SUCCESS!
Found out after running SnoopDos it was doing something very strange.
The Deluxe Galaga game is looking for the libs in the drawers that they come in so I had to move the "libs" drawer and the "compression" drawer into the sys libs location. You cant just place the 4 library files into the sys libs drawer as you would normally do.
Pritty sure I know what went wrong and it's an easy misstake to make. First off under no scenario does the game look for libraries in LIBS:libs/ I checked with both ECS and OCS and after SnoopDOS said it didn't look there I purposly removed my libraries anyway and put them as described in LIBS:libs/ and was precented with the "packers missing message".
I was then able to recreate the the "File missing in game directory" by copying over powerpacker.library and xpkmaster.library byt leaving out xpkMASH.library and xpkSQSG.library.
After reading your post I belive you first copied powerpacker.library, xpkmaster.library, xpkMASH.library and xpkSQSG.library to LIBS: as "normal libraries". BUT xpkMASH.library and xpkSQSG.library are NOT normal libraries but compressorlibraries for the xpkmaster.library and as such they need to be placed in LIBS:compressors/. After first attempt failed I bet you didn't delete these libraries before you next copied over the libs and compressor directories to LIBS:, resulting in it working because you copied 2 libraries to the right location at first and the 2 compressorlibraries to their right location the second time.
Now to clean up all you need to do is delete the LIBS:libs/ directory and the LIBS:xpkMASH.library and LIBS:xpkSQSG.library files.