar  Advance on a date other than the last
day of an Interest  Period for such Advance;  or (ii) any failure by Borrower to
borrow,  convert, or prepay a Eurodollar Advance on the date for such borrowing,
conversion,  or  prepayment,  specified  in the  relevant  notice of  borrowing,
prepayment, or conversion under this Agreement.

                     Article 1.7 Computation of Interest .

Interest on Eurodollar  Advances shall be computed on the basis of a year of 360
days  and the  actual  number  of days  elapsed  (including  the  first  day but
excluding the last day) occurring in the period for which  payable,  unless such
calculation  would  result  in a  usurious  rate or  amount  of  interest  under
Applicable  Law, in which case  interest  shall be  calculated on the basis of a
year of 365 or 366  days,  as the case may be,  and the  actual  number  of days
elapsed  (including  the first day but excluding the last day)  occurring in the
period for which  payable.  Interest on Base Rate Advances  shall be computed on
the  basis of a year of 365 or 366  days,  as the case  may be,  and the  actual
number of days  elapsed  (including  the first day but  excluding  the last day)
occurring in the period for which payable.

                          Article 1.8 The Facilities .

Notwithstanding  any term or  provision  contained  in any Loan  Document to the
contrary,  it is hereby  agreed that in no event shall  Chapter 346 of the Texas
Finance Code, as amended, apply to any Loan Document or related documentation or
the loan  transactions  provided for  hereunder  in any manner.  All payments by
Borrower on account of the Note or other amounts payable by Borrower pursuant to
the  terms  of  this  Agreement  shall  be made in  Dollars  and in  immediately
available  funds not later than 3:00 P.M.,  Dallas,  Texas time, on the day such
payment  shall become due, and any  payments  received  after such time shall be
deemed received on the next following  Business Day. In any case where a payment
of  principal  of or  interest  on a Loan is due on a day that is not a Business
Day,  Borrower shall be entitled to delay such payment until the next succeeding
Business Day, but interest  shall  continue to accrue at the rate then effective
under the Note,  until the payment is, in fact,  made. Each payment  received by
Lender on the Note presented for payment,  shall be applied first to accrued and
unpaid interest and, second, to any outstanding principal amounts.

                               Article 1.9 Fees.

     (a) Commitment  Fee. The Borrower  agrees to pay to Lender a commitment fee
equal to the  lessor  of (i) the  commitment  fee or other  comparable  fee that
Lender pays under the Existing  Credit  Agreement  and (ii) .5% per annum on the
average  daily unused  portion of the Total  Credit  Commitment  (determined  by
subtracting  the  aggregate  amount  of all  outstanding  Revolving  Loans  then
outstanding  and the face amount of Letters of Credit issued and outstanding and
the aggregate amount of any Reimbursement  Obligations) computed on the basis of
the actual  number of days elapsed  over a year of 365 or 366 days,  as the case
may be. Such  commitment fee with respect to the Total Credit  Commitment  shall
accrue from and  including  the date hereof to but  excluding  the Maturity Date
(including  all  extensions  thereof) and shall be payable  quarterly in arrears
commencing on the last  Business Day of September  2001,  and  continuing on the
last Business Day of each December,  March, June and September  thereafter until
the Maturity Date (including all extensions  thereof).  Pursuant to Section 1.10
hereof,  Borrower  shall have the right to  permanently  reduce the Total Credit
Commitment;  and any such permanent reduction or termination of the Total Credit
Commitment  shall  proportionately   reduce  or  terminate  the  commitment  fee
otherwise  payable  pursuant to this Section 1.09(a) as of the date on which the
Total Credit Commitment is so permanently reduced or terminated.

     (b) Letter of Credit Fees and  Commissions.  The Borrower  agrees to pay an
issuance fee for each Letter of Credit  issued equal to $500.00,  which shall be
due and  payable  on the date of the  issuance  of any  Letter  of  Credit.  The
Borrower  agrees to pay to Lender a fee for causing the  issuance of the Letters
of Credit (calculated  separately for each Letter of Credit) equal to the lessor
of (i) the letter of credit fee or other  comparable  fee that Lender pays under
the Existing Credit Agreement and (ii) 1% per annum of the maximum  liability of
Lender existing from time to time under such Letter of Credit, payable quarterly
in arrears on the last Business Day of each March, June,  September and December
during the period that such Letter of Credit is outstanding.

     (c) Facility  Fee. The Borrower  agrees to pay to the Lender a facility fee
equal to 1.25% of the Total Credit Commitment (the "Facility Fee"). The Facility
Fee shall be payable 1/3 on the date hereof, 1/3 on the first anniversary of the
date hereof and 1/3 on the second anniversary of the date hereof,  provided that
if the Total Credit Commitment has been permanently  terminated in full pursuant
to Section 1.10, the balance of the Facility Fee shall be payable in full on the
date the Total Credit Commitment has been permanently terminated in full.

     Article 1.10 Reduction or Termination of Revolving Credit Commitment.

Subject to the provisions hereof,  Borrower may at any time or from time to time
permanently reduce the Total Credit Commitment or permanently terminate in whole
the Total Credit Commitment by giving not less than two (2) Business Days' prior
written notice to such effect to Lender, provided that (a) any partial reduction
of the Total Credit  Commitment shall be in an aggregate amount of not less than
$100,000  and (b) unless  Borrower  shall  provide  to Lender  cash in an amount
sufficient  to satisfy  and  secure the  payment in full of all Letter of Credit
Liabilities in excess of the Total Credit Commitment as so reduced,  in no event
shall  Borrower be entitled to terminate  or reduce the Total Credit  Commitment
if, after giving effect thereto,  the Total Credit Commitment would be less than
the sum of the  aggregate  amount of all  outstanding  Revolving  Loans plus the
Total Letter of Credit Liabilities.

                        Article 1.11 Letters of Credit .

Subject to all the terms of this Agreement,  prior to the Maturity Date,  Lender
agrees to cause a Financial  Institution  to issue,  renew and extend Letters of
Credit as requested by Borrower in accordance with Section 1.12 hereof; provided
that in no event shall Total Letter of Credit  Liabilities  exceed nor shall any
Letter of Credit be issued,  renewed or extended that would result in the sum of
the Total Letter of Credit  Liabilities  plus the aggregate  amount  outstanding
under the Revolving Loans exceeding the Total Credit Commitment.  Each Letter of
Credit may be for any corporate or business purpose of Borrower. Borrower hereby
agrees to pay to Lender any Reimbursement  Obligation with respect to any Letter
of Credit within ten Business Days of being notified in writing by Lender of the
existence of such Reimbursement  Obligation.  If any Reimbursement Obligation is
not  paid  within  ten  Business  Days of  such  notice  by  Lender,  then  such
Reimbursement Obligation shall be automatically,  without any action on the part
of Borrower or Lender,  Base Rate Advance on the date of the  expiration of such
10-Business Day period.  The Letters of Credit issued pursuant to this Agreement
shall  contain  such  customary  and  reasonable  terms  and  conditions  as the
Financial Institution shall require for the issuance of any Letter of Credit.

         Article 1.12 Notice and Manner of Obtaining Letters of Credit.

Borrower shall notify (whether by telephone,  facsimile,  in person,  by mail or
e-mail) Lender of the beneficiary,  amount and date of issuance,  term, renewal,
extension  or  reissuance  of a Letter of Credit  pursuant to this  Agreement at
least six Business Days prior to the requested date of such  issuance,  renewal,
extension or reissuance.  All Letters of Credit issued hereunder shall expire on
or before the  Maturity  Date,  except that Letters of Credit may be issued that
expire no later than one year after the Maturity  Date,  provided  that Borrower
shall have first provided (prior to such issuance) to Lender,  cash in an amount
sufficient  to satisfy  and  secure the  payment in full of all Letter of Credit
Liabilities  that could be due within such  one-year  period  after the Maturity
Date.

