* Weak Canadian oil prices cut into producer profits * Lack of pipeline space lowers prices * Heavy oil producers take biggest hit * Refiners benefit from low oil price By Scott Haggett CALGARY, Alberta, Jan 13 - Canada's independent oil producers may face months of depressed earnings and weak share prices as they jockey for space on the country's over-full oil pipelines. The independents, companies that focus on producing oil and gas and have no refining or marketing operations, are being squeezed by a shortage of export capacity as rising heavy oil production from the Alberta oil sands strains pipeline capacity, trapping oil in Canada and pushing down prices. While North American benchmark oil prices remain relatively robust near $95 per barrel, Canadian prices have tanked, with the Western Canada Select heavy crude trading at more than $41 per barrel below the West Texas Intermediate (WTI) standard on Friday. That cuts into producers' cash flow and profits, with a likely knock-on impact on shares that have already fallen sharply over the past three months. "The shortfall in take-away capacity is absolutely going to weigh on realized prices for the Canadian producers over the near term on both heavy and light oil," said Chris Feltin, an analyst at Macquarie Research. "But especially heavy oil, which is at a pretty substantial discount to WTI right now ... It's a challenging market for Canadian upstream crude producers." Canada is the largest source of U.S. oil imports, shipping as much as 2.5 million barrels of crude per day to refineries primarily located in the Midwest. The lack of pipeline capacity became acute in the fourth quarter of last year, as Enbridge Inc carried out maintenance on the pipeline network that carries the bulk of Canada's crude exports and refinery maintenance shutdowns in the Midwest capped demand. Over the fourth quarter of 2012, the Toronto Stock Exchange's energy index dropped 5.3 percent as shares of the oil producers fell. Canadian Natural Resources Ltd, the largest independent, fell 7.5 percent over the period while other heavy oil producers also suffered. MEG Energy Corp's stock was down 19 percent over the period, Penn West Petroleum Ltd shed 22 percent and Baytex Energy Corp dropped 8.6 percent. And conditions are not improving - pointing to an even weaker first quarter as Canadian prices continue to weaken. "If this persists it really points to (the first quarter) as being a really, really ugly quarter for heavy oil producers," said Andrew Potter, an analyst with CIBC World Markets. The problems are not going to go away quickly. Heavy oil production is set to rise further, with Imperial Oil Ltd expected to open its 110,000 barrel-per-day Kearl oil sands mine within weeks. But no additional pipeline space is expected until the end of March, when Enbridge plans to add 50,000 barrels per day of space on its Line 5, which runs from Superior, Wisconsin, to Sarnia, Ontario. To cope with the lack of space, companies are looking to alternatives to pipelines. Costly rail shipment has become increasingly popular, allowing oil producers to tap the most lucrative markets even if they are not served by pipelines and to avoid blending their crude with the expensive diluent needed so that it can flow on pipelines. Other producers are broadening the number of pipelines they use. Canadian Oil Sands Ltd, Syncrude Canada Ltd's largest shareholder, said this week it is booking space on several pipelines in the United States and Canada to ensure access to sufficient capacity to ship its oil. "We are hedging and making sure we are going to have pipe capacity for most of our product as we get through what will continue be a couple of tough years here in 2013 (and) 2014," Marcel Coutu, the chief executive of Canadian Oil Sands, said at an investment conference on Tuesday. However the producers' pain is others' gain, and the refining sector is seeing windfall profits from low feedstocks costs, bringing potential stock price gains. "The companies that outperformed (in 2012) are the refiners, the integrated companies in Canada," Feltin said. Indeed, while producer shares waned over the fourth quarter, the integrated companies, which combine production, refining and marketing, were less badly hit. Shares in Suncor Energy Inc were flat over the period, Imperial Oil shares dropped 6.3 percent and Husky Energy Inc's stock rose 9.7 percent.