Chevron Corporation (CVX.US) and Microsoft Corporation (MSFT.US) sign a 20-year power supply agreement: Low gas prices provide energy for Texas AI data center, establishing a new industry paradigm of "behind-the-meter generation"

On June 22nd, Chevron Corporation (CVX.US) and Microsoft Corporation (MSFT.US) announced the signing of a 20-year power supply agreement. According to the agreement, Chevron Corporation will provide natural gas power generation for Microsoft Corporation's ultra-large-scale data center park in Texas, China West Construction Group, with a contract value of up to $7 billion. The power plant, known as "Project Kilby," is expected to begin power generation in 2028 and gradually increase to a capacity of 2.67 gigawatts. Chevron Corporation is partnering with investment fund Engine No. 1 to develop the project, with plans to make a final investment decision later this year. This is the largest energy collaboration to date between a U.S. oil and gas giant and a technology giant. Against the backdrop of widespread stagnation in the construction of AI data centers due to power supply bottlenecks, the completion of this deal may be outlining a new way forward for the entire industry. The Achilles' heel of AI computing power expansion: $130 billion project stalled due to electricity The end of AI is computing power, and the end of computing power is electricity - this industry adage is becoming a harsh reality. In the first quarter of 2026, the pace of data center construction in the United States has significantly slowed down, with some projects even stalled. A study by Data Center Watch shows that in the first quarter of this year alone, the total value of data center projects in the U.S. that have been locked down or delayed is approximately $130 billion, roughly equivalent to the total for the entire year of 2025. According to a report by JPMorgan Chase last month, based on satellite image analysis, over 60% of data center projects planned to be completed in 2027 have not yet started construction. The primary culprit is the power supply bottleneck. Data centers currently account for 5% of the demand from the American Electric Power Company, Inc., and this demand could triple by 2035. In Virginia, where large data centers are concentrated, this proportion has already exceeded 25% and could rise to over 40% by 2030. EPRI pointed out, "The grid and previous policies were not designed for the speed and scale of demand brought by AI infrastructure." At the same time, the opposition from the grassroots is at an all-time high. The number of active grassroots opposition organizations against data centers in the U.S. has surged from 396 at the end of 2025 to 833 in March 2026, spanning 49 states. Maryland, Ohio, and Texas have become the hardest-hit areas for opposition organizations. It is against this backdrop that Chevron Corporation and Microsoft Corporation's "Project Kilby" stands out. The "self-generating power plant" model: a 20-year off-grid contract The core design concept of Project Kilby is fundamentally different from traditional data center power supply models. Self-generating power, off-grid. The power plant will use cheap natural gas from the largest oil field in the U.S. - the Permian Basin - to fuel GE Vernova's large gas turbines, providing power directly to the data center park planned by Microsoft Corporation near Pecos City, Texas. Chevron Corporation's head of new energy, Jeff Gustavson, made it clear in an interview that the project will generate its own power, not drawing from the grid or working with local power companies. "Consumers are concerned about the growth in power demand and are already feeling its effects," Gustavson said. "We intentionally designed this system in this region to avoid such situations." This "behind-the-meter generation" model directly ties energy supply to electricity demand, ensuring stable power supply for data centers and avoiding adding additional burden to the already fragile regional grid. The 20-year commitment provides the project with a commercial framework of certainty. For Chevron Corporation, this means stable income for twenty years; for Microsoft Corporation, it means reliable power assurance for the expansion of its AI infrastructure. The Permian Basin's "negative gas price" miracle: Chevron Corporation's cost moat The most disruptive competitive advantage of Project Kilby comes from the unique distortion in the natural gas market in the Permian Basin. Since 2026, the benchmark natural gas price in the Permian Basin has been trading in negative territory. In the past week, the spot price of natural gas at the Waha Gas Hub Group, Inc. Class A in the basin dropped to as low as -$9.75 per million British thermal units, and is expected to reach the historical low of -$10 per million British thermal units later this year. This "negative gas price" phenomenon stems from the unique production structure in the Permian Basin. In this region, natural gas is mostly a byproduct of oil extraction. Due to supply interruptions caused by the Middle East situation, global oil prices have soared, with the futures price of West Texas Intermediate crude oil rising by 50% to $99.89 per barrel. The high oil prices incentivize drillers to maintain high oil production, leading to a surge