The newspaper said the merger would combine the downstream forces of Texaco, Shell, the US unit of Royal Dutch/Shell Group and Star Enterprise, a joint venture between Texaco and Saudi Aramco, the state oil company of Saudi Arabia.
It said company officials would neither confirm nor deny that the talks were going on but cited people close to the negotiations as its source of information.
The newspaper said the talks were being guided by CS First Boston Corp for Texaco, Morgan Stanley Group Incs Morgan Stanley & Co unit for Shell and JP Morgan & Co for Star.
A letter of intent could be signed within the next few months, it said.
Under its terms, two separate entities, both as yet unnamed, would be created. One would join Stars assets with those of Shell in the eastern half of the US, and the other would merge Shell facilities with Texacos refining and marketing operations, which are in the West.
It said the new companies would control about 15 per cent of the petroleum-products market in the US.
The deals value could not be determined, it said.
It is unlikely that it would involve an exchange of cash or stock, it said.
Rather, the percentage each parent could own of the two new companies would be dictated by the value of the assets each placed into the pot. And profits paid out to the parents would be based on their individual stakes, it added.