                              Article 1.13 Taxes.

     (a) Payments  Free and Clear.  Any and all payments by Borrower  under this
Agreement or any of the other Loan Documents shall be made free and clear of and
without  deduction  for any and all present or future  taxes,  levies,  imposts,
deductions,  charges or withholdings,  and all liabilities with respect thereto,
excluding,  in the case of Lender, taxes imposed on its income, and franchise or
similar taxes imposed on it, by (i) any jurisdiction  (or political  subdivision
thereof)  of which  Lender is a citizen  or  resident  or in which  Lender has a
permanent  establishment  (or is otherwise  engaged in the active conduct of its
business through an office or a branch), (ii) the jurisdiction (or any political
subdivision thereof) in which Lender is organized, or (iii) any jurisdiction (or
political subdivision thereof) in which Lender is presently doing business which
taxes are imposed solely as a result of doing business in such jurisdiction (all
such non-excluded taxes, levies, imposts, deductions,  charges, withholdings and
liabilities so arising out of payments by Borrower being hereinafter referred to
as "Taxes"). If Borrower shall be required by law to deduct any Taxes from or in
respect of any sum  payable  hereunder  to Lender (i) the sum  payable  shall be
increased by the amount  necessary so that after making all required  deductions
(including  deductions  applicable to additional sums payable under this Section
1.13) Lender shall receive an amount equal to the sum it would have received had
no such deductions been made, (ii) Borrower shall make such deductions and (iii)
Borrower shall pay the full amount deducted to the relevant taxing  authority or
other Governmental Authority in accordance with applicable law.

     (b) Other Taxes. In addition,  Borrower agrees to pay any present or future
stamp or  documentary  taxes or any other excise or property  taxes,  charges or
similar levies that arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement or any
other Loan Document (hereinafter referred to as "Other Taxes").

     (c)  Receipts.  Within 30 days  after the date of any  payment  of Taxes or
Other Taxes  withheld by Borrower in respect of any payment to Lender,  Borrower
will furnish to Lender the original or a certified copy of a receipt  evidencing
payment thereof.

     (d)  Survival.  Without  prejudice to the  survival of any other  agreement
contained herein, the agreements and obligations  contained in this Section 1.13
shall survive the payment in full of principal and interest hereunder.

                      Article 1.14 Interest Rate Evidence.

Upon the request of Borrower,  Lender shall timely provide to Borrower  evidence
to the reasonable  satisfaction of Borrower that  establishes the interest rates
and commitment fees that Lender is charged under the Existing Credit Agreement.

                   Article 2 - Representations and Warranties

Borrower hereby represents and warrants to Lender as follows:

     Article 2.1 Legal  Existence . Borrower is a  corporation  duly  organized,
validly existing and in good standing under the laws of the jurisdictions  under
which it is incorporated, and it is duly qualified to do business as of the date
hereof  in  all  jurisdictions  wherein  the  property  owned  or  the  business
transacted by it would require such  qualification,  except where the failure to
so qualify would not have a Material Adverse Effect on Borrower.

     Article 2.2 Corporate  Power and Authority to Execute  Documents . Borrower
has all  requisite  corporate  power and  authority to create,  issue,  execute,
deliver, carry out and comply with this Agreement and the Note. Borrower has all
requisite  corporate  power and authority and all necessary  licenses,  permits,
franchises and other authorizations to own and operate its property and to carry
on its business as now conducted  and as proposed to be conducted,  except where
the failure to have such licenses,  permits,  franchises or other authorizations
would not have a Material Adverse Effect on Borrower.

     Article 2.3 Valid, Binding, Enforceable Obligations . Borrower has duly and
effectively   taken  all  corporate  action  requisite  for  the  due  creation,
execution,  issuance,  delivery and  performance of this Agreement and the Note,
and this  Agreement  and the Note,  will  constitute a legally valid and binding
obligation of Borrower,  enforceable  against  Borrower in accordance with their
respective terms except as limited by bankruptcy, reorganization,  moratorium or
other  similar  laws  and  judicial  decisions   affecting  the  enforcement  of
creditors' rights generally and by general equitable principles.

     Article 2.4 No  Violation of Charter,  By-Laws or  Agreements . Borrower is
not in violation of any term of its  certificate  of  incorporation  or by-laws.
Borrower  is not in  default  of any term of any  indenture,  mortgage,  deed of
trust,  promissory  note,  loan  agreement,  note  agreement  or other  material
agreement including,  but without limitation,  any lease, to which it is a party
or by which it or any of its  property  may be bound,  the effect of which would
have a Material Adverse Effect on Borrower.

     Article 2.5 No Violation of Laws,  Rules or Orders . Except as disclosed in
its public filings made with the Securities and Exchange Commission, Borrower is
not:

     (a)  in violation of any laws, ordinances,  statutes,  rules,  regulations,
          franchises,  certificates,  permits or other Governmental Requirements
          to which it is subject,  the  violation of which would have a Material
          Adverse Effect on Borrower; or

     (b)  in violation  of any  judgment,  order,  writ,  injunction,  decree or
          demand of any court,  arbitrator or governmental body applicable to it
          that  individually or in the aggregate  would have a Material  Adverse
          Effect on Borrower.

     Article 2.6 Loan  Documents  Do Not Violate  Other  Documents.  Neither the
execution  and  delivery  by  Borrower  of this  Agreement  or the  Note nor the
consummation  of the  transactions  herein  and  therein  contemplated,  nor the
performance of, or compliance with, the terms and provisions hereof and thereof,
does or will  violate any  provision  of its  certificate  of  incorporation  or
bylaws,  or any  applicable  law,  statute,  rule or regulation or any judgment,
decree, writ, injunction,  franchise,  order or permit applicable to Borrower or
its  assets or  properties,  or does or will  result in any breach of or default
under,  any of the terms,  covenants,  conditions or provisions of, or result in
the creation or imposition of any lien, security interest, charge or encumbrance
upon any of the  property  or assets of Borrower  pursuant to the terms,  of any
indenture, mortgage, deed of trust, loan agreement, or other instrument to which
Borrower is a party and which  terms are  applicable  to Borrower  the breach or
default of which will have a Material Adverse Effect on Borrower,  or materially
and  adversely  affect  its  abilities  to  perform,  promptly  and  fully,  its
obligations hereunder or under any of the other Loan Documents.

     Article 2.7 Board of  Directors  Authorization  . The Board of Directors of
Borrower, acting pursuant to a duly called and constituted meeting, after proper
notice,  or pursuant to a valid and unanimous  written  consent,  has determined
that  entry  into  and  performance  of this  Agreement  and the  Note  benefits
Borrower, and that adequate and fair consideration has been received by Borrower
to execute and perform this Agreement and the Note.

