Chevron and Microsoft sign power purchase agreement for West Texas data center, combining oil-and-gas infrastructure with cloud compute facilities.
Chevron Corporation has finalized a 20-year agreement with Microsoft to develop Project Kilby, a co-located natural gas-powered electricity facility in West Texas designed to power a Microsoft data center entirely behind-the-meter by 2028. The project will be operated through Chevron's Energy Forge One LLC in partnership with Joulent, with a Final Investment Decision targeted for the end of 2026 and first power delivery in 2028.
By co-locating large-scale power generation with the data center, Kilby is designed to deliver reliable, dispatchable electricity directly to Microsoft while mitigating impacts on the regional grid. This behind-the-meter setup allows the facility to produce its own energy on-site, eliminating reliance on the power grid or local utilities. The agreement builds on an exclusivity deal announced in late March 2026 between Chevron, Microsoft, and Engine No. 1.
West Texas, particularly the Permian Basin, produces vast quantities of associated natural gas as a byproduct of oil extraction. Historically, limited pipeline takeaway capacity has left significant volumes stranded, leading to routine flaring. Project Kilby captures this stranded gas to deliver independent, on-site power while bypassing the local utility grid entirely.
According to Chevron, the project is expected to generate over US$10 billion in local tax revenue and create almost 2,000 jobs. Microsoft CEO Satya Nadella told investors that the company's "AI business surpassed an annual revenue run rate of US$37 billion, up 123% year-over-year," with capital expenditures reaching US$30.88 billion in fiscal 3Q26, up 84.39% year-over-year. Noelle Walsh, Microsoft president of Cloud Operations and Innovation, stated: "The rapid growth we're experiencing in AI and cloud, driven by customer demand, requires energy infrastructure that can scale quickly and reliably. Our agreement with Chevron helps ensure we'll have dedicated, large-scale power to support the evolution and reliability of advanced computers."
The Chevron-Microsoft agreement exemplifies how surging AI electricity demand—projected to drive data centers toward 9% or more of US power consumption by 2030—is reshaping the energy landscape. Oil and gas companies are no longer merely suppliers of fuel; they are becoming critical developers of reliable power infrastructure tailored to hyperscale needs.
Mexico's data center sector has doubled its operational capacity between 2024 and early 2026, reaching 279 MW, with analysts expecting this trajectory to continue as nearshoring and AI-driven cloud demand concentrate investment in the country's principal industrial corridors. However, this growth has collided directly with the same constraint the Chevron-Microsoft deal addresses: insufficient reliable electricity at the point of demand.
Mexico's grid reliability challenge is acute in the states where data center development is concentrating. The CFE's grid has been operating at over 60% of national transmission capacity near its ceiling, with critical bottlenecks in Nuevo León, Mexico City, and Querétaro, the country's three principal data center markets. The Cancún substation fire on June 17, which cut power to multiple zones of the city in the absence of any extraordinary demand event, illustrates the vulnerability created when distribution infrastructure operates near its limits without adequate redundancy.
The Chevron-Microsoft model addresses this problem at its source: instead of relying on a congested grid to deliver power from distant generation to a data center, generation is co-located with the load. The gas that powers it is sourced locally, eliminating transmission losses, grid congestion charges, and the physical vulnerability that comes with long-distance power delivery through aging infrastructure.