Within a year another consortium had signed a contract to explore an offshore block, and within five years the country boasted 19 contracts worth some $50 billion in potential investment to explore and develop the country's hydrocarbons.

"That first deal certainly paved the way for investment by others, and changed companies' expectations and perceptions of Azerbaijan," said analyst Julian Lee at the Centre for Global Energy Studies.

The contract with the now 11-member Azerbaijan International Operating Company (AIOC), signed on September 20 1994, was quickly ratified by the country's parliament, dispelling fears about the contract's future viability."Once theparliament ratified AIOC's production sharing agreement (PSA), it laid the groundwork for future PSAs and gave companies the security of knowing that their deals were enshrined in law," said Igor Efimoff, president of Pennzoil Caspian Corporation, with a 4.82 per cent stake in AIOC.

By 1996 the world's biggest oil companies, spurred on by reports that Azerbaijan was another Gulf, were falling over themselves to grab acreage in the Azeri sector of the Caspian.

But last year's drop in oil prices and the closure of two consortia that were unable to find reserves worth developing forced a more realistic perspective on the Caspian.

Enthusiasm wanes

"The Caspian is still attractive, but not as spectacularly attractive as it was five years ago and there isn't the same unbounded enthusiasm as there was then," said Lee.

And by the summer, when another BP Amoco-led consortium announced it had discovered major gas reserves at its offshore Shakh Deniz field, it became clear that Azerbaijan's wealth laynot just in oil but in gas as well.

"The general expectations are more realistic now," said Gavin Graham, Shell's vice president for Central Asia, by telephone from The Netherlands."We know Azerbaijan is a potential North Sea with very attractive oil reserves, and we also know that Azerbaijan is going to be a major gas player in the coming yea4rs," he said.

Since 1994, AIOC has invested some $2 billion in renovating and building infrastructure, including drilling platforms and rigs, pipelines and two terminals.

The first oil was exported in November 1997 North through a Russian pipeline, and the consortium has been shipping all its 1,15,000 barrels per day (bpd) output through a second pipeline West through Georgia since earlier this year.

"In a way AIOC has been the pilot project that has shown other western companies that it's possible to work in Azerbaijan to the same standards they work anywhere else in the world," said AIOC president David Woodward in an interview.

Transportation aheadache

But the biggest problem is no longer getting the oil out of the ground, say analysts. The real challenge now is getting it out of the landlocked Caspian Sea region. "Transportation is still a big issue. It's moved forward somewhat, but it's still basically unresolved," Lee said.

Fighting in Dagestan and problems with Chechen rebels earlier this year has meant the Russian route is now closed for Azeri oil, leaving the Georgian line pumping at full capacity.

"It's fine for AIOC to have the Georgian line, but it doesn't help the smaller companies, especially those operating onshore who still have problems getting oil out," Lee said.

Both Azerbaijan and the United States have put their support firmly behind an ambitious $2.4-billion pipeline that would move one million bpd through close ally and strategic partner Turkey.

But negotiations are on-going and none of the companies are so far willing to finance the project, which at a minimum would cost almost triple the cost of expanding theGeorgian pipeline.

Without an export route, AIOC will have to hold off on its $3-billion Phase 1 plan to triple production with first oil flowing by 2002.

"The Azeris are shooting themselves in the foot," said one diplomat. "If they don't sort this out soon, they're going to lose a lot of investment."