Chevron (CVX) and Microsoft (MSFT) announced a 20-year power purchase agreement on June 22 to build a natural gas-fired power plant in West Texas dedicated to supplying electricity to a Microsoft data center campus. The project, named Project Kilby, sits on more than 2,000 acres in Reeves County near the city of Pecos, deep in the Permian Basin. Bloomberg was first to report the deal.
The arrangement is one of the largest between a U.S. oil major and a hyperscaler, and it builds on an exclusivity agreement the two companies reached with investment firm Engine No. 1 in late March. It also lands at a moment when access to reliable electricity has become the most pressing constraint in the AI infrastructure race, ahead of chips, permits, or construction timelines.
Project Kilby: what the 20-year Chevron-Microsoft power deal covers
Project Kilby is designed as a behind-the-meter installation, meaning the power plant sits co-located with the data center rather than feeding into the public ERCOT grid. That setup gives Microsoft a direct, dedicated power supply that bypasses Texas’s main grid entirely. At full build-out, the facility is expected to generate approximately 2.67 gigawatts of capacity, enough to power roughly 2 million homes, Chevron said. A majority of that output will come from large GE Vernova turbines, with additional capacity supplied by Solar Turbines, a subsidiary of Caterpillar.
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The project will be built in phases, with first power targeted for 2028 and development extending through the 2030s. Chevron has not officially disclosed a cost estimate, but people familiar with the deal put the initial phase at roughly $7 billion, QZ reported. Engine No. 1 holds an option to take on half the project’s ownership and contribute a matching share of the capital. Chevron expects to make a final investment decision by the end of 2026.
Why Chevron is turning Permian stranded gas into Microsoft’s AI electricity
The choice of the Permian Basin for Project Kilby is deliberate. West Texas produces enormous volumes of natural gas as a byproduct of oil extraction, and local pipeline capacity consistently runs short of what operators pull out of the ground. When takeaway capacity fills up, producers have to flare the excess, burning it off and collecting nothing for it. That dynamic depresses local gas prices and keeps a significant energy source from being used productively.
By siting the power plant close to Chevron’s existing Permian production, Project Kilby converts what would otherwise be flared gas into baseload electricity for one of the most power-hungry computing campuses in the country. Chevron said that gives the project a built-in cost advantage. The company is targeting mid-teen returns and expects Project Kilby to generate cash flow independent of oil and gas price cycles.
“AI is reshaping the global economy, and abundant, affordable, reliable energy is essential to fueling that transformation,” Jeff Gustavson, Chevron’s president of New Energies, said in a statement.
Beyond the returns, Chevron said Project Kilby is expected to generate more than $10 billion in state and local tax revenue for Texas and support nearly 2,000 jobs. For an energy company making a case to investors that it can grow outside commodity cycles, those numbers carry weight.
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What the Chevron and Microsoft data center deal means for CVX and MSFT investors
For Chevron investors, Project Kilby is the clearest sign yet that the company is trying to build a revenue stream that does not move with oil prices. A 20-year contract with Microsoft is the kind of long-duration, fixed arrangement that energy companies typically have to pursue in infrastructure or utilities, not upstream production. If the AI buildout continues driving electricity demand, Chevron could use Kilby as a template for additional deals.
CVX shares were up roughly 0.9% in premarket trading after the announcement, Schaeffer’s Investment Research reported, a modest move for a stock that had lost nearly 12% over the prior month.
For Microsoft, Project Kilby is another data point in a capital spending story that keeps getting larger. Azure cloud revenue grew 40% year over year in Q3 FY2026 earnings and AI revenue hit a $37 billion annual run rate. Microsoft’s commercial remaining performance obligation, which represents booked revenue not yet recognized, stood at $627 billion. Securing 2.67 gigawatts of dedicated power in West Texas is the kind of infrastructure move that supports those numbers continuing to grow.
The broader signal from this deal is that the AI economy has moved well past software ambition. It now requires securing land, locking in energy supply, and making 20-year commitments to physical infrastructure. Chevron and Microsoft are two very different companies putting serious capital behind the same bet: that demand for AI compute will be large enough, and durable enough, to justify arrangements built to last decades.
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