Just last week, BP Amoco announced it had encountered hydrocarbons at its key Shakh Deniz test well, seen as vital to future investor confidence in the country.

The Baku boomtown bubble burst last year when oil prices crashed to 25-year lows, hitting high-cost Caspian projects particularly hard. Two oil consortia closed, hundreds of expatriates left and many small businesses shut up shop.

``It was like a domino effect - the oil price fell, many contracts were delayed and everyone was affected,'' said one of the founders of the British Business Group and a long-time resident in Baku, Robin Bennett

But on the eve of Baku's June 1-4 international oil and gas exhibition, industry sources now say there is a detectable change in mood here as investors have more realistic expectations of the former Soviet republic.

``We'vegone from a period of euphoria when people thought any well drilled would yield a treasure trove to a more realistic approach,'' said Pennzoil, president in Baku Igor Efimoff.

As operator of the now-defunct Caspian International Operating Company consortium, dissolved earlier this year, the US company's still positive outlook is significant.

Pennzoil and the consortium's other members are still working in Azerbaijan, eyeing other possible future investments.

Geologists from Azerbaijan's state oil company SOCAR say there are still another eight big offshore structures worth developing in the country, which has reserves of an estimated 4.5 billion tonnes of oil.

Since 1994, Azerbaijan has signed 19 deals worth some $50 billion in potential investment with major oil firms like BP Amoco, Exxon and Mobil to develop energy reserves.

Three of those deals were signed just last month in Washington. More contracts are expected to be finalised this year, including a $1.2 billion deal with Conoco for SOCAR'smost productive off-shore field.

``The new contracts prove there's still an interest here,'' said deputy head of mission at the British Embassy, Linda Cross.

She cited as evidence the participation of over 300 companies in Baku's sixth oil and gas exhibition. Though smaller than last year's it is still larger than in 1997, Cross said.

``We're cautiously optimistic now -- there are two or three things in the pipeline which could turn things around,'' said general manager, Brendan Bowler of UK service company Rig Blast, the largest contractor upgrading an Azeri drilling rig.

Other sources in the service industry are also looking ahead to projects later this year and early next year.

If the Conoco deal is signed, sources predict a flurry of investment activity to renovate infrastructure crucial for development of the offshore field.

And next year the flagship $11 billion Azerbaijan International Operating Company will start construction for the first stage of full-field development.

``First Bakuwas hyped up too much, then it was talked down too much,'' said Bennett. ``Now people are starting to find the middle ground and realise there's still lots of business to be done here.''