It is now understood that, David O'Reilly, chairman and chief executive of Chevron, will head the new company, while Peter Bijur, chairman and chief executive of Texaco, will become vice-chairman. The new company will be the world's fifth biggest oil group by market capitalisation.

The deal, however, comes at a sensitive time. With high gasoline prices proving to be a controversial issue in the US, presidential candidate Al Gore, has questioned the power of big business and 'Big Oil' in particular. Further, the Federal Trade Commission has also taken a hard line on recent oil mergers, particularly BP's acquisition of Arco.

But the two American companies are expected to play the 'American card', with the hope that the US government will support the transaction. They are likely to argue that the new and enlarged company will remain in US hands, after a flurry of consolidation, which saw other US oil groups swallowed up by foreign rivals.

The combined company, to be called Chevron Texaco, is expected to generate potential cost savings of around $1.2 billion, with most of these coming from upstream activities. About $300 million is expected to be saved on elimination of corporate overheads. The merger will also result in a job loss of about 4,000 people.

In preparation for answers to close regulatory scrutiny, especially in their downstream refining and marketing ventures, the two companies are understood to have initiated negotiations with the Anglo-Dutch oil major, Royal Dutch / Shell, to reduce their ownership on some of the downstream ventures.

Royal Dutch is understood to have asked Schroder Salomon Smith Barney, the investment bank, to advise it on the negotiations with Texaco.