                       Article 3 - Defaults and Remedies

     Article 3.1 Events of Default . If any of the following  events shall occur
and be continuing (each an "Event of Default"):

     (a)  Borrower  (i) shall fail to pay any  principal of the Note as and when
due,  (ii) shall fail to pay any interest on the Note within five  Business Days
of the date when due, or (iii) shall fail to pay any other Obligation  hereunder
or under any other Loan Document  within ten Business Days of the date when due;
or

     (b) Borrower  shall (i) dissolve or terminate its  existence  (except for a
merger of Borrower  with a Wholly Owned  Subsidiary),  or (ii)  discontinue  its
usual business,  or (iii) apply for or consent to the appointment of a receiver,
trustee,  custodian or liquidator  of it or of all or a substantial  part of its
property,  or (iv)  generally  fail to pay its  debts  as they  come  due in the
ordinary course of business,  or (v) commence,  or file an answer  admitting the
material allegations of or consenting to, or default in a petition filed against
it in, any case,  proceeding or other action under any existing or future law of
any  jurisdiction,  domestic or foreign,  relating  to  bankruptcy,  insolvency,
reorganization  or relief of  debtors,  or  seeking  to have an order for relief
entered  with  respect  to it under the  Federal  Bankruptcy  Code,  or  seeking
reorganization,  arrangement, adjustment, winding-up, liquidation,  dissolution,
composition or other similar relief with respect to it or its debt; or

     (c) A receiver, conservator,  liquidator,  custodian or trustee of Borrower
or any of its  properties  is  appointed  by the order or decree of any court or
agency or supervisory  authority having  jurisdiction,  and such decree or order
remains in effect for more than 60 days; or Borrower obtains an order for relief
under the  Federal  Bankruptcy  Code;  or any of the  property  of  Borrower  is
sequestered  by court  order and such  order  remains in effect for more than 60
days; or a petition is filed or a proceeding is commenced against Borrower under
any bankruptcy,  reorganization,  arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction,  whether now or hereafter in
effect, and is not dismissed within 60 days after such filing; or

     (d) An event of default  occurs and  continues  for more than 60 days under
the Indenture or under any other Bank Credit Agreement; or

     (e) Any of the Significant  Subsidiaries  shall (i) apply for or consent to
the appointment of a receiver,  trustee, custodian or liquidator of it or of all
or a substantial  part of its property,  or (ii) generally fail to pay its debts
as they come due in the ordinary course of business,  or (iii) commence, or file
an answer admitting the material  allegations of or consenting to, or default in
a petition  filed against it in, any case,  proceeding or other action under any
existing or future law of any  jurisdiction,  domestic  or foreign,  relating to
bankruptcy, insolvency,  reorganization or relief of debtors, or seeking to have
an order for relief  entered  with  respect to it under the  Federal  Bankruptcy
Code,   or  seeking   reorganization,   arrangement,   adjustment,   winding-up,
liquidation, dissolution, composition or other similar relief with respect to it
or its debt; or

     (f) A receiver, conservator, liquidator, custodian or trustee of the any of
the Significant  Subsidiaries or any of its properties is appointed by the order
or decree of any court or agency or supervisory  authority having  jurisdiction,
and such decree or order  remains in effect for more than 60 days; or any of the
Significant   Subsidiaries  obtains  an  order  for  relief  under  the  Federal
Bankruptcy Code; or substantially  all of the property of any of the Significant
Subsidiaries  is sequestered by court order and such order remains in effect for
more than 60 days; or a petition is filed or a proceeding  is commenced  against
any  of the  Significant  Subsidiaries  under  any  bankruptcy,  reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation law of
any  jurisdiction,  whether now or  hereafter  in effect,  and is not  dismissed
within 60 days after such filing; or

     (g) A Change of Control occurs; or

     (h) Borrower or any of the Significant  Subsidiaries shall assert or claim,
that this Agreement or any of the Loan Documents executed in connection herewith
does not or will not  constitute  the  legal,  valid,  binding  and  enforceable
obligations of the party or parties (as applicable) thereto; or

     (i) Borrower or any of the Significant  Subsidiaries  shall have concealed,
removed, or permitted to be concealed or removed, any part of its property, with
intent to hinder,  delay or defraud  its  creditors  or any of them,  or made or
suffered  a  transfer  of any of its  property  that  is  fraudulent  under  any
bankruptcy,  fraudulent  conveyance  or  similar  law;  or shall  have  made any
transfer  of its  property  to or for the  benefit of a creditor  at a time when
other creditors similarly situated have not been paid, or shall have suffered or
permitted,  while  Insolvent,  any  creditor  to  obtain a Lien  upon any of its
property  through  legal  proceedings  or distraint or other process that is not
vacated  within  sixty  days from the date  thereof;  then,  unless  Lender  has
consented to such event,  Lender may declare the unpaid principal portion of the
Obligations  to be forthwith due and payable,  whereupon the said portion of the
Obligations and all other portions of the Obligations  then accrued,  earned and
unpaid  shall become  immediately  due and payable by Borrower  without  demand,
presentment  for payment,  notice of  non-payment,  protest,  notice of protest,
notice of intent to accelerate  maturity,  notice of acceleration of maturity or
any other notice of any kind to Borrower,  or any other Person liable thereon or
with respect  thereto,  all of which are hereby expressly waived by Borrower and
each other Person liable thereon or with respect thereto; and upon the happening
of any Event of Default referred to in Section 3.01(b) or Section  3.01(c),  the
unpaid  principal  portion  of the  Obligations  and all other  portions  of the
Obligations then accrued,  earned and unpaid shall become  automatically due and
payable  by  Borrower  without  demand,   presentment  for  payment,  notice  of
nonpayment, protest, notice of protest, notice of intent to accelerate maturity,
notice of  acceleration  of maturity or any other notice of any kind to Borrower
or any other Person  liable  thereon or with respect  thereto,  all of which are
expressly  waived by  Borrower  and each  other  Person  liable  thereon or with
respect  thereto.  Further,  upon any Default or Event of Default,  Lender shall
have all other  rights and  remedies  as set forth  herein and in the other Loan
Documents  and as  otherwise  provided at law or in equity,  all such rights and
remedies being cumulative.

                        Article 4 - Termination of Loans

     Upon the  occurrence of any Default and so long as such continues to exist,
Lender  may,  without  prior  notice  to  Borrower  or any  of  the  Significant
Subsidiaries  or any other Person,  terminate,  temporarily  or  permanently  as
chosen by Lender,  the Loan  Commitment,  the Total  Credit  Commitment  and the
obligations of Lender to advance any Loans, cause the issuance of any Letters of
Credit or extend any other type of credit or financial accommodations hereunder;
provided,  however,  upon the occurrence of any Default  referred to in Sections
3.01(b) or 3.01(c),  or upon  acceleration of the maturity of the Note, the Loan
Commitment,  the Total Credit  Commitment and any and all  obligations of Lender
hereunder  to make any Loans,  cause the  issuance  of any  Letters of Credit or
extend  any other type of credit or  financial  accommodations  hereunder  shall
automatically   be   permanently   terminated;    provided   further,   however,
notwithstanding   any  such  termination  of  such  obligation  of  Lender,  all
covenants,  agreements,  obligations,  liens and  undertakings of Borrower shall
remain in full force and effect.

               Article 5 - Conditions Precedent

     Article 5.1 Conditions Precedent to Initial Loan . The obligation of Lender
to make the initial  Letters of Credit and the  obligation of Lender to make the
initial  Loan  hereunder,  in addition to the matters set forth in Section  1.02
hereof,  shall  be  subject  to  the  completion  of  the  following  conditions
precedent:

          (a) Lender shall have received the Note.

          (b)  Lender  shall have  received  all  exhibits  and  annexes  herein
     referenced   and  such   additional   reports,   certificates,   documents,
     statements,  agreements and instruments,  in form and substance  reasonably
     satisfactory  to Lender,  as Lender shall have  reasonably  requested  from
     Borrower or its counsel.

     Article 5.2  Conditions  Precedent to Each Loan . At the time of the making
by Lender of each Loan or the  issuance  of a Letter of  Credit,  including  the
initial Loan or Letter of Credit but not including  continuations or conversions
pursuant to Section 1.03 (before as well as after giving effect to such Loan):

          (a) There shall exist no Default or Event of Default.

