The source could not be named as the merger talks between Woodside and Santos are confidential.

Woodside and Santos declined to comment, with Santos referring to its statement on Thursday, which said it was "assessing a range of alternative structural options".

Woodside and Santos after market hours on Thursday confirmed speculation they were in preliminary talks to create a major oil and gas company, with assets in Australia, Alaska, the Gulf of Mexico, Papua New Guinea, Senegal and Trinidad and Tobago.

The merged entity would control about 26% of Australia's east coast gas market and 35% of the Western Australian domestic gas market according to analysts, which could be a matter of concern for the country's competition regulator.

The Australian Competition and Consumer Commission (ACCC) has been investigating the east coast market for several years, under pressure from the Australian government to help drive down gas prices for households and businesses.

The west coast is facing similar issues now, with major gas buyers facing price increases and a forecast supply crunch from 2025.

The source did not name any assets that could be sold to appease the regulator. However, analysts have mentioned Santos' Varanus Island asset, which is a key gas supplier in Western Australia, and its Cooper Basin gas business, a key gas supplier on the east coast.

Santos shares jumped on Friday on the prospects of an A$80 billion merger with its bigger rival Woodside, but investors were cautious about the competition and valuation hurdles to a deal.

The ACCC on Thursday said it would study whether a public review into the deal was necessary if there was progress on talks to merge two of Australia's largest oil and gas producers merging.

ACCC has blocked three major M&A transactions in the country in the past year, though its Chairperson Gina Cass-Gottlieb told Reuters in September that the regulator was not averse towards deals.

The blocked deals included a data-sharing agreement between telecoms giant Telstra and internet provider TPG Telecoms as well as a buyout by ANZ bank of rival Suncorp's banking business.

It also blocked a purchase by Transurban of a Melbourne road.

(Reporting by Scott Murdoch in Sydney; Editing by Sumeet Chatterjee and Sonali Paul)

By Scott Murdoch