A deal with Texaco could help Shell fight off the threat from supermarket petrol stations

Negotiations between the two companies are reported to have been going on for several months.

Shell is said to have hired surveyors to determine a fair value for Texaco's assets, which could be worth up to £1bn.

Spokesmen for Shell and Texaco declined to comment on the newspaper speculation.

But a spokesman for Texaco said: "We would look into anything that increased the company's value for our shareholders."

Any potential deal would create Britain's largest petrol retailer, with up to 21% of the market.

Shell could link up with its US rival

It could involve Shell buying Texaco's operations outright or the two could pool their assets in a joint venture in which Texaco would maintain a stake of 20-25%.

The latter deal would be similar to one struck by BP and Mobil two years ago.

It created Britain's second largest petrol station chain behind Esso, pushing Shell down into third place.

Retail Expert Richard Perks talking on BBC's Working Lunch: 'The petrol companies are not strong retailers yet'

The Petrol Retailers Association (PRA), which represents thousands of petrol station owners across the UK said it was "concerned" about a possible link-up between the two oil giant. It pointed out that some of both companies' stations are independently owned and will face closure in areas where both Shell and Texaco operate.

PRA's director Ray Holloway said there were "bound to be closures where there is overlap between the two companies. That will be bad news for people running those stations," he said. "There will also be restriction of choice for the consumer," he added.

Fighting the supermarkets

A merger between Shell and Texaco would give them the power to compete with major supermarkets, including Sainsbury's and Tesco, whose petrol price wars have cornered a quarter of the market.

Tesco recently revealed plans to operate more than 100 new petrol stations to compete with rival oil companies.

When the London Stock Exchange opened on Monday shares in Shell were up 5 to 430.