@peterthebike. Thanks for posting. What you posted from the error logs aren’t applicable to our situation.
Ok. I can’t think of any reason why the dropdown would be greyed out like that. It should at least list the images folder. The ‘images’ folder is specified as the default. Maybe you should create a custom folder, with read, write and execute permissions, in the Joomla root, and see if it shows.
Another possibility could be that the select element could be disabled in your admin template for some reason, which should not be the case normally.