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The ongoing crisis in Ukraine has generated much concern and speculation about what it means for the energy industry and specifically for European gas supply.

The situation could continue to shift and change, perhaps dramatically. However, at present, it appears that the most likely scenario is one in which Russia maintains control over Crimea but, despite whatever turmoil may ensue, does not seek to introduce a military presence into other regions of Ukraine. In this case the Western response will be restricted to diplomatic and limited economic measures. Meanwhile the interim Ukrainian government—recognized by Europe and the United States but still considered illegitimate by Russia—must struggle through a severe political and economic crisis while preparing for presidential elections on 25 May.

More disruptive outcomes are possible if turmoil develops in Russian-speaking eastern Ukraine and if Russia seeks to extend its area of control beyond Crimea. The energy implications of this scenario would be more severe than those sketched out here; they will be considered in future IHS research if events should move in this direction.

The key energy implications that follow from the IHS base-case scenario are as follows:

• We do not foresee a cutoff of Russian gas supply to Europe. The only plausible scenario in which Russian gas supply to Europe is reduced or cut off would be one in which the Kremlin actively chooses this path by reducing supplies to Ukraine and/or Europe. IHS does not believe that Russia will take this step.
• New emphasis in Europe on existing efforts to reduce dependence on Russian gas supply. For some time the European Union has sought to diversify gas supply and reduce the perceived risks of its reliance on Russian gas—and as a result it is better prepared for a potential reduction in Russian supply than in previous gas interruptions in 2006 and 2009. The current Ukraine crisis will reinforce this policy and contribute to a continuation of a tough stance on regulatory issues related to Russian gas supply. However, the powerful realities of infrastructure and gas economics will limit what Europe can ultimately achieve in this area. Russia will remain a substantial gas supplier to Europe, although this occurs within both a diversified gas supply portfolio and a broader context of considerable diversification in total energy supplies.
• Conflict over South Stream. Following the European Commission’s December 2013 declaration that the Gazprom-sponsored South Stream pipeline (which goes under the Black Sea directly to southeast Europe) was not in compliance with European regulations and would not be allowed to operate on EU territory, a tentative dialogue between the two sides began. This dialogue is unlikely to proceed constructively in the current circumstances, which casts a shadow over South Stream while also holding out the eventual possibility of a serious deterioration in Russian-EU gas relations. But stemming from the crisis, Russia is likely to be more anxious than ever to promote the latest of its Ukrainian bypass pipelines.
• US liquefied natural gas (LNG) exports to Europe are still a few years off and, despite political discussion, can have no real impact on the current situation. In the United States, much attention has been focused in recent weeks on the potential for US exports of LNG to help Europe offset its dependence on Russian gas. Although the United States is currently on track to become one of the world’s three major LNG exporters by 2020–22, IHS Energy expects the ultimate impact on European gas supply to be limited. However, the Ukrainian crisis may promote a shift to simplifying (and expediting) the US government export approval process.

US - Balkans