          (b)  (i)  All   representations   and  warranties  (other  than  those
     representations  and warranties  limited by their terms to a specific date)
     contained herein and in the other Loan Documents  executed and delivered on
     or after the date hereof shall be true and correct in all material respects
     with the same effect as though such representations and warranties had been
     made on and as of the date of such Loan or the date of the issuance of such
     Letter of  Credit  and (ii) no event  shall  have  occurred  since the date
     hereof  that has  irrevocably  and  manifestly  caused a  Material  Adverse
     Effect.

          (c) The Lender  shall  have  received  from an  officer of  Borrower a
     certificate,  dated as of the date of such Loan or the date of the issuance
     of such Letter of Credit,  certifying as to the accuracy of subsections (a)
     and (b) of this Section 5.02.

                             Article 6 - Covenants

     Article  6.1  Insurance.  Borrower  will,  and will cause each  Significant
Subsidiary to, maintain with financially sound and reputable insurance companies
insurance on all their  property  and assets in such  amounts and covering  such
risks as is consistent with sound business practice, and in each case, with such
deductibles  and  with  such   self-insurance   provisions  as  are  customarily
maintained by similar businesses.

     Article  6.2 Lender  Change of  Control.  Upon the  occurrence  of a Lender
Change of Control,  Lender  shall cause a Financial  Institution  acceptable  to
Borrower  to issue a letter of credit,  containing  only those  other  terms and
conditions  as such  Financial  Institution  shall  reasonably  and  customarily
require,  for the  benefit of Borrower to secure  Lender's  obligations  to make
Loans under this Agreement.

                           Article 7 - Miscellaneous

     Article  7.1 No Waivers  Except by Writing;  Governing  Law . No failure or
delay on the part of Lender in exercising any power or right  hereunder or under
any other Loan Document shall operate as a waiver thereof,  nor shall any single
or  partial  exercise  of  any  such  right  or  power,  or any  abandonment  or
discontinuance  of steps to enforce such a right or powers preclude any other or
further  exercise  thereof  or the  exercise  of any other  right or  power.  No
modification  or waiver of any  provision  of this  Agreement  or any other Loan
Document nor consent to any departure by Borrower,  or any other Person  thereof
shall in any event be  effective  unless the same shall be in writing,  and then
such waiver or consent shall be effective only in the specific  instance and for
the purpose given. No notice to or demand on Borrower or any other Person in any
case shall entitle  Borrower or such other Person to any other or further notice
or demand in similar or other  circumstances.  This Agreement and the other Loan
Documents  shall be deemed to be contracts  under the internal laws of the State
of Texas and for all purposes shall be construed and enforced in accordance with
the laws of the State of Texas, and, to the extent  applicable,  the laws of the
United States of America.

     Article  7.2  Usury  Laws . It is the  intent of the  parties  that each of
Lender and  Borrower in the  execution,  delivery  and  performance  of all Loan
Documents,  the transactions  provided for therein and contemplated thereby, and
all matters incidental and related thereto and arising  therefrom,  shall comply
and conform strictly with Applicable Law from time to time in effect,  including
usury laws. In furtherance thereof, Lender and Borrower stipulate and agree that
none of the terms  and  provisions  contained  in, or  pertaining  to,  the Loan
Documents  shall ever be  construed  to create a contract  to pay for the use or
forbearance  or  detention  of money with  interest at a rate or in an amount in
excess of the Maximum Rate or maximum amount of interest permitted or allowed to
be contracted  for,  charged,  received,  taken or reserved under said laws. For
purposes of each Loan Document,  (i)  "interest"  shall include the aggregate of
all  amounts  that  constitute  or  are  deemed  to  constitute  interest  under
Applicable Law,  including to the extent they may apply,  the laws of the United
States of America,  that are contracted  for,  chargeable,  receivable  (whether
received or deemed to have been  received),  taken or  reserved  under each such
document,  and (ii) all computations of the maximum amount of interest permitted
or  allowed  under  Applicable  Law  will  be made on the  basis  of the  period
prescribed by Applicable Law.  Neither  Borrower nor any other Person shall ever
be required to pay  unearned  interest  on, or with  respect to any of, the Loan
Documents and shall never be required to pay interest on, or with respect to any
of, the Loan  Documents  at a rate or in an amount in excess of the Maximum Rate
or maximum  amount of interest  that may be lawfully  contracted  for,  charged,
received,  taken or reserved  under  Applicable  Law, AND THE PROVISIONS OF THIS
PARAGRAPH SHALL CONTROL OVER ALL OTHER PROVISIONS OF THE LOAN DOCUMENTS.  If the
effective  rate or amount of interest that would  otherwise be payable under the
Loan  Documents  would  exceed the  Maximum  Rate or maximum  amount of interest
Lender  or any other  holder  of any Note or other  Obligations  is  allowed  by
Applicable  Law to charge,  contract for,  take,  reserve or receive,  or in the
event  Lender  or any  holder  of any Note or other  Obligations  shall  charge,
contract  for,  take,  reserve or receive  monies that are deemed to  constitute
interest that would,  in the absence of this  provision,  increase the effective
rate or amount of interest  payable under the Loan Documents to a rate or amount
in excess of that  permitted or allowed to be charged,  contracted  for,  taken,
reserved or received  under  Applicable  Law then in effect,  then the principal
amount of such Note or other  Obligations  or the amount of interest  that would
otherwise  be  payable  thereunder  shall be  payable  at,  or  reduced  to,  as
applicable, the maximum amount allowed pursuant to the then applicable indicated
(weekly)  rate ceiling  referred to  hereinabove  in the  definition of the term
Applicable  Law,  or if no such  ceiling is then in effect,  as  authorized  and
allowed  under said laws as now or  hereafter  construed  by the  courts  having
jurisdiction,  and all such monies so charged,  contracted, for, received, taken
or reserved that are deemed to constitute interest in excess of the Maximum Rate
or maximum  amount of interest  permitted by Applicable Law shall be immediately
returned or credited to the  account of Borrower  upon such  determination.  All
amounts  paid  or  agreed  to be paid  in  connection  with  any  Note or  other
Obligations  that would under  Applicable Law be deemed  "interest" or if not so
deemed,  would be deemed an amount that would be included in the  calculation of
the Maximum Rate or maximum  amount of interest  allowed  pursuant to Applicable
Law,  shall,  to the  maximum  extent  not  prohibited  by  Applicable  Law,  be
amortized,  prorated,  allocated  and  spread  throughout  the full term of this
Agreement or the Note, as the case may be;  provided  that, if the Note or other
Obligation  is  paid  and  performed  in  full  prior  to the  end  of the  full
contemplated term thereof, and if the interest received for the actual period of
existence  thereof exceeds the Maximum Rate, Lender shall refund to Borrower the
amount of such excess or credit the amount of such excess  against the principal
amount of such Note or other  Obligation  (as  applicable)  and,  in such event,
Lender  shall  not be  subject  to  any  penalties  provided  by  any  Laws  for
contracting for, charging,  taking, reserving or receiving interest in excess of
the Maximum Rate.

     Article 7.3 Notice . All notices required or made hereunder shall be deemed
to have been given (i) five  Business  Days after being  deposited in the United
States mail (certified, return receipt requested) or (ii) one Business Day after
being sent by telecopy to any party  hereto at its address and  telecopy  number
given below,  or at any other  address of which it shall have notified the other
party hereto in writing. All notices,  requests and demands shall be given to or
made upon the respective parties hereto as follows:

If to Borrower:                   Kaneb Services, Inc.
                                  2435 N. Central Expressway, Suite 700
                                  Richardson, Texas 75080-2731
                                  Telecopy No. (972) 699-4025
                                  Attention:      William H. Kettler
                                                  Vice President

With  a copy to:                  Fulbright & Jaworski L.L.P.
                                  1301 Mckinney, Suite 5100
                                  Houston, Texas 77010-3095
                                  Telecopy No. (713) 651-5246
                                  Attention:      John A. Watson, Esq.

