LONDON—U.S. pressure is threatening to quash Iranian hopes of using oil fields it jointly holds with Iraq as a way to evade sanctions, people familiar with the matter say.
The failure of the cross-border plan is the latest example of Tehran's struggle to find ways to keep its oil revenue out of the reach of measures designed to stop its nuclear program.
Washington is tightening the noose on Tehran with the toughest sanctions to date—a law that will bar countries from the U.S. banking system if they conduct oil trades with Iran's central bank. The European Union will also ban Iranian oil purchases from July 1.
Iran had hoped to use oil fields straddling its border with Iraq as a way to market oil that wouldn't be subject to sanctions, according to two people familiar with Tehran's thinking.
An Iranian oil official said Tehran had proposed setting up a joint operating company with Iraq, which could have been registered in the British Virgin Islands. But he said that following Washington's pressure, Baghdad offered to bring in a private Iraqi contractor rather than a state concern, fearing the latter could breach U.S. sanctions. Iran maintained that no existing private Iraqi contractor was large enough to handle such project, making the proposal unviable.
An oil industry professional said Iran also approached France's Total SA TOT -1.21% last year to operate some of the fields on behalf of both countries. He said the plan was to market the oil as effectively "stateless;" neither Iraqi nor Iranian, and with a foreign operator. But Total, wary of sanctions, refused.
In an interview, Total's Chief Executive Christophe de Margerie confirmed the approach had taken place. "It is a nontopic. It cannot happen because of the political situation," he said.
Washington has been using the legislation against Iran's central bank to stifle ties between Iran and its trade partners and is now bringing the heat to Iran's closest neighbor.
A State Department official said recently that "we consult closely with the government of Iraq on Iran sanctions-related issues, including recently-enacted U.S. sanctions legislation."
Iran and Iraq have both said they remained confident a deal could be reached on developing the cross-border fields. Iranian Deputy Oil Minister Alireza Zeiqami was quoted as saying mid-March that negotiations were making good progress.
Iraqi government spokesman Ali al Dabbagh said "no [deal to jointly develop cross-border oil fields] has been signed with Iran yet [but] we are ready to have an [understanding] on many common fields with them."
However, the spokesman also said: "Iraq will comply with sanction regulations and will never violate [them]." A spokesman for the National Iranian Oil Co. didn't return an emailed request for comment.
Much is at stake for Iran, where production has been eroded by previous sanctions and risks being further hit by the most recent measures. Last year, Iran's Oil Minister Rostam Ghasemi said the country will focus its efforts on developing new oil fields on the cross-border areas. He didn't explain the rationale behind such decision.
Iran has been able to start production from its side of the border in some of the fields. Iranian state-owned Petroleum Engineering and Development Co. said last month that Yadavaran, which is part of a field straddling both countries, has kicked off production and is expected to peak at 300,000 barrels a day, thanks to reserves of 3 billion barrels of recoverable oil.
But a lack of agreement between Iran and Iraq could impede the development of many of these oil fields—which Tehran says number 23—by making them open to legal or armed disputes.
In 2009, Iran sent soldiers to the Fakkah oil field, part of a complex that straddles both countries and altogether holds reserves of 2.5 billion barrels, after saying one of the wells was part of its territory. Fakkah hasn't been producing since 2003 and Iraq hasn't been able to find bidders for the field because of the dispute.