in natural gas production. However, the local natural gas pipeline capacity lags far behind the pace of the increase in production. To avoid shutting down high-profit oil wells, producers have to pay customers to take excess natural gas, and even burn and emit it. The energy consultancy Energy Aspects reported that natural gas burning events this year have surged to the highest seasonal level in five years. "This is the richest gas reserve in the U.S. and even in the world," said Gustavson. "This power plant will bring demand for natural gas to this basin and avoid waste." For the Project Kilby, this means an almost irreplicable cost advantage - generating power using raw materials at or near zero cost, or even negative cost, to provide power to AI data centers. Chevron Corporation calls this their "competitive advantage." Supply chain bottlenecks and execution risks However, there is a huge gap between the grand blueprint and the reality of execution. Chevron Corporation and Engine No. 1 have ordered seven large gas turbines from GE Vernova. However, the delivery time for these types of core equipment has extended from 12 months to over 36 months. GE Vernova's new orders increased by 48% in 2025, and it is expected to have an in-hand order of 100 gigawatts by 2026; Siemens' backlogs for energy gas turbines have reached 78 gigawatts, and the delivery period has extended to over four years. Customers even need to pay non-refundable deposits four years in advance for delivery in 2030. Chevron Corporation has not disclosed the total project cost, but sources estimated around $7 billion in April of this year. It is estimated that Microsoft Corporation's participation will reduce the project financing cost by about 3 percentage points and shorten the overall construction period by 18 months. However, the Project Kilby still needs to undergo environmental assessments from the Federal Energy Regulatory Commission and complete negotiations on state tax incentives and other key procedures. Chevron Corporation's subsidiary, Energy Forge One, has submitted a tax relief application to the Texas Comptroller's Office. Industry change: oil and gas giants collectively "cross-border" power supply Project Kilby is not an isolated event but a microcosm of the deep integration of the U.S. Energy Corp. and technology industries. Mike Wirth, Chairman and CEO of Chevron Corporation, said at the CERAWeek Energy Conference in March of this year that the company hopes to help the U.S. compete against China in AI by helping large customers solve natural gas supply and permitting issues. "The two industries are coming together in ways we've never seen before, and electricity is becoming the biggest limiting factor for growth," Wirth said. Chevron Corporation also stated that it is examining similar co-located power generation projects in the Midwest and West. According to BloombergNEF forecasts, total data center capacity in the U.S. is expected to double by 2030, reaching 77 gigawatts. Data center power projects in Texas are planned with a capacity of 33 gigawatts, surpassing Virginia and ranking first in the U.S. "Many of our peers are talking about doing similar things," Gustavson said, "and we are now taking real action. We believe this sets us apart." At the same time, gas turbine manufacturers are experiencing a rare boom cycle. GE Vernova's stock price has risen by over 500% since early 2024. Forecasts for North American AI power demand have been greatly increased, with a compound annual growth rate of 73% from 2026 to 2028. Slow grid connection is forcing data centers to self-generate power, with gas turbines being the preferred base load power source due to their low cost and high efficiency. Outlook: from "Kilby" to industry standards? The significance of Project Kilby goes beyond the commercial contract between Chevron Corporation and Microsoft Corporation. It provides a replicable template for solving the power supply bottleneck of AI data centers: oil and gas companies using cheap associated natural gas to provide "off-grid" power to technology giants' data centers through self-generating power plants. This model bypasses multiple obstacles such as slow upgrades of the U.S. grid, intense public opposition, and equipment delivery delays, deepening the physical space and commercial relationships in energy production and consumption. If Project Kilby successfully lands and operates smoothly, it is likely to become the "standard answer" for future AI data center power supply - attracting more oil and gas giants and technology companies to replicate this model. Peers of Chevron Corporation, such as Exxon Mobil Corporation, may already be planning similar projects in secret. Of course, risks are also inevitable. A $7 billion investment scale, equipment delivery periods of several years, yet-to-be-finalized tax incentives, legal challenges from environmental organizations - any delay or failure in any link could potentially lead this ambitious project into trouble. However, regardless, when the "appetite" of AI meets the "bottleneck" of the U.S. power grid, Chevron Corporation and Microsoft Corporation have chosen the most direct and daring path: bypassing all obstacles, in the deserts of the Permian Basin, redefining the source of "electricity" for the AI era.