If to Lender:                     Kaneb Services LLC
                                  2435 N. Central Expressway
                                  Richardson, Texas 75080
                                  Telecopy No. (972) 699-4025
                                  Attention:      Howard C. Wadsworth
                                                  Vice President

With  a copy to:                  Fulbright & Jaworski L.L.P.
                                  1301 McKinney, Suite 5100
                                  Houston, Texas 77010-3095
                                  Telecopy No. (713) 651-5246
                                  Attention:      John A. Watson, Esq.

But actual notice to any party hereto,  however given or received,  shall always
be effective.

     Article  1.1  Waivers  of  Certain  Rights  . TO  THE  MAXIMUM  EXTENT  NOT
PROHIBITED  BY  APPLICABLE  LAW FROM  TIME TO TIME IN  EFFECT,  BORROWER  HEREBY
KNOWINGLY,  VOLUNTARILY AND INTENTIONALLY (AND AFTER BORROWER HAS CONSULTED WITH
ITS OWN ATTORNEY)  IRREVOCABLY AND UNCONDITIONALLY  WAIVES THE PROVISIONS OF THE
TEXAS  DECEPTIVE  TRADE  PRACTICES-CONSUMER  PROTECTION ACT (TEXAS  BUSINESS AND
COMMERCE CODE, CHAPTER 17, SUBTITLE E, SECTIONS 17.41-17.63).

     Article 1.2 No Intended Third-Party  Beneficiaries.  This Agreement and all
other Loan  Documents  are intended to benefit  only the parties  hereto and the
parties  hereby  expressly  acknowledge  and agree  that  there are no  intended
third-party beneficiaries.

     Article 1.3  Severability  of Provisions . Any provision of this Agreement,
or any other Loan Document, or any portion or portions of such provisions,  held
by a court of competent jurisdiction to be invalid, illegal or ineffective shall
not impair,  invalidate or nullify the remainder of this Agreement or any of the
other Loan Documents, but the effect thereof shall be confined to such provision
or  the  portion  or  portions  thereof  so  held  to  be  invalid,  illegal  or
ineffective.

     Article  1.4  Survival  of  Representations  and  Warranties;   Unsatisfied
Conditions . Except as otherwise expressly set forth herein, all representations
and  warranties of Borrower  herein shall survive the date of this Agreement and
the making of each Loan hereunder.  Except to the extent,  if at all,  expressly
waived by Lender,  any condition  precedent not timely performed by or on behalf
of Borrower  prior to or at a  corresponding  borrowing  date shall survive such
date, unless otherwise  expressly stated in this Agreement,  and shall be deemed
to constitute a covenant by Borrower to accomplish such condition as promptly as
possible.  All payment obligations  hereunder or referenced herein shall survive
the termination of this Agreement.

     Article 1.5 Assignments . This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective  successors and permitted
assigns.  Neither  party to this  Agreement  may assign  its  rights  under this
Agreement without the prior written consent of the other party.

     Article  1.6 Gender and Usage . As used  herein  and when  required  by the
context,  each number  (singular  and plural) shall include all numbers and each
gender  shall  include all  genders.  The words  "herein,"  "hereof,"  "hereby,"
"hereto,"  "hereunder"  and words of similar import shall mean and refer to this
Agreement rather than to any specified provision of this Agreement.

     Article 1.7 Multiple  Counterparts  . This Agreement may be executed in any
number of counterparts,  all of which, taken together,  shall constitute one and
the same instrument.

     Article  1.8  Debtor-Creditor  Relationship  .  None of the  terms  of this
Agreement  or of any other Loan  Document  executed in  conjunction  herewith or
related  hereto  shall be deemed to give Lender the rights or powers to exercise
control  over the  business or affairs of  Borrower.  The  relationship  between
Borrower  and  Lender  created  by this  Agreement  is only that of  debtor  and
creditor.

     Article 1.9 Agreement Controlling . To the extent that any provision of the
Note is expressly in direct conflict with the provisions of this Agreement,  the
provisions of this Agreement shall control and govern. In all other regards, all
provisions  of the Note are intended to be read and  integrated  in a harmonious
and consistent manner, including defined terms herein and therein.

     Article 1.10 Integration . This Agreement, together with the Note, embodies
the entire agreement  between the parties thereto relating to the subject matter
hereof and thereof,  and may be amended or supplemented only by an instrument in
writing  executed  jointly  by an  authorized  officer of each of  Borrower  and
Lender.

     Article  1.11 WAIVER OF JURY TRIAL . THE PARTIES  HERETO WAIVE ALL RIGHT TO
TRIAL BY JURY IN ANY  PROCEEDING  ENFORCING OR  DEFENDING  ANY RIGHTS UNDER THIS
AGREEMENT,   THE  OTHER  LOAN  DOCUMENTS  OR  RELATING  THERETO.   THE  BORROWER
ACKNOWLEDGES  THAT THE  PROVISIONS  OF THIS SECTION HAVE BEEN  BARGAINED FOR AND
THAT IT HAS BEEN  REPRESENTED BY COUNSEL IN CONNECTION  THEREWITH.  THE SCOPE OF
THIS WAIVER IS INTENDED TO BE  ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY
BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION,
INCLUDING  WITHOUT  LIMITATION,  CONTRACT  CLAIMS,  TORT CLAIMS,  BREACH OF DUTY
CLAIMS,  AND ALL OTHER  COMMON LAW AND  STATUTORY  CLAIMS.  THE BORROWER AND THE
LENDER  ACKNOWLEDGE  THAT THIS WAIVER IS A MATERIAL  INDUCEMENT  TO ENTER INTO A
BUSINESS  RELATIONSHIP,  THAT EACH HAS ALREADY  RELIED ON THE WAIVER IN ENTERING
INTO THIS  AGREEMENT  AND THAT EACH WILL  CONTINUE  TO RELY ON THE WAIVER IN ITS
RELATED  FUTURE  DEALINGS.  THE  BORROWER  AND THE LENDER  FURTHER  WARRANT  AND
REPRESENT  THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL  COUNSEL,  AND THAT
EACH  KNOWINGLY  AND  VOLUNTARILY  IS WAIVING  ITS JURY TRIAL  RIGHTS  FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY
NOT BE MODIFIED  EITHER ORALLY OR IN WRITING,  AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT,
THE OTHER LOAN DOCUMENTS,  OR TO ANY OTHER  DOCUMENTS OR AGREEMENTS  RELATING TO
THE LOAN OR ANY LETTERS OF CREDIT.  IN THE EVENT OF  LITIGATION,  THIS AGREEMENT
MAY BE FILED AS A WRITTEN  CONSENT TO A TRIAL BY THE COURT UNDER THIS  AGREEMENT
AND THE OTHER LOAN DOCUMENTS.

     Article 1.12 Headings . All headings used herein are for the convenience of
the parties  only and shall not be used in  construing  the meaning or intent of
the terms or provisions hereof.

     IN WITNESS  WHEREOF,  the parties  have caused  this  Agreement  to be duly
executed and  delivered by their proper and duly  authorized  officers as of the
day and year first above written.

                                  BORROWER:

                                  KANEB SERVICES, INC.

