Chevron Is Hungry for More Power Deals After Inking a 2.7-Gigawatt Contract With Microsoft. Here's Where the Energy Giant Is Looking Next.

Written by James Brumley for The Motley Fool->

Oil and gas giant Chevron is evolving how it sells and supplies one of its core products.

Unsurprisingly, the rapid growth of AI data centers is forcing the centers' owners/operators to think unconventionally about how to power them.

One particular approach is proving very popular, most likely because the underlying technology is well-proven.

Integrated energy outfit Chevron (NYSE: CVX) is looking beyond the traditional oil and gas business for growth opportunities. That's the chief takeaway from a late-June press release in which the company announced it was working with Microsoft to power one of its new artificial intelligence (AI) data centers in West Texas, bypassing local electric utilities.

This is just a taste, however, of the direction the energy company is moving in now that it has the option to do so.

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It's not a complicated arrangement. Software powerhouse Microsoft's artificial intelligence data center in West Texas needs power. Rather than tapping a nearby utility for what may or may not be an adequate or affordable supply, the tech giant is installing 2.7 gigawatts' worth of natural gas power turbines made by GE Vernova, which will use gas supplied directly by Chevron for a contracted period of 20 years.

It's obviously not Chevron's usual business model. But these are unusual times. AI data center-driven demand for electricity is straining producers. So, operators are taking matters into their own hands, largely because they can. Reliable natural gas power turbines are now available at scale, and Chevron has the infrastructure in the region to make a direct natural gas supply feasible.

For now, the agreement looks more like a test than a new business venture, but that's apt to change eventually. As Chevron's president of new energies, Jeff Gustavson, commented in an interview following the announcement, "If we can get to a returns equation that works for our company and our shareholders, you can expect to hear more from us going forward." For clarity, Gustavson made a point of adding, "This does represent a platform for growth for us." High-opportunity areas include the Midwest, the Gulf Coast, the Rocky Mountains, and Utah -- all areas where the company's already got established infrastructure.

And it should pursue them. Although these so-called "behind-the-meter" natural gas-burning power plants aren't unheard of, they've also only scratched the surface of the underlying opportunity. For perspective on the sudden surge in demand, Bloomberg notes that roughly 100 gigawatts' worth of behind-the-meter gas power has been planned or permitted specifically for U.S. data centers, but only 2 GW is currently up and running. Separately but simultaneously, PwC believes AI-driven demand for natural gas could more than quintuple over the next 10 years, with much of it being directly burned by the end user rather than a utility company.

The more Chevron can steer this evolution, the better.

It's an exciting prospect to be sure, simply because the idea solves a very real problem that's only apt to grow before it starts to shrink. It's also just pretty cool to see companies collaborating creatively to come up with solutions that at one point would have been unthinkable. And, it's worth mentioning that Chevron is tinkering with man-made alternatives to natural gas, if and when that time comes.

Just don't let this be the chief reason you step into a stake. It will be years before this venture grows into something that could make a noticeable difference in Chevron's gas-and-oil-driven bottom line.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron, GE Vernova, and Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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