I am aware that the system account does not have access to network drives but this is all done via http. Hence, I would have thought, since it is only launching IE (system account has rights to do this) then navigating to a site using IE (its within firewall so no proxy related issues) then network rights would not come into play.

Finding exactly what the system account can/cannot do is not fun unfortunately. And debugging what is going wrong is also impossible since the ie process is never visible.