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

                                  LENDER:

                                  KANEB SERVICES LLC

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

                                   DEFINITIONS

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

     "Adjusted  Eurodollar  Rate" means,  for any Eurodollar  Advance during any
Interest  Period  therefor  the rate per annum  equal to  (rounded  upwards,  if
necessary,  to the  nearest  1/100 of 1%) (a) if Lender  borrows  funds under an
Existing Credit Agreement to fund such Eurodollar Advance, the lesser of (x) the
eurodollar  rate (or other interest rate that is based on the interbank  offered
rates for Dollar  deposits in the London,  England  market) that Lender would be
charged  under such Existing  Credit  Agreement if it were to borrow on the same
Borrowing Date the same amount with the same Pricing  Selection and the Interest
Period as such Eurodollar  Advance and (y) the Eurodollar Rate plus 1.5% and (b)
if Lender does not borrow funds under an Existing Credit  Agreement to fund such
Eurodollar Advance, the Eurodollar Rate plus 1.5%.

     "Advance" means any advance of funds by Lender to Borrower pursuant to this
Agreement, and after each initial advance thereof, any portion thereof remaining
outstanding  and unpaid;  and each  advance of funds by Lender to Borrower for a
particular  selected  Interest  Period  (except for such  Advances  for which an
Interest  Period need not be  specified),  shall  constitute  one  "Advance" for
purposes of determining the number of "Advances" outstanding hereunder.

     "Affiliate"  means any Person  controlling,  controlled  by or under common
control  with any  other  Person.  For  purposes  of this  definition  "control"
(including   "controlled   by"  and  "under  common  control  with")  means  the
possession,  directly  or  indirectly,  of the  power to  direct  or  cause  the
direction of the  management  and policies of such Person,  whether  through the
ownership of voting securities or otherwise.  Without limiting the generality of
the  foregoing,  for  purposes  of  this  Agreement  Borrower  and  each  of its
Subsidiaries shall be deemed to be Affiliates of each other.

     "Agreement"   shall  have  the  meaning   assigned  to  that  term  in  the
introduction  hereto,  and "Agreement",  "hereof",  "hereto" and "hereunder" and
words of similar import mean this  Agreement as a whole,  and not any particular
article, section or subsection.

     "Applicable  Law" means,  with respect to Lender,  the law in effect,  from
time to time,  applicable to this loan  transaction  and each Loan Document that
lawfully  permits the contracting for, taking,  reserving,  receiving,  charging
and/or  collection of the maximum lawful,  non_usurious rate of interest by such
Person on each Loan Document and the transactions evidenced thereby, and arising
in connection therewith (including, but without limitation, the Note), including
(i) laws of the State of Texas, (ii) to the extent controlling,  the laws of the
United States of America,  and (iii) laws of any jurisdiction  whose laws may be
mandatorily  applicable to such Person,  notwithstanding other provisions of any
Loan Document or laws of the United States of America  applicable to such Person
and the  transaction  contemplated  hereby,  which  would  permit such Person to
contract for,  take,  reserve,  receive,  charge or collect a greater  amount of
interest than under such  jurisdiction's  law. To the extent that Applicable Law
is determined by reference to Chapter 303 of the Texas Finance Code, as amended,
the interest ceiling  applicable hereto and in connection  herewith shall be the
"indicated"  (weekly)  rate  ceiling  from time to time in effect as referred to
therein;  provided  however,  it is agreed that the terms hereof,  including the
rate,  or  index,  formula  or  provision  of law  used to  compute  the rate in
connection  herewith,  will be subject to the revisions as to current and future
balances,  from time to time,  pursuant to Applicable  Law. IT IS FURTHER AGREED
THAT IN NO EVENT SHALL CHAPTER 346 OF THE TEXAS FINANCE CODE, AS AMENDED,  APPLY
TO ANY LOAN  DOCUMENT  OR THE  TRANSACTIONS  EVIDENCED  THEREBY,  OR  ARISING IN
CONNECTION THEREWITH.

     "Applicable  Rate"  means,  during  the  period  that (i) an  Advance  is a
Eurodollar Advance,  the Adjusted Eurodollar Rate, and (ii) an advance is a Base
Rate Advance, the Base Rate.

     "Bank Credit Agreement" means any credit agreement or loan agreement by and
between, or by and among, Borrower, or any of its Significant Subsidiaries,  and
any bank or other financial institution.

     "Base Rate" means, at the time any determination thereof is to be made, (a)
if Lender  borrows  the funds  under an Existing  Credit  Agreement  to fund the
Advance, then the lesser of (x) the base rate or prime rate (or other comparable
interest  rate) that Lender is charged under the Existing  Credit  Agreement and
(y) the rate  quoted by the Wall Street  Journal as the prime  rate,  and (b) if
Lender does not borrow  funds under the  Existing  Credit  Agreement  to lend to
Borrower,  then the rate quoted by the Wall Street  Journal from time to time as
the prime rate.

     "Base Rate Advance"  means any Advance that bears  interest at a rate based
upon the Base Rate.  Changes in the rate of interest on Base Rate  Advances will
take effect simultaneously with each change in the Base Rate.

     "Borrower" shall have the meaning assigned to that term in the introduction
to this Agreement.

     "Borrowing  Date"  means a date  upon that a  Revolving  Loan is to be made
pursuant to Section 1.02 hereof.

     "Business  Day" means any day that  commercial  banks are not authorized or
required to close in Dallas, Texas.

     "Change of Control"  shall be deemed to have occurred at such time as (i) a
"person"  or "group"  within the  meaning of  Sections  13(d) or 14(d)(2) of the
Securities  Exchange  Act of 1934,  as  amended  (the  "1934  Act"),  other than
Borrower becomes the "beneficial owner" (as defined in Rule 13d-3 under the 1934
Act) of more than 20% of the Voting Stock of Borrower,  or (ii) a person  enters
into an agreement with Borrower to purchase, lease, or otherwise acquire, all or
substantially  all of the assets of Borrower  or (iii)  during any period of two
consecutive  years (not  including  any period  prior to the  execution  of this
Agreement),   individuals  who  at  the  beginning  of  such  period  constitute
Borrower's  Board  of  Directors  (and  any  new  director,  whose  election  by
Borrower's  stockholders  was approved by a vote of at least  two-thirds  of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was so approved),  cease for
any reason to constitute a majority thereof.

     "Code" means the Internal Revenue Code of 1986, as amended.

     "Consolidated"  shall  mean,  with  reference  to any  item,  such  item of
Borrower and its Subsidiaries, consolidated in accordance with GAAP.

     "Consolidated Subsidiaries" means, when used in connection with Borrower or
any of its  Subsidiaries,  any  corporation  or other  Person the  accounts  and
financial  information  of  that is at the  time  included  in the  Consolidated
financial  statements of Borrower or such Subsidiary prepared in accordance with
GAAP.

     "Default  Rate" means at any time a per annum rate of interest  equal to 2%
plus the Base Rate, but in no event to exceed the Maximum Rate.

     "Dollars" or "$" means lawful currency of the United States of America.

     "Environmental Laws" means any and all laws, statutes,  ordinances,  rules,
regulations,   orders,   requirements  or  determinations  of  any  Governmental
Authority  pertaining  to  health  or the  environment  in effect in any and all
jurisdictions  in that any of Borrower or any of its  Subsidiaries is conducting
or at any time has conducted business,  or where any Property of any of Borrower
or its Subsidiaries is located or where any hazardous substances generated by or
disposed of by any of Borrower of any of its Subsidiaries are located.

     "Eurodollar  Advance" means any Advance that bears interest at a rate based
on the Adjusted Eurodollar Rate.

     "Eurodollar Rate" means the interest rate quoted by the Wall Street Journal
as the London Interbank Offered Rates (LIBOR).

