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A European Energy Executive’s Delicate Dance Over Ukraine

ENI, an Italian energy firm, is a partner with the Russian gas supplier Gazprom on a pipeline that would bypass Ukraine.Credit...Sergei Karpukhin/Reuters

LONDON — European executives, especially in the energy industry, have been notably wary of ratcheting up economic tensions with Russia over the Ukraine crisis. They see their business interests as too intertwined to risk stiffer sanctions.

But few tread a finer line than Paolo Scaroni, chief executive of the Italian energy giant ENI. Despite his long dealings with Gazprom, Russia’s chief supplier of natural gas to Europe, he is willing to risk rankling Moscow by trying to help Ukraine.

The executive recently met in Kiev with the Ukrainian energy minister, Yuri Prodan, to discuss ways to supply more gas to the country from sources other than Gazprom as a way to relax the Russian stranglehold. Besides being Ukraine’s chief source of natural gas, Russia sends gas through pipelines in Ukraine that supply about one-third of Europe’s imports. ENI is the leading distributor of that Gazprom gas.

In the short term, Mr. Scaroni says, ENI could send spare gas to Ukraine via routes through neighboring countries like Slovakia. On Sunday, Slovakia, a European Union member, yielded to pressure to permit such flows.

“It will not be major quantities, but every cubic meter helps,” Mr. Scaroni said in a telephone interview after returning to Italy from Kiev.

Major Western oil companies like BP and Exxon Mobil have extensive exploration deals in Russia that they fear could be jeopardized if the United States and European Union impose stiffer sanctions on the Putin regime.

But ENI, Europe’s fourth-largest energy company, has focused its exploration and production on North and East Africa, and acts mainly as a middleman for Russian gas. And that business has become less profitable in recent years, as various market forces have pushed down the price of gas. That may be one reason ENI is willing to potentially incur Gazprom’s anger by cutting side deals with Ukraine.

Although Gazprom officials have sought to assure the European Union that the company will not cut off gas in response to the tensions over Ukraine, Mr. Scaroni warned that the situation was fragile.

“This is by far the toughest time for European energy security that I have seen,” said Mr. Scaroni. “This issue might stop the supply of Russian gas.”

Under the Slovakian deal announced Sunday, the country plans to retool an old, unused pipeline to conduct so-called reverse flows, sending gas from west to east. Slovakia might be a possible route for ENI, which is studying the issue at the request of the Ukrainian government. The goal is to be able to ship gas to Ukraine at an annual rate of more than three billion cubic meters by the time the heating season begins in the autumn, increasing the flow to up to 10 billion cubic meters annually by next spring. Last year Ukraine imported nearly 30 billion cubic meters of gas, according to a recent report by the Oxford Institute for Energy Studies.

“Enabling reverse gas flows as foreseen in the agreement is an important step to increase security of gas supply in Ukraine,” said Sabine Berger, a spokeswoman for Günter Oettinger, the European Union energy commissioner. Ms. Berger added that the commission had helped negotiate the accord, which is to be signed on Monday.

Mr. Scaroni, 67, whose tenure will end next month, is among the top energy executives advising European and American officials of the potential consequences to the energy market of applying much tougher sanctions on Russia.

Part of his message is that, even though gas demand in Europe has been weak because of sluggish economies, imports from Russia actually rose last year by about 16 percent as other sources of supply including Norway and Algeria declined. Europe, he warned, is simply not prepared to do without gas from Russia.

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Working on pipes for South Stream. European officials are skeptical of the pipeline plan.Credit...Sergei Karpukhin/Reuters

The European gas business was formerly a mundane set of transactions between monopoly suppliers like Gazprom and giant distributors like ENI that just passed the price on to customers.

But with the gradual introduction of more competitive pricing in the European markets, the gas business has become much less attractive for ENI and other big gas middlemen. They are stuck with high-priced long-term contracts to a handful of suppliers like Gazprom and Sonatrach, the Algerian state-owned company, while their customers are able to secure gas at often lower spot market prices — assuming the gas is flowing.

ENI only breaks even on its gas dealings with Gazprom. ENI’s gas unit lost 660 million euros, or $913 million, in 2013.

Even so, one of Mr. Scaroni’s biggest worries now is ENI’s deep engagement with Gazprom. It operates not only as a distributor but also as a partner on a planned new gas pipeline called South Stream that would run from Russia under the Black Sea, avoiding Ukraine to run through countries like Bulgaria and Hungary and ending in northern Italy.

The pipeline would be a major new source of Russian gas for energy-hungry Europe. But European Union authorities have become deeply skeptical about the South Stream plan, seeing it as just another way of making Europe more dependent on Russian energy. They have shown far greater enthusiasm for plans to deliver gas along a so-called Southern Corridor pipeline from Azerbaijan in the Caspian region and could run through countries including Turkey, Albania, Greece and Italy.

Mr. Scaroni worries that the portion of ENI’s gas from Russia that passes through Ukraine might be severed at any moment through contract disputes or if fighting broke out. He also worries that ENI and other energy companies might be ordered by Europe and the United States to stop buying Russian gas as part of tougher sanctions.

Given the balance of interests, tighter sanctions by Western governments might more likely aim to stem the technology that Russia needs to increase its future production, rather than to cut off gas supplies to Europe, said David L. Goldwyn, a special envoy and coordinator for international energy affairs from 2009 to 2011 at the United States Department of State.

“No one seeks an outcome that would hurt Europe as much as Russia,” he said.

Tensions between Europe and Russia over energy have been mounting for years, partly because of previous standoffs between Kiev and Moscow that temporarily blocked supplies to the European Union. Those outages in 2006 and 2009 are a top reason that the European Union had already been trying to chip away at Europe’s dependence on Russia even before the Crimea annexation.

Despite those efforts, there are few signs that the mutual dependence they share will diminish anytime soon.

One of the most acrimonious battles is between the bloc’s antitrust authorities and Gazprom. That standoff began in 2011 when the European Commission carried out surprise raids on natural gas companies across Europe, including Gazprom affiliates, seeking evidence of blocking access to networks, charging excessive prices and raising barriers to diversification of supplies.

E.U. officials said this month that the European Commission was still seeking a negotiated settlement with Gazprom while also preparing formal antitrust charges in case those negotiations fail.

Energy executives say Europe is still far away from adopting a coherent set of policies that would ease dependence on Russian energy sources.

For instance, European Union leaders have delayed decisions on lower carbon-emission targets for beyond 2030 that might help drive the development of energy alternatives to Russian gas. That is partly because powerful Eastern European countries like Poland argue that such clean-energy policies would impede their ability to reduce Russian dependence by mining more coal or developing their own shale gas resources.

And this month, the European Commission issued rules aimed at reducing the subsidies that governments use to support the wind and solar industries, saying those technologies should prepare to compete on the market. Environmental groups have lambasted the move, calling it a shortsighted reaction that risks leaving the bloc more dependent on heavily polluting coal at a time when it is seeking alternatives to Russian gas.

For Mr. Scaroni, the Ukraine crisis is a test of the European Union’s ability to devise a coherent energy policy. “The E.U. cannot have its cake and eat it, too,” he said. “I just tell them that you cannot keep on shouting and being inconsistent between what you say and what you do.”

A correction was made on 
April 27, 2014

An earlier version of this article misspelled the name of an oil company. It is Exxon Mobil, not Exxon Mobile.

How we handle corrections

Stanley Reed reported from London and James Kanter from Brussels.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: For a European Energy Chief, a Difficult Alliance. Order Reprints | Today’s Paper | Subscribe

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