Has Chevron Found a New Growth Platform?
Chevron has an agreement to sell electricity to Microsoft, showcasing an interesting opportunity for the energy giant.
By Reuben Gregg Brewer
One of the knocks against Chevron (CVX 2.39%), and many other oil and natural gas companies, is that they aren't participating in the energy transition toward electricity. That may have changed significantly, as Chevron has just tentatively agreed to provide 2.7 gigawatts of electricity to a Microsoft (MSFT 0.74%) data center. Is Chevron suddenly an AI play? Here's what you need to know.
Chevron isn't changing its business much
What's really happening between Chevron and Microsoft isn't exactly an electricity deal. Chevron is partnering with GE Vernova (GEV +2.06%) to build a natural gas-powered electric power plant. Assuming the agreement receives final approval, which won't be known until later in the year, it will provide Microsoft with dedicated power at a Microsoft data center under a 20-year agreement.
So, on the surface, Chevron is starting to produce electricity, a business that will provide more reliable cash flows than the volatile oil and natural gas industry. However, the real story is that Chevron is using the natural gas it produces to generate electricity at a power plant it owns. The company isn't really moving too far outside its comfort zone, noting that it is used to building and operating large infrastructure assets. That should help investors get more comfortable with the agreement.
A model that could easily be replicated
What's interesting here is that the power plant, with nearly 2.7 gigawatts of capacity, will be co-located with the data center. Essentially, the two will be located right next to each other, with the electricity generated from the power plant dedicated to supplying the data center. In other words, there's no impact on the power grid, which has been a headwind for data center construction.
The location of the data center in West Texas, where Chevron has sizable operations, is important because natural gas must be transported to the power plant. However, there's no reason why this model couldn't be used with other data centers. And that opens up a whole new set of opportunities for Chevron in the hot artificial intelligence sector, and beyond.
This could be a big deal for Chevron over the long term
The 2.7 gigawatts of power generated would be enough to power two million homes, making it a sizable project. But, still, relative to Chevron, it is a fairly modest deal. That's not a bad thing, as this global energy giant tends to move incrementally. So this isn't exactly a green transition. However, investors should pay close attention to this agreement because it could be an important long-term platform for Chevron to diversify beyond the oil and natural gas industry.