     "Event of Default" means any of the events specified in Section 3.01 hereof
that has occurred and is continuing,  provided that there has been satisfied any
requirement in connection with such event for the giving of notice, or the lapse
of time, or the happening of any further condition,  event or act, and "Default"
shall  mean any of such  events,  whether or not any such  requirement  has been
satisfied.

     "Existing  Credit  Agreement" means any credit agreement or credit facility
under which Lender is entitled to borrow funds from a commercial bank or a group
of commercials banks.

     "Financial  Institution" means any bank or other financial  institution who
has, both at the time of the issuance of the applicable  Letter of Credit and at
every time thereafter,  as reported by Moody's  Investors Service , a short-term
debt rating of at least a "P-2" and a long-term debt rating of at least an "A".

     "Funded  Debt"  means  for  any  Person  (without  duplication):   (i)  all
indebtedness for the repayment of borrowed money,  whether or nor represented by
bonds, debentures, notes, securities, bankers' acceptances or other evidences of
indebtedness,  regardless  of whether such  indebtedness  would be classified in
accordance  with GAAP as a current  liability  or long-term  debt,  and (ii) all
reimbursement  and repayment  obligations  then due in respect of a drawing of a
current  period be  comparable  in all material  respects to those  applied in a
preceding period.

     "Governmental  Authority"  means any  domestic or foreign  federal,  state,
province,  county, city,  municipality or political  subdivision in which any of
Borrower or any of its Subsidiaries,  is located or that exercises  jurisdiction
over any  Property  of  Borrower  or any of its  Subsidiaries,  and any  agency,
department, commission, board, tribunal, court, bureau or instrumentality of any
of them that exercises or has jurisdiction over any such Property.

     "Governmental  Requirement"  means (without  duplication) any law, statute,
code,  ordinance,   order,  rule,  regulation,   judgment,  decree,  injunction,
franchise,  permit,  certificate,  license,  authorization or other directive or
requirement   (including,   without   limitation,   Environmental  Laws,  energy
regulations and  occupational,  safety and health  standards or controls) of any
Governmental  Authority.  letter of  credit,  or  guaranty,  surety,  indemnity,
reimbursement or other similar obligations then due.

     "GAAP"  means  United  States  generally  accepted  accounting  principles,
applied  on a  consistent  basis,  as set forth in  Opinions  of the  Accounting
Principles Board of the American Institute of Certified Public Accountants or in
statements of the Financial  Accounting Standards Board or their successors that
are applicable in the circumstances as of the date of determination of any item;
and the  requirement  that such  principles be applied on a  "consistent  basis"
shall mean that the accounting principles observed in a

     "Indenture"  means that certain  Indenture  dated as of January 15, 1983 by
and  between  Moran  Energy Inc.  and First City  National  Bank of Houston,  as
Trustee,  as amended by that certain First  Supplemental  Indenture  dated as of
March 20, 1984 by and between Kaneb Services,  Inc. and First City National Bank
of Houston, as Trustee,  and as the same is amended and in force and effect from
time to time.

     "Insolvent"  means, with respect to any Person,  that (i) the fair saleable
value of the assets of such  Person  does not  exceed  the amount  that would be
required to be paid on or in respect to the existing debts and other liabilities
(including,  without  limitation,  pending or overtly  threatened  litigation in
amounts  in excess of  effective  insurance  coverage  and all other  contingent
liabilities)  of such Person as they  mature,  or (ii) the assets of such Person
constitute  unreasonably small capital for such Person to carry out its business
as then being  conducted  or as proposed to be conducted  including  the capital
needs of such Person, taking into account the particular capital requirements of
the business  conducted by such Person and projected  capital  requirements  and
capital availability  thereof, or (iii) the fair saleable value of the assets of
such  Person  is not  greater  than the  total  fair  value of the  liabilities,
including  contingent,  subordinated,  absolute,  fixed, or matured or unmatured
liabilities of such Person.

     "Interest  Payment Date" means the last  Business Day of each March,  June,
September and December.

     "Interest Period" means with respect to any Eurodollar Advance,  the period
commencing on the date, as applicable, such Advance is made or converted from an
Advance of another Type or, in the case of each subsequent,  successive Interest
Period  applicable to a Eurodollar  Advance,  the last day of the next preceding
Interest  Period with  respect to such  Advance,  and ending on the  numerically
corresponding  day in the first,  third or sixth calendar month  thereafter,  as
Borrower may select as provided in Section  1.02  hereof,  except that each such
Interest  Period that commences on the last Business Day of a calendar month (or
on  any  day  for  which  there  is no  numerically  corresponding  day  in  the
appropriate subsequent calendar month) shall end on the last Business Day of the
appropriate subsequent calendar month.

     Notwithstanding the foregoing:

          (a) each Interest Period that would otherwise end on a day that is not
     a Business Day shall end on the next  succeeding  Business Day, except that
     if such  succeeding  Business  Day  falls in the next  succeeding  calendar
     month,  than such Interest Period shall end on the next preceding  Business
     Day;

          (b) no  Interest  Period  for  any  Eurodollar  Advance  shall  have a
     duration  of less  than  one  month,  and if the  Interest  Period  for any
     Eurodollar Advance would otherwise be a shorter period,  such Advance shall
     not be available hereunder; and

          (c) no Interest  Period may extend  beyond the maturity of the Note or
     the Maturity Date.

     "Law" means any constitution,  statute, law, ordinance,  regulation,  rule,
order, writ, injunction or decree of any Tribunal.

     "Lien"  means any  security  interest,  mortgage,  deed of  trust,  pledge,
hypothecation,  assignment, charge or deposit arrangement,  encumbrance, sale of
accounts,  lien (statutory or other) or preferential  arrangement of any kind or
nature  whatsoever  in respect of any  Property  (including  those  created  by,
arising  under or evidenced  by any  conditional  sale or other title  retention
agreement,  the interest of a lessor under a capital lease,  any financing lease
having  substantially  the same economic effect as any of the foregoing,  or the
filing of or  agreement  to file any  financing  statement  under the UCC or any
comparable  law  naming  the owner of the asset to which  such lien  relates  as
debtor),  but not including  the interest of a lessor under an operating  lease,
and any filing of, or agreement to give, any financing  statement  under the UCC
or equivalent statute in any jurisdiction or any other instrument that evidences
the creation, perfection, continuation, notice, registration and/or other aspect
of a present or future Lien or asserted Lien.

     "Lender" shall have the meaning  assigned to that term in the  introduction
to this Agreement.

     "Lender Change of Control" shall be deemed to have occurred at such time as
(i) a "person" or "group"  within the  meaning of Sections  13(d) or 14(d)(2) of
the 1934 Act,  other than Lender becomes the  "beneficial  owner" (as defined in
Rule  13d-3  under  the 1934 Act) of more than 20% of the  member  interests  of
Lender  entitled  to vote at a  meeting  of the  Board of  Directors  of  Lender
(calculated  based on the  number of  votes),  or (ii) a person  enters  into an
agreement  with  Lender  to  purchase,  lease,  or  otherwise  acquire,  all  or
substantially  all of the  assets of Lender or (iii)  during  any  period of two
consecutive  years (not  including  any period  prior to the  execution  of this
Agreement),  individuals who at the beginning of such period constitute Lender's
Board  of  Directors   (and  any  new  director,   whose  election  by  Lender's
shareholders was approved by a vote of at least two-thirds of the directors then
still in office who either  were  directors  at the  beginning  of the period or
whose election or nomination for election was so approved), cease for any reason
to constitute a majority thereof.

     "Letter  of Credit"  means a letter of credit (as  defined in the UCC) that
Lender causes a Financial Institution to issue, naming a beneficiary (as defined
in the UCC)  designated by Borrower,  all in accordance  with the  provisions of
Sections 1.11 and 1.12 hereof.

