I just discovered that you can use a bottle of water to put out a torch. Really adds to stealth potential!
So, once you get your gem dealer's license and the goblin on the castle level lets you go by, do the other goblins on the floor become friendly?
I started out just massacring the whole floor but that makes the level feel lonely for the rest of the game.

Unless you do something to tick them off, like stealing or murdering, I believe that the goblins do stop being hostile. However, you should be warned that, for most of the game, you'll be fighting enemies who can see in the dark better than you can and who MUST die in order for you to progress. Stealthing your way through the whole game ain't gonna happen.

The problem with using water is that you tend to need to expose yourself to use it (unfortunately there are no water arrows like in Thief) and you will inevitably need to backtrack to refill the bottles since there are only a few usable water supplies in the game. With even the most basic magic ability you can cast the Level 1 spell Douse (Nhi + Yok, 2 mana per use); it works from a short distance away (just like Ignite) so you may be able to cast it while partially hidden, and in some places you can take out more than one at the same time.