     "Letter  of Credit  Liability"  means,  at any time and in  respect  of any
Letter of  Credit,  the sum of (a) the  undrawn  face  amount of such  Letter of
Credit plus (b) the aggregate unpaid amount of all Reimbursement  Obligations at
the time due and  payable  in  respect of  drawings  made  under such  Letter of
Credit.

     "Loan" means an extension of credit or financial  accommodation by way of a
loan or Advance hereunder to Borrower.

     "Loan Commitment" means the commitment of Lender to make Loans as set forth
in Section 1.01 hereof, up to the maximum aggregate amount of $25,000,000.

     "Loan Documents"  means this Agreement,  the Note, and all other promissory
notes, drafts, security agreements,  reports,  opinions,  requests for Advances,
certificates and other instruments,  documents,  and agreements now or hereafter
executed and delivered pursuant to, or in connection with, this Agreement.

     "Material Adverse Effect" means, with respect to any Person, a material and
adverse effect on (i) the business, financial condition or results of operations
of such Person, or (ii) its ability to fulfill,  punctually and completely,  its
obligations under each Loan Document;  provided,  however, that the distribution
by  Borrower  to its  stockholders  of  the  common  shares  of  Lender,  or the
consummation of any transaction  contemplated thereby, shall be deemed not to be
a Material Adverse Effect.

     "Maturity Date" means 12:00 noon Dallas, Texas time on July 1, 2008.

     "Maximum  Rate" means the maximum lawful  nonusurious  rate of interest (if
any) that under Applicable Law Lender may charge Borrower on the Loans from time
to time. If,  however,  during any period  interest  accruing on any Loan is not
limited to any maximum lawful  non-usurious  rate of interest  under  Applicable
Law,  then during each such  period the  "Maximum  Rate" shall be equal to a per
annum rate of 2% plus the Base Rate from time to time in effect.

     "Note"  means that certain  promissory  note dated as of the date hereof in
substantially  the form and  substance  as set forth in  Exhibit  A hereto,  and
otherwise acceptable to Lender.

     "Obligations" means all obligations, indebtedness, accrued unpaid interest,
fees,  expenses,  costs,  indemnities  and  liabilities  of  Borrower to Lender,
including  without  limitation  all Loans,  now existing or  hereafter  arising,
whether direct, indirect,  related,  unrelated,  fixed, contingent,  liquidated,
unliquidated,  joint,  several,  or joint and several,  under,  or in connection
with, this Agreement and the other Loan Documents.

     "Person" means any individual,  corporation,  business trust,  association,
company,   limited  liability  entity,   partnership,   joint  venture,   trust,
unincorporated  organization or Governmental Authority, or any agency, tribunal,
court, instrumentality or subdivision thereof, or any other form of entity.

     "Pricing  Selection" means Borrower's  selection pursuant to this Agreement
of the Base Rate or the Adjusted Eurodollar Rate.

     "Property" means,  with respect to any Person,  any interest of such Person
in any kind of property or asset,  whether real,  personal or mixed, or tangible
or intangible, excluding capital stock in any other Person.

     "Reimbursement Obligations" means, collectively,  the obligation under this
Agreement of Borrower to pay Lender the aggregate  amount of the  obligations of
Lender to  reimburse  any  Financial  Institution  for the amounts  paid by such
Financial Institution in respect of drawings made under Letters of Credit.

     "Revolving  Loans"  means the Loans to be made to Borrower  pursuant to the
provisions of Article I hereof.

     "Significant  Subsidiaries"  means each Subsidiary of Borrower that, at any
date  of  determination  of  the   Subsidiaries   that  constitute   Significant
Subsidiaries,  either (i) has total  tangible  assets,  determined in accordance
with GAAP as of the most recent date for which a consolidating  balance sheet of
Borrower and its Subsidiaries is available, of at least $50,000,000, or (ii) had
total revenue  (excluding  revenues from  Affiliates),  determined in accordance
with GAAP as of the most recent date for which a consolidating  income statement
from Borrower and its Consolidated Subsidiaries is available, of at least 25% of
Consolidated total revenues of Borrower and its Subsidiaries.

     "Subsidiary" means any corporation or other Person (whether now existing or
hereafter  created)  of  which  more  than  50% of the  issued  and  outstanding
securities  having ordinary voting power for the election of directors,  or more
than 50% of the  beneficial  ownership  interest,  is now or hereafter  owned or
controlled,  directly or indirectly, by Borrower or any Subsidiary thereof, with
the voting  power and  ownership  of Borrower  and all  Subsidiaries  aggregated
together to determine whether a Person is a Subsidiary,  and "Subsidiary"  shall
include,  without  limiting the  generality of the  foregoing,  the  Significant
Subsidiaries.

     "Total Credit  Commitment"  means the commitment of Lender to make Advances
and to cause the  issuance of Letters of Credit,  the  principal  amount of such
Advances  and  the  face  amount  of  such  Letters  of  Credit,  including  any
Reimbursement Obligations, not to exceed $25,000,000.

     "Total Letter of Credit Liabilities" means the aggregate outstanding amount
of all Letter of Credit Liabilities in respect of all Letters of Credit.

     "Tribunal"   means  any  court,   tribunal  or   governmental   department,
commission,  board, bureau,  agency, or instrumentality of any state,  province,
commonwealth,  nation, territory,  possession,  county, parish, or municipality,
whether now or hereafter constituted and/or existing.

     "Type"  means  any type of  Advance  (that  is, a Base  Rate  Advance  or a
Eurodollar Advance).

     "UCC" means the Uniform Commercial Code as adopted and amended in the State
of Texas.

     "Voting Stock" means,  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 at the  times  that such  class of  capital  stock has
voting  power by  reason of the  happening  of any  contingency)  to vote in the
election  of  members of the board of  directors  (or  comparable  body) of such
Person.

     "Wholly Owned  Subsidiary" means any Subsidiary 100% of whose capital stock
(of every class or type,  including  warrants,  rights,  options and instruments
convertible into capital stock), except shares required as directors' qualifying
shares, is owned directly or indirectly by Borrower.

     Accounting Terms and Definitions.

          (a) Unless  otherwise  specified  herein,  all  accounting  terms used
     herein shall be interpreted,  all accounting determinations hereunder shall
     be made, and all financial  statements  required to be delivered  hereunder
     shall be prepared,  in accordance with GAAP as in effect from time to time.
     All other terms used herein  shall have the  meanings as  otherwise  stated
     herein or as otherwise defined in the Code.

          (b) All terms  defined in this  Agreement  shall  have  their  defined
     meanings  when used in each of the other  Loan  Documents,  unless any such
     instruments shall expressly  indicate  otherwise,  and when required by the
     context,  each term  shall  include  the  plural  as well as the  singular.
     Definitions  of each Person  specifically  defined  herein or in each other
     Loan Document shall mean and include herein and therein,  unless  otherwise
     expressly provided to the contrary, the successor, assigns, heirs and legal
     representatives of each such Person.  Unless the context otherwise requires
     or unless otherwise  expressly  provided,  references to this Agreement and
     each other Loan Document  shall include all  amendments  and  modifications
     thereof or thereto, as applicable and as in effect from time to time.

          (c) Each reference  herein to a section,  or any subdivision  thereof,
     shall  refer to the  applicable  section or  subdivision  thereof,  of this
     Agreement,  unless another instrument is thereby expressly referenced.  The
     headings in this  Agreement  and the other Loan  Documents are inserted for
     convenience only and shall be ignored when construing any such instruments.

